Supplier Development under Supply Risk and Reputational Risk

Abstract

This paper considers the supplier investment decision-making problem in a supply chain consisting of an original equipment manufacturer (OEM), a global supplier, and a local supplier. To reduce dependence on global suppliers and improve supply stability, we develop a differential game model to investigate the optimal investment decisions of the OEM towards the local supplier under different risk scenarios and the impact of different risks on the optimal decisions. The results show that investment efficiency and risks have a significant impact on OEM investment decisions. Specifically, when the OEM has higher investment efficiency, investing in the local supplier is profitable for the OEM; conversely, when the investment efficiency of the OEM is lower, it does not invest. In addition, an increase in the supply risk of the global supplier will lower the entry threshold for OEM investment, but an increase in the supply risk of the local supplier and the reputational risk of both will increase this threshold, meaning that only the OEM with significantly higher investment efficiency can profit.

Keywords

Supplier investment / supplier development / supply risk / reputational risk / dual sourcing

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