Supply Risks and Asymmetric Information.

Abstract

In the extant supply-risk management literature, most research assumes the manufacturer is as knowledgeable about supply disruption risk as its suppliers. In practice, however, a supplier often has better information about its likelihood of experiencing a disruption than the manufacturer it serves. This dissertation studies the manufacturer's supply risk management under asymmetric information about supply disruption risk.

In the first essay, we consider a supply chain with one manufacturer and one unreliable supplier, who has private information about its probability of a disruption. In case of a disruption, the supplier runs backup production or pays penalty for non-delivery. We find information asymmetry about supply risk discourages the manufacturer from invoking the supplier's backup production option. However, asymmetric information could make backup production more valuable. Under asymmetric information, backup production could become more valuable, even as the probability of drawing a high-reliability supplier increases. Finally, higher reliability need not be a substitute for information.

In the second essay, we study the manufacturer's supply-risk management when it has a dual-sourcing option, that is, there are two unreliable suppliers in the supply base for the same part. We find information asymmetry pushes the manufacturer away from diversification (ordering from both suppliers) toward sole-sourcing to leverage supplier competition. Asymmetric information may cause the manufacturer to stop diversifying, even as the supply-base reliability worsens. Hence, information becomes more valuable when changes in the underlying business condition encourage diversification, such as an increase in the manufacturer's cost of disruption and a decrease in the codependence between the suppliers' disruptions. Lastly, asymmetric information may make a dual-sourcing option more or less valuable.

In the third essay, the manufacturer delegates procurement of a part to one of its two unreliable suppliers, who then collaborate to fulfill the manufacturer's requirement. The preliminary results show that, compared to direct contracting, under delegation the manufacturer may induce more or less diversification, depending on the suppliers' reliability types. Delegation may decrease or increase the manufacturer's profit. These effects of delegation would not be observed under symmetric information.