MULTI-TIERED SUPPLY CHAIN RISK MANAGEMENT
FERYAL ERHUN, JUDGE BUSINESS SCHOOL
We study contracting for a three-tier supply chain consisting of a buyer, a supplier, and a sub-supplier where disruptions of random length occur at the sub-supplier. As is common in supply chains, the buyer has a direct relationship with the supplier but not the sub-supplier; that is, the buyer has limited supply chain visibility. Both the supplier and the sub-supplier can reserve emergency capacity proactively to protect the supply chain from a disruption. We study how the buyer and the supplier can guarantee that the correct level of emergency capacity is reserved. Due to two types of inefficiencies---a special form of double marginalization and the substitution effect---the supply chain is misaligned in its decentralized form, leading to either under- or over-reservation of emergency capacity by the sub-supplier depending on the cost structure of the supply chain. The lack of visibility prevents the buyer from directly contracting with the sub-supplier to eliminate these inefficiencies. Yet, he can coordinate the supply chain through cascading: i.e., contracting with the supplier (using a value-based carrot-and-stick contract), who in turn contracts with the sub-supplier (using a cost-based carrot-and-stick or two-level wholesale price contract, depending on the cost structure of the supply chain). Although the sub-supplier is the source of limited visibility in the supply chain and is the party with private information, the supplier is the one that benefits from this limited visibility and is the party that receives information rent from the buyer. (Joint work with Georg Schorpp and Hau Lee)
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Cass Business School, 106 Bunhill Row
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Cambridge Judge Business School
Prof Feryal Erhun is a member of the Operations and Technology Management group at the University of Cambridge Judge Business School. She holds BS and MS degrees in Industrial Engineering (Bilkent University, Turkey) and MS and PhD degrees in Business Administration (Graduate School of Industrial Administration, Carnegie Mellon University). Feryal is a strong proponent of practice-based research. Through collaborations with Intel Corporation, Cisco, Stanford University Medical Center and others, she has been able to combine her academic interests with firms’ needs to deliver insights for both communities. Feryal is an editorial board member of the Production and Operations Management Society and the Manufacturing and Service Operations Management Society. She is the co-director of the CJBS’s Centre for Health Leadership & Enterprise.