Production planning and backup sourcing strategy of a buyer-dominant supply chain with random yield and demand

Abstract

This paper studies the backup sourcing strategy of the buyer and the production planning of the supplier in presence of both random yield and random demand. Since the production is susceptible to the randomness of yield beyond the control of the supplier, the buyer may access to a backup sourcing option for the finished items. We analyse the value of backup sourcing for both the decentralised and centralised channels. Backup sourcing strategy of the buyer may lower the supply chain's performance. We show that the order quantity of the buyer does not change the stocking factor of the supplier's input. Meanwhile, compared with the centralised operation, the decentralised operation is more dependent on the backup sourcing to reduce supply shortage of the contracting supplier. From the channel's perspective, an incentive scheme is developed to facilitate the coordination of both the buyer and the contracting supplier, we show that the proposed option contract can allow the supply chain members to share the respective risks involved in the production and selling processes. Finally, we also provide qualitative insights based on numerical examples of the centralised and decentralised solutions.