Mitigating Supply Disruption Risks: Impact of Product Upgrading Strategy

Supply disruption is one of the crucial risks faced by supply chains in the changing external environment. To mitigate supply disruption risk and enhance resilience, product upgrading with Research and Development (R&D) investment is widely adopted by firms. In this paper, we establish a game-theoretic model to study the operation decisions and product upgrading strategies for a supply chain. Specifically, Firm 1 faces supply disruption risks when selling a normal product with a key component sourced from an unreliable supplier. To achieve supply resilience, the firm has an incentive to replace the unreliable supplier with product upgrading supported by R&D. It has an option to make high or low investments in R&D projects, indicating a high or low success rate. Our findings reveal that Firm 1 prefers to make investments in R&D for the upgraded product at a high investment level when the additional production cost of the upgraded product is relatively low or both the upgrading cost and supply disruption risk are relatively high. Extending our model to a duopoly scenario, we investigate the impact of competition on the product upgrading strategy selection. It is shown that a firm with a sufficiently large market share can drive its competitor out of the market by making R&D investments. Compared to the monopoly scenario, Firm 1 has a stronger incentive to upgrade the product under the duopoly scenario if its market share is relatively low. Finally, we identify the conditions where consumers get benefits from product upgrading. Our findings shed light on the importance of product upgrading strategy in a volatile business environment and provide insights into how firms can effectively mitigate supply disruption risk through R&D investments.