Capacity allocation with differentiated product demands under dual sourcing

This paper investigates a two-stage decentralized supply chain with one capacity-constrained manufacturer sourcing from two competing suppliers with asymmetric component quality. The manufacturer sells an established product with demand exceeding its capacity, and introduces a new, higher-quality product with small and uncertain demand. As opposed to the process maturity for producing the established product, the higher-quality product process suffers from yield uncertainty and higher production cost. We analyze the manufacturer's capacity allocation for the processes and the suppliers' price decisions through a game-theoretical framework, and explore how model parameters influence the manufacturer's decision and profit. One interesting finding is that the effects of certain model parameters, such as the expected yield rate and yield rate variation of producing a higher-quality product, on the manufacturer's profit are contingent upon the expected demand of the higher-quality product. This outcome could help guide manufacturers' profit planning decisions when the expected demand of higher-quality products is very small.