Commitment strategies and inventory decisions under supply disruption risk

Abstract

Abstract Pandemics, trade frictions, and military conflicts may disrupt manufacturers' production capacity. This paper develops a two‐period supply chain model with supply disruption risk in the second period to investigate inventory decisions and the manufacturer's commitment strategies. We consider three strategies: no commitment, price commitment, and inventory commitment. Inventory holding within the supply chain is investigated under each strategy, and the dominant strategy is determined by comparing them. Distinct results arise due to supply disruption risk. First, the retailer may have two opposite motives for inventory holding: inventory‐building motive and inventory‐shifting motive (i.e., shifting inventory burden to the manufacturer by decreasing order quantity), where the latter is exclusive to situations with supply disruption risk. Price commitment suppresses both motives, and inventory commitment suppresses only inventory shifting. Second, the retailer never holds inventory under price commitment. Under no commitment and inventory commitment, for high (low) holding cost and disruption risk, only the manufacturer (retailer) holds inventory. Furthermore, the manufacturer's inventory may decrease as disruption risk increases. Third, regarding strategy choice, while each strategy can be the dominant choice for the retailer and the supply chain, the manufacturer (weakly) prefers inventory commitment to the other two strategies. However, the implementation of inventory commitment demands high supply chain transparency, as the manufacturer always has an incentive to secretly deviate by holding less inventory. When inventory commitment is infeasible, the price commitment strategy's performance varies compared to no commitment, contrasting with the disruption risk‐free literature where wholesale price commitment never outperforms no commitment.