Managing Risks of Supply-Chain Disruptions: Dual ... - CiteSeerX

guarantees to supply all of the company’s requirements should the need arise.For the proportion x (where x < 100%L2 L1), the local supplier sells the components at a pricew ≥ w in order to take into account the scale effect. On these components the firm makes aprofit ofπ2LocalSupplier= P − w − c dollars per device (33)L2There is a cost premium to ask the second supplier to increase its production from x to 100% incase of disruption of the main supplier. As it is very expensive for the supplier to ramp up quicklyits production, it will provide immediately the remaining components at a price wL3 ≥ wL2≥ wL1.The selling of the remaining components is guaranteed only for a limited time – until the end ofdisruption - which can also justify a higher price. The profits made on these components are:π3LocalSupplier= P − w − c dollars per device (34)L3Another alternative to model the cost premium is to add a delay in the supplying of the remainingcomponents as it may require time for the local supplier to increase its production for the firm.The total profits of the firm depend on two elements that are the state of the main supplier (normalor disruption) and the type of sourcing contract that the firm has taken (single or dual sourcing).Table 5.1 prevents those profits in the case of three different prices from the local supplier( wL3 , wL2, wL1) and no delay.Table 5.1: Firm ProfitsNormalStateDisruptionStateSingle Sourcing Dual SourcingMain Supplierπ (1−x)* π x * πMain SupplierMain Supplier+03(1−x)* π x * πLocalSuppl ier+2LocalSupplier2LocalSupplierSingle SourcingLocal Supplier1πLocalSupplier1πLocalSupplierSeeing the costs assumptions, profits are linear with the demand.Changing supplier or adding a supplier requires an investment. Indeed, the firm needs to allocateresources to define a new supplying contract and set up a new purchasing process. The different53