Management Insights Co-opetition and Investment for Supply-Chain Resilience

Because of outsourcing and offshoring, supply chains have become longer and more complex in the past decade, with huge increases in intermediate and final goods destined for manufacturers and retailers in North America and Europe, originating in emerging markets in Asia. While overall costs of procurement have decreased as a result, CEOs and supply managers have also noted a strong increase in interdependent supply-chain risks and a greater need for coordination between trading partners in order to avoid disruptions in supply. Such coordination is, however, itself a complicated affair because of lack of information about the suppliers’ local environment. The latter dimension also presents suppliers with the opportunity to strategically misrepresent their level of vulnerability and the cost of mitigating supply-chain risks. With this environment as the basic context, the authors analyze a two-tier supply chain in which the trading partners can invest jointly in supply-chain resilience, e.g., through end-to-end RFID implementation. The authors find that a non-cooperative approach leads to under-investment, as compared with a coordinated supply chain. This inefficiency can be mitigated through bargaining between the trading partners, and appropriately compensating upstream (typically smaller) trading partners to encourage them to mitigate supply-chain disruption risks.