Global Sourcing and Capability Investment in the Face of Trade Frictions
Abstract: Global Sourcing and Capability Investment in the Face of Trade Frictions
In this talk, I will discuss how recent trade frictions between countries impact the sourcing decisions and contract design of supply chain participants. First, I will talk about the effects of trade tariffs on buyers' sourcing choices and the adoption of trade contracts. We explore various combinations of trade contracts governed by Incoterms and tariff calculation bases. Specifically, we consider three types of Incoterms contracts—Ex Works (EXW), Delivered at Place (DAP), and Delivered Duty Paid (DDP)—based on who bears the freight charges and import tariffs. Depending on the cost basis on which the tariff is calculated, two tariff calculation bases, i.e., Free on Board (FOB) and Cost Insurance Freight (CIF), are considered. We find that, as the tariff rate increases, counter to our intuition, the buyer is more willing to bear the tariff and freight charge. Interestingly, we also show that dual sourcing is the equilibrium sourcing strategy for the buyer under FOB based tariff, while single sourcing from the unreliable supplier located in a free trade area can sustain as an equilibrium sourcing strategy under CIF based tariff when the tariff rate is relatively high. Next, I will discuss the impact of mandatory exclusion, imposed by government regulation, that affects free trade among parties. We show that mandatory exclusion can exacerbate or mitigate the independent manufacturer’s incentive to invest in internal sourcing capability, relative to a setting in which the supplier determines its distribution strategy in the absence of such government regulations. Moreover, we show that mandatory exclusion always hurts the supplier, but it can benefit or hurt the manufacturers as well as the consumers, depending on the independent manufacturer’s investment cost and the conditions leading to an exclusionary contract under free trade.
Speaker Bio
Yulan Wang is a full professor and associated head (research) of the Department of the Logistics and Maritime Studies at Faculty of Business of the Hong Kong Polytechnic University. She has a broad research interest in operations and supply chain management, behavioral operations, and operations-IS-marketing interface. Her research work has been published in leading academic journals such as Management Science, Operations Research, Manufacturing & Service Operations Management, and Production and Operations Management. Dr Wang serves as a senior editor of Production and Operations Management and an associate editor of Decision Sciences, Naval Research Logistics and Omega. She currently serves as the president of POMS-HK Chapter.