Optimal ordering policies and sourcing strategies with supply disruption

Abstract

Successful supply chain management has to find an effective sourcing strategy to cope with uncertainty in both supply and demand. Most of existing literature deals with the problems related to the uncertain demand, however, in this paper, we discuss a model in which a firm is in the face of demand uncertainty and supplier reliability uncertainty at the same time prior to a single selling season. The firm has two instants to order from two suppliers (one supplier is completely reliable and the other is unreliable), while the unreliable supplier's reliability is uncertain at instant 1 and is completely observed at instant 2. To determine the cost-minimizing ordering strategies at both instants, the firm has to evaluate the trade-off between a more accurate forecast and a potentially higher unit cost at instant 2. We present the optimal supplementary order quantities with the realized reliability and give the optimal ordering policies and sourcing strategies at instant 1 under certain conditions. We find conditions under which the order quantity from the unreliable supplier at instant 1 is decreasing in the reorder costs at instant 2.