Newsvendor problem with multiple unreliable suppliers

Abstract

This paper focuses on supplier-related decisions in a newsvendor setting. We build upon the current literature by analysing the newsvendor problem with multiple unreliable and non-identical suppliers. We also incorporate both fixed ordering costs and capacity limits for supplier selection. We develop an exact algorithm to solve the problem optimally and a heuristic algorithm to solve the problem efficiently. Through structural properties of the optimal solution and a numerical study, we provide useful managerial implications regarding optimal sourcing strategies in complex supply chains. Previous literature concludes that with multiple unreliable (independent) suppliers, cost is the order qualifier and reliability is the order winner. We found that when fixed ordering costs and supply capacities exist, this insight no longer holds. We also examine the sensitivity of the sourcing decisions to supplier capacity levels, demand uncertainty, salvage value and shortage cost. Our results show that high levels of demand uncertainty lead firms to turn to a single-sourcing strategy whereas high salvage values and high shortage cost suggest multi-sourcing strategy.