Managing supply chains facing extreme weather: Supplier’s nature and investment

Abstract

In recent times, extreme weather conditions have been playing havoc on supply chains. Companies are investing in climate-specific assets to mitigate weather-related risks and ensure continuous supply chain activities. In this paper, we analytically investigate a supplier’s decision regarding climate-specific investment to understand how the probability of weather disruption, its effort during extreme weather, and its reciprocal behavior influence the buyer’s optimal order decision. We develop a dynamic game model to capture and examine the nature of the supplier–buyer interaction. We also investigate the impact of the supplier’s nature on this interaction during an extreme weather event. Our key findings are as follows: (i) With a higher probability of extreme weather disruption, the supplier prefers generic investment over climate-specific investment. (ii) With a decrease in the probability of extreme weather events, the non-proactive supplier prefers generic investment, whereas the proactive supplier prefers climate-specific investment. This situation allows proactive suppliers to reveal themselves and buyers to recognize the nature of suppliers by observing their investment type. The buyer chooses to source from the proactive supplier when it anticipates extreme weather scenarios. (iii) A downstream buyer orders less from the non-proactive supplier and orders the required quantity from the proactive supplier. There exists a pooling equilibrium for the supplier–buyer interaction where all types of suppliers choose a climate-specific investment, and the buyer orders its required order quantity. Subsequently, through extended analysis, we demonstrate that the proactive supplier charges a higher per-unit price to the buyer in the case of a higher possibility of extreme weather events. The proactive supplier charges a reduced per-unit price only if it exhibits reciprocal behavior. From our analysis, we also find that, with an increase in the cost of climate-specific investment, a non-proactive supplier tends to choose a generic investment and a proactive supplier tends to choose a climate-specific investment.