Efficient Supplier or Responsive Supplier? An Analysis of Sourcing Strategies under Competition

Motivated by the recent trend of onshoring/backshoring, this paper studies a two-stage sourcing game where competing firms may choose between sourcing internationally (call this efficient sourcing strategy due to low production cost) and sourcing domestically (call this responsive sourcing strategy due to short lead time). We first characterize the equilibrium of the sourcing game. Then we examine how the equilibrium depends on various problem parameters. It has been found that more firms will shift from efficient sourcing to responsive sourcing in equilibrium if (1) the market size shrinks, (2) the demand is more volatile, or (3) the sourcing costs rise simultaneously. We also investigate how the information structure in the game affects the equilibrium outcome and the firms’ profits. Interestingly, when the responsive sourcing firm can collect more demand signals, the firms may be less likely to use responsive sourcing in equilibrium under certain conditions. This is because obtaining more information that is also available to the competitor may actually hurt the profit of the responsive sourcing firm. Finally, we examine the impact of backshoring and a new entrant on other firms’ profitability and sourcing strategies. We show that the backshoring trend will benefit the firms using efficient sourcing, but its impact on the responsive sourcing firms is ambiguous. We also find that adding a new entrant into the market will not affect the sourcing strategy of any existing firm.