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Supply Disruptions, Asymmetric Information and a Dual-Sourcing Zhibin (Ben) Yang

Summary: Supply Disruptions, Asymmetric Information and a Dual-Sourcing
Zhibin (Ben) Yang
GĻoker Aydin
Volodymyr Babich
Damian R. Beil §
September 9, 2008
We study a manufacturer's strategic use of a dual-sourcing option when facing suppliers
who possess private information about their likelihood of experiencing a supply disruption. The
manufacturer can diversify its supply by ordering from both suppliers, but we find that the
cost of doing so is inflated under asymmetric information due to the suppliers' incentives to
misrepresent their reliabilities. If the manufacturer instead sole-sources, competition between
the suppliers curbs their informational rents. Therefore, asymmetric information pushes the
manufacturer away from diversification and towards sole-sourcing. Surprisingly, the additional
cost that asymmetric information imposes on diversification may cause the manufacturer to
cease diversifying in reaction to uniformly eroding supply base reliability, while it would do
just the opposite under symmetric information. Despite these trends away from diversification,
the value of the dual-sourcing option should not be underestimated for manufacturers who are
unsure of their suppliers' reliabilities -- the dual-sourcing option is actually more valuable un-


Source: Aydin, Goker - Department of Operations and Decision Technologies, Indiana University Bloomington


Collections: Engineering