Procurement mechanism for dual sourcing and emergency production under capacity constraint

This study investigates the optimal procurement mechanism of a buyer who faces two potential suppliers with capacity constraint and private information on costs. The buyer places regular orders to the capacitated suppliers before demand realization and has the option to place an expensive emergency order depending on remaining capacity after that. We observe that the buyer solely exercises emergency option when the virtual cost of the first supplier (with low cost) is greater than emergency production cost. When this virtual cost is not too large, the buyer chooses dual sourcing solely, dual sourcing with emergency option, and single sourcing with emergency option when the capacity is small, moderate, and large, respectively. Compared with symmetric information, information asymmetry weakens capacity constraint for the buyer in terms of order quantity in regular sourcing. However, in terms of order quantity in emergency sourcing, information asymmetry either strengthens capacity constraint when total capacity is greater than expected demand, or weakens capacity constraint when the opposite is the case. Furthermore, the capacity constraint of the first supplier causes a greater buyer's profit loss than the second supplier (with high cost) does under symmetric information, and information asymmetry further amplifies this asymmetric effect. We also show that the dual sourcing mechanism can be extended to the case of multiple sourcing without loss of the main properties.