In modern manufacturing, the implementation of dual or multi-sourcing strategies presents challenges concerning the variability in component quality. This study investigates a supply chain where a manufacturer sources components from an incumbent and an entrant supplier, with the latter having lower quality but meeting standards. The entrant aims to enhance quality through research and development (R&D) efforts, which may succeed or fail. Failure in R&D leads the manufacturer to either limit the high-quality component use from the incumbent, offer consistent but lower-performance products in one market, or sell distinct products in two separate markets. We formulate the problem as a two-stage game within defined market structures (single- or two-market) and derive equilibrium solutions for both models. Our findings reveal interesting managerial in[1]sights. In both market structures, we surprisingly find that an increase in the likelihood of success for the entrant supplier’s R&D may negatively impact the entrant supplier while benefiting the manufacturer and the other supplier. Dual sourcing is beneficial to the manufacturer in general, except when the entrant supplier is highly uncompetitive in quality. Furthermore, we derive analytical conditions that dictate when each member of the supply chain favors either the single-market model or the two-market model over the other.

Qingkai Ji is a professor at International Business School of Hainan University. He was a visiting scholar at University Of California Riverside in 2012-2013. His research centers on supply chain and operations management in the context of new technologies such as blockchain, IoT, AI, and so on. He has published in premier academic journals such as Omega, European Journal of Operational Research, International Journal of Production Research, Managerial and Decision Economics, and Ocean and Coastal Management. He has received three program grants from the National Natural Science Foundation of China. Dr. Ji obtained his Ph.D. in Management Science and Engineering from Dalian University of Technology.