2023 article
Sourcing and pricing decisions under upstream competition with a financially distressed supplier, endogenous bankruptcy risk, and a backup supply option
Gernert, A. K., Wuttke, D. A., & Heese, H. S. (2023, April 19). PRODUCTION AND OPERATIONS MANAGEMENT.
author keywords: backup supply; endogenous bankruptcy risk; finance and operations interface; financial distress; supplier selection; supply chain risk management
onlinelibrary.wiley.com (publisher PDF)
UN Sustainable Development Goal Categories
12. Responsible Consumption and Production
(Web of Science)
Source: Web Of Science
Added: May 9, 2023
To maintain future supplier competition, manufacturers may support financially distressed suppliers by sourcing from them, even if they are less efficient than competitors, and by procuring larger quantities from them at higher prices. We analyze these strategies in a model in which a manufacturer decides for one of two available suppliers, supplier bankruptcy risk is endogenous, and financial distress can lead to internal or external reorganization. Following bankruptcy, the remaining supplier may serve as a backup option. Our research identifies settings in which the manufacturer should support the distressed supplier. We also find that in some cases, a nondistressed supplier may charge price premiums due to its competitor's distress, while in other cases, it may use predatory pricing to drive its competitor into bankruptcy. We complement our results with a small case study and show how our model can explain patterns observed in industry.