Supplier Development and Integration in Competitive Supply Chains

Supplier development and supplier integration are two deeply interconnected strategic tools that manufacturers often employ to improve the efficiency and competitiveness of their supply chains. This paper studies the interaction of these two strategic decisions in a competitive environment. Specifically, we analyze a duopoly model where manufacturers source two (different) components from their suppliers to produce and sell substitutable products in the market. Each manufacturer has a distinct collaborative supplier whom it decides whether to integrate with and how much to invest on to help reduce the supplier’s cost. We consider two sourcing structures: dedicated sourcing (sourcing both components only from its collaborative supplier) and diversified sourcing (sourcing one component from its collaborative supplier and the other from its competitor’s). We find that in most cases supplier integration leads to a larger investment on supplier development; and at equilibrium both manufacturers integrate with their collaborative suppliers. However, when the heterogeneity of the manufacturers’ supplier development capabilities is high, under the dedicated sourcing, supplier integration may result in a lower supplier development level from the less capable manufacturer who, at equilibrium, prefers not to integrate with its supplier. Furthermore, we find that in most cases, the manufacturers invest more on supplier development under the dedicated sourcing, while both manufacturers prefer the diversified sourcing to the dedicated one. The exception occurs when the heterogeneity of the manufacturers’ supplier development capabilities is high: the less capable manufacturer may invest more on supplier development under the diversified sourcing and the more capable manufacturer is better-off under the dedicated sourcing. Finally, by comparing with the monopoly case, we show that the market competition is one important driver to many of the preceding results.