Abstract
In this paper, a dynamic model is presented to study retailer’s procurement strategy when supply stability is endogenously determined. The optimal supply stability as well as the optimal purchasing strategy are characterized with a quadratic cost function. Based on these models, the following findings are brought about. Firstly, when the difficulty level of building supply stability exceeds a certain threshold, it would be more profitable for the retailer to choose a less reliable supplier. Secondly, given that the suppliers can get positive profit, the retailer would choose the one who has the strongest ability to be reliable. Thirdly, the equilibrium supply to the retailer would always meet the demand on the retailing market. Finally, emergency procurement is shown to be an effective way to reduce the risk of supply chain disruptions. To better fit the real situations, an extended model which considers the impact of the stability on costs is further discussed.
Highlights
In the past decades, the risk of supply disruptions has greatly influenced many industries
After comparing the case with emergency procurement strategy and the case without emergency procurement strategy, we find that: the retailer would prefer to improve the stability if there is no emergency procurement strategy
When the difficulty level of building supply stability exceeds a certain threshold, it would be more profitable for the retailer to choose a less reliable supplier
Summary
The risk of supply disruptions has greatly influenced many industries. The findings show that: when supplier’s cost of improving reliability is below a threshold, the retailer would choose a procurement strategy which gives the supplier an incentive to pursue the highest supply reliability. When the cost is above the threshold, it would be the best for the retailer to choose a procurement strategy which gives the supplier an incentive to pursue low supply reliability. The main results in the basic model still hold that when the cost is below the threshold mentioned previously, the supplier would reach the highest supply reliability When it is above this threshold and the procurement price is high, retailer would choose less reliable suppliers. For any given order quantity q and purchasing price w, the optimal stability level of supplier is: θ∗(q, w; β) = min{wq/β, 1} This result is determined by differentiating (1) with respect to θ. We would use uniform distribution as an example to show how to solve the optimal strategy
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