Mitigating Supply Disruption with Backup Supplier under Uncertain Demand: Competition and Cooperation

When supply disruption occurs following major disasters, many supply chains tend to breakdown due to stock-outs or lost sales and take a long time to recover. However, by keeping one or more emergency sources of supply, some supply chains continue to function smoothly, satisfying consumer demand even after a major disaster. In this study, we use the game-theory-based framework to model a supply chain with random and price dependent demand in a competitive environment where suppliers are prone to disruption. To mitigate the negative effect of supply disruption, a backup supplier is incorporated into the proposed model as an emergency source of supply. Further, to enable supply chain coordination, two coordinating mechanisms are addressed. In our study, we investigate how these coordinating contracts work in a supply chain under risk and competitive environment. Finally, we perform a comprehensive numerical study to show the impact of the model parameters on the equilibrium solutions and to signify the performance of the proposed coordination contracts.