The impact of a quantity flexibility contract on disruption management in a dual-sourcing supply chain

This paper focuses on addressing resilience in a two-tier supply chain under supply disruption and demand uncertainty by integrating dual-sourcing and flexibility strategies. The supply chain comprises two suppliers and one manufacturer. In the event of a disruption with the primary supplier, a reliable backup source is chosen to supply some of the orders to the manufacturer at a higher price and lower quality than the primary source. This study aims to answer the following questions by developing a Stackelberg game model between the backup supplier and the manufacturer: How should the order quantity from each supplier be determined, and how can the backup supplier set the selling price of the component under supply disruption? This study also looks into coordinating the backup supplier and the manufacturer using a Quantity Flexibility Contract (QFC) to create flexibility in addition to redundancy for the manufacturer to manage supply disruption and demand uncertainty. Analytical results show that the component's selling price by the backup supplier increases with the disruption probability in the decentralized system but remains independent of the disruption probability under QFC. Numerical calculations demonstrate that when the disruption probability is not very high, accepting the contract prevents the backup supplier's exploitation of supply disruption and improves profits. Although the feasible range of flexibility rate for agreeing on QFC gets tighter with the increased disruption probability, the penalty price in QFC will decrease, indicating that the contract offers the manufacturer more resilience in the case of a more likely supply disruption.