Disruption Risk and Optimal Sourcing in Multitier Supply Networks

A manufacturer worried about disruptions at its suppliers’ suppliers usually cannot choose those tier-2 firms directly, but it can shape their selection through contracts with tier 1. When tier-1 suppliers share tier-2 sources in a diamond-shaped network, the manufacturer should rely less on excess inventory and multisourcing and more on inducing tier-1 mitigation. Yet manufacturers prefer less overlap while tier-1 suppliers may prefer more; penalty contracts can alleviate this conflict.

Management Science, vol. 63, no. 8, pp. 2397–2419