Minimizing downside risks for global sourcing under price-sensitive stochastic demand, exchange rate uncertainties, and supplier capacity constraints

Abstract

In this paper, a methodology for minimizing downside risks in relationship to the supplier base, supplier capacities, purchase-order-quantity, purchase-order-time, and selling-price is presented. Specific purchasing and selling strategies to minimize downside risks when suppliers have limited capacities is offered. Numerical analyses are used to demonstrate the profound impact on risks due to the increases in the potential supplier base, together with the effects of purchasing price trends and the impact factor of selling price to the demand.We assume that the retailer stocks a certain quantity of a single product globally during a certain time period and then sells it to the domestic customers during the selling season. As exchange rate fluctuations are involved in the overseas purchasing and because the demand in the domestic selling is random and negatively impacted by the selling price, the retailer needs to combine uncertainties in both purchasing and selling to determine when an order should be placed, what quantity must be ordered, and what the selling price should be in order to minimize its downside risk, i.e., the possibility of missing target expected profits. We then consider multiple supplier candidates from different countries with limited capacity and determine the corresponding purchasing and selling decisions to minimize downside risks. The study is further extended to allow multiple purchasing at any time during the purchasing period from any supplier candidates.