Enhancing the Benefits of Dual Sourcing with Upstream Visibility

Problem definition: Yield uncertainty is a ubiquitous and serious issue in supply chain management. A common mitigation strategy for buyers is dual sourcing: ordering the same good from multiple suppliers to hedge against uncertainty in the suppliers’ ability to fulfill orders. In the literature, it is typically assumed that there is a single buyer that knows or can learn the reliability of each supplier, which is assumed to be exogenous to the buyer’s ordering behavior. However, in supply chains with a large number of buyers, this assumption is limiting. Methodology/results: We study a stylized supply chain model consisting of n buyers and two suppliers. The buyers do not observe their suppliers’ reliabilities a priori but can learn about them over time based on their interactions with the suppliers (in the learning setting) or through supply chain visibility (in the upstream visibility setting). We allow for the suppliers’ reliabilities to be impacted by the buyers’ ordering behaviors; when suppliers receive larger order volumes, it diminishes their ability to meet a buyer’s order in full, and thus, their perceived reliability falls. As a result, buyers—who cannot distinguish whether shortfalls are caused by low supplier capacity versus order congestion—may increase order quantities to hedge against shortage risk. We study the long-run ordering dynamics that emerge from this model in both settings. Managerial implications: We find that without visibility, “overordering spirals” can emerge, whereby buyers continue to inflate orders to the suppliers because they perceive shortages. This phenomenon has been observed when sudden, unexplained shortages occur, such as in the semiconductor or drug manufacturing industries. Interestingly, this can occur even in cases where shortages would not arise under truthful ordering but are created by inflated orders. Upstream visibility can be used as a tool to combat these spirals and can benefit both the buyers and the suppliers.

History: This paper was selected as part of the 1RR initiative between the M&SOM Journal and the MSOM Society. This paper was part of the 2024 MSOM Supply Chain Management SIG Conference.

Funding: This research is based upon work supported by the National Science Foundation Graduate Research Fellowship Program [Grant 1745302]. G. Perakis acknowledges support from the National Science Foundation [Grant CMMI-1563343].

Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2025.0278.