Sourcing Decisions With Time-Varying Emergency Order Costs and Production Disruption During Environmental Enforcement Campaigns

Abstract

This study investigates a retailer's sourcing decisions from two different suppliers (i.e., compliant and substandard suppliers) during environmental enforcement campaigns. The compliant supplier spends more on environmental protection and will supply products stably at a higher price, whereas the substandard supplier is cheaper but less environmentally friendly. Due to environmental issues, the substandard supplier is at risk of production disruption, which makes the supplier partially deliver the order with the quantity related to the disruption time. When the disruption occurs, an emergency ordering opportunity is provided at a cost that increases with the disruption time. We derive optimal order quantities and threshold conditions regarding supplier selection. If the order cost of the substandard supplier (or compliant supplier) is relatively small (or large), the compliant supplier will always be abandoned regardless of the increasing rate of the emergency order cost. Otherwise, the compliant supplier will be selected only if the increasing rate is large. The impacts of loss aversion are also investigated. Loss aversion will inhibit the retailer's willingness to place an emergency order and may increase the retailer's preference for the substandard supplier rather than the compliant supplier. Numerical experiments are conducted based on the sourcing problem of the company Mengniu.