Tactical and Strategic Risks From Supply Disruptions in Competing Supply Chains

ABSTRACT Supply chain disruptions can lead to both tactical (i.e., loss of short‐term sales during a disruption) and strategic (i.e., loss of long‐term market share) consequences. We model the impact of a supply disruption on competing supply chains in which two firms compete for a limited backup supply. We describe strategies for both firms in a two‐stage game comprising (i) Preparation , which involves investment prior to the disruption to secure backup supply, and (ii) Response , which involves post‐disruption purchasing from the secured backup supply for a component whose availability has been compromised. Firms maximize their long‐run profit while simultaneously deciding their preparation and response strategies. We find the equilibrium strategy for firms in the two stages of the game. We describe the conditions under which a firm can use its preparation investment to not only minimize its disruption risks but also capture more market share. We also introduce a Leader‐Follower‐based game‐theoretic model that helps measure each firm's risk exposure by estimating the benefit of preparation. We identify the primary factors that influence the firm's preparation investment and affect customer satisfaction, and show that these depend on the size of the firm and the length of the disruption. This enables us to characterize the appropriate balance between protecting market share and exploiting a disruption to gain market share.