Abstract
This paper studies a buyer’s inventory control problem under a long-term horizon. The buyer has one major supplier that is prone to disruption risks and one backup supplier with higher wholesale price. Two kinds of sourcing methods are available for the buyer: single sourcing with/without contingent supply and dual sourcing. In contingent sourcing, the backup supplier is capacitated and/or has yield uncertainty, whereas in dual sourcing the backup supplier has an incentive to offer output flexibility during disrupted periods. The buyer’s expected cost functions and the optimal base-stock levels using each sourcing method under long-term horizon are obtained, respectively. The effects of three risk parameters, disruption probability, contingent capacity or uncertainty, and backup flexibility, are examined using comparative studies and numerical computations. Four sourcing methods, namely, single sourcing with contingent supply, dual sourcing, and single sourcing from either of the two suppliers, are also compared. These findings can be used as a valuable guideline for companies to select an appropriate sourcing strategy under supply disruption risks.
Highlights
With widespread applications of outsourcing, supply chains are becoming increasingly dependent upon suppliers, and supply interruption can obstruct the normal operations of the entire supply chain
We study the situation in which a buyer has two sources for the same product: a main source and a backup supply source, where the former is prone to supply disruptions during which it provides no supply of the critical component and the latter offers higher wholesale price
We have studied a buyer’s decisions when their major supplier encounters supply disruption and backup suppliers are available for selection
Summary
With widespread applications of outsourcing, supply chains are becoming increasingly dependent upon suppliers, and supply interruption can obstruct the normal operations of the entire supply chain. After the disasters hit Japan in March of 2011, Toyota and their part suppliers struggled to resume operations, which paralyzed the downstream supply chain; for example, General Motors was reported to be the first US auto maker to close a factory because of a short supply of a Japan-made part. Most research to date has studied the optimal solutions for finite-horizon situations under supply disruption risks. Unlike most of the existing research efforts on supply risk management that look for optimal decision parameters and strategies in finite horizon, especially in single period, this work aims to study the optimal backup sourcing methods and inventory management decisions from the viewpoint of Discrete Dynamics in Nature and Society minimizing the buyer’s long-term cost. Note we use the term, buyer, in the paper to generally refer to any firm procuring physical items from outside vendors
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