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

uses the main supplier its profits will decrease with the disruption frequency. We distinguish 3different cases:- When the disruption probability is very low, the best sourcing strategy is to rely only on the mainsupplier. Thus the firm will expect the most profits as the main supplier is relatively reliable (thedisruption costs are not high enough to justify a second supplier), and its prices are the cheapest.- Between α1and α2, the main supplier is less reliable and the supply is likely to disrupt. Since thedisruption costs are higher, the firm finds it valuable to make a supply arrangement with the localsupplier in order to hedge the disruption risk.- When the disruption probability is sufficiently high, the main supplier is very likely to default andthe firm calls on relatively often on the second supplier. The problem is that the dual sourcingoption is very expensive: in case of disruption the local supplier adds a premium to the extracomponents in order to reflect the emergency of the command, and there may even be a shortdelay. Moreover keeping the two vendors requires high maintenance costs. As a result, it is betterto rely directly on the second supplier that will sell the products at its regular price and withoutdelay.6.2 Sensitivity AnalysisThe values of the sourcing strategies depend on numerous parameters. To cite only a few of them:prices of local and main suppliers, duration of disruption, loss of market share in case of no supply,delay in supply by the local supplier, forecast of demand evolution etc…Sensitivity analyses permit to measure the impact that each of these parameters has on value, anddetermine the most important drivers. Let us vary for example the price at which the local suppliersells its components in case of disruption (i.e. the price of the extra components denoted wL3in themodel). A change in price will affect the value of the “dual sourcing strategy”, but not the value ofthe “local supplier strategy”. In Figure 6.1, this price is taken equal to $360 (the product selling at400$), and if the disruption probability is 0.25, dual sourcing is the best sourcing strategy. If everthe local supplier increases his price, relying on dual sourcing becomes less interesting and Figure6.2 shows that if the price exceeds P1, this solution is no longer the most appropriate. Knowing thisbreak-even is useful when negotiating the contract with the local supplier.60