Vulnerable options in supply chains: Effects of supplier competition

Concerned with the risk of supplier default, a firm may choose to diversify its orders among multiple suppliers. Furthermore, the discrepancy in production lead-times among suppliers furnishes a firm with a valuable option to defer ordering decisions until uncertainty has been partially resolved. The suppliers also have an option: to defer their pricing decisions. Using a single-period, multi-stage model of a two-echelon supply chain with competing risky suppliers and single manufacturer, this paper investigates how the supplier default risk and default co-dependence affect manufacturer procurement and production decisions, supplier pricing decisions, firms' profits, and the deferment option value and how the introduction of the deferment option alters supplier competition.