6. Conclusion
To deal with the increasingly severe consequences of supply chain disruption, the development of efficient methods to reduce the vulnerability of the globalized supply chain becomes an essential undertaking for both researchers and practitioners. In this study, we investigated the problem of disruption loss sharing and prevention investment in a supply chain facing supply risks. When internalizing the expected loss from supply chain disruption, suppliers become motivated to contribute to disruption prevention investment that will influence the entire supply chain. As with their production processes, the suppliers can make certain investments to improve their own reliability. The distribution of the supply chain disruption loss influences the suppliers’ investment motive. Therefore, a proper mechanism should be established to achieve the efficiency of the supply chain disruption prevention.
We presented two types of cost-sharing structures in this study: the divided and united cost-sharing structures. The two methods differ from each other mainly in the manner of identifying the accountability for the loss arising from the supply chain disruption. In the divided cost-sharing structure, suppliers are responsible for the disruption due to their own failure, but they share the costs incurred from joint failure. In the united sharing structure, suppliers share the supply chain loss whenever disruption occurs. Comparing the two types of cost-sharing structures, we found that supply chain reliability can be efficiently improved without significant increase in investment with the divided sharing structure. The reason is that when motivated by the prospect of being held responsible for their own failure, suppliers will reinforce their disruption prevention activities to reduce their own disruption probability. Such prevention efforts simultaneously benefit the entire supply chain. Without this positive externality, the united cost-sharing structure loses a certain amount of efficiency. Nevertheless, the united sharing structure may still prove to be competitive in practice. Under this structure, the focal company can control outsourcing suppliers by adjusting the cost-sharing ratio given its edge in terms of bargaining power.