Sourcing assemble-to-order inventories under supplier risk uncertainty

Abstract

In this paper, we consider sourcing and inventory spare-parts decisions in an assemble-to-order setting wherein components are subject to defect risk. Sourcing from dual suppliers diversifies the defect risk and reduces the variability of random defects. Upon careful consideration of assemble-to-order (ATO)-type repair and uncertainty of supplier reliability, we found that dual sourcing minimizes spare-part inventory cost by reducing the shortage cost or enabling storage of lesser amounts of the common resource. This paper identifies the conditions under which dual sourcing is better than sourcing from a single supplier in spite of lost pooling effect, higher procurement cost, and failure to achieve higher reliability.