Expensive Supplier Research Articles

Mitigating risky sourcing with a responsible supplier in a competitive environment: the implication of product line design and sourcing diversification

We consider the sourcing decisions of two competing firms with a potential responsibility violation risk from a supplier. There are two consumer segments in the market: socially and nonsocially conscious consumers. When a responsibility violation occurs, the socially conscious consumers will not purchase from any firm who sources from the risky supplier. To avoid this potential demand loss, the two firms can consider sourcing from a responsible but more expensive supplier. We develop game theoretical models to investigate the firms’ optimal sourcing strategies and examine the effects of product line design and sourcing diversification on firms’ incentives to source responsibly. Our study shows that when each firm adopts a single sourcing strategy, as the suppliers’ cost difference increases, both of their sourcing choices deviate from the responsible supplier to the risky supplier. Moreover, we find that when the firm sourcing responsibly can determine whether to extend the product line to offer responsible and conventional products, product line design improves both firms’ profits and induces them to source responsibly. Finally, we find that when each firm can choose between a single and a dual sourcing strategy, sourcing diversification can be potentially detrimental for both firms and prevent them from sourcing responsibly.

Control of Dual-Sourcing Inventory Systems Using Recurrent Neural Networks

A key challenge in inventory management is to identify policies that optimally replenish inventory from multiple suppliers. To solve such optimization problems, inventory managers need to decide what quantities to order from each supplier given the net inventory and outstanding orders so that the expected backlogging, holding, and sourcing costs are jointly minimized. Inventory management problems have been studied extensively for more than 60 years, and yet even basic dual-sourcing problems, in which orders from an expensive supplier arrive faster than orders from a regular supplier, remain intractable in their general form. In addition, there is an emerging need to develop proactive, scalable optimization algorithms that can adjust their recommendations to dynamic demand shifts in a timely fashion. In this work, we approach dual sourcing from a neural network–based optimization lens and incorporate information on inventory dynamics and its replenishment (i.e., control) policies into the design of recurrent neural networks. We show that the proposed neural network controllers (NNCs) are able to learn near-optimal policies of commonly used instances within a few minutes of CPU time on a regular personal computer. To demonstrate the versatility of NNCs, we also show that they can control inventory dynamics with empirical, nonstationary demand distributions that are challenging to tackle effectively using alternative, state-of-the-art approaches. Our work shows that high-quality solutions of complex inventory management problems with nonstationary demand can be obtained with deep neural network optimization approaches that directly account for inventory dynamics in their optimization process. As such, our research opens up new ways of efficiently managing complex, high-dimensional inventory dynamics. History: Accepted by Ram Ramesh, Area Editor for Data Science & Machine Learning. Funding: This work was supported by Schweizerischer Nationalfonds zur Förderung der Wissenschaftlichen Forschung (NCCR Automation) [Grant P2EZP2 191888] and the Army Research Office [Grant W911NF-23-1-0129]. Supplemental Material: The software that supports the findings of this study is available within the paper and its Supplemental Information ( https://pubsonline.informs.org/doi/suppl/10.1287/ijoc.2022.0136 ) as well as from the IJOC GitHub software repository ( https://github.com/INFORMSJoC/2022.0136 ). The complete IJOC Software and Data Repository is available at https://informsjoc.github.io/ .

Dual sourcing systems: An asymptotic result for the cost of optimal tailored base-surge (TBS) policy

We study the problem of managing an inventory system with two supply sources which differ in their lead times and unit prices. We consider a simple class of policies called Tailored Base-Surge (TBS) policies for managing this system. These policies order a constant amount in every period from the slow supplier and order up to a target level in every period from the faster and more expensive supplier. We prove an asymptotic convergence result on the cost of an optimal TBS policy as the unit inventory holding cost goes to zero while keeping the service level constant and simultaneously increasing the unit cost of procurement from the faster supplier. The asymptotic value of cost also serves as an upper bound on the optimal cost of all dual sourcing systems with the same service level and product of unit procurement and holding cost. This bound is better than the previously best known upper bound on the cost of an optimal dual sourcing policy in the same regime.

The impact of multiple products and limited capacity on routine sourcing decisions

We study the influence of limited capacity and multiple products on the optimal sourcing decisions for a manufacturer subject to supply and demand uncertainty. The manufacturer produces two products. The component of one product is sourced from two suppliers, one perfectly reliable and the other cheaper but unreliable, failing to deliver the order with some probability. We develop a mathematical model for a single-period setting and study the associated optimality conditions. Our results show that the supplier diversification strategy is significantly different when the buyer has limited capacity. Specifically, we find that single sourcing from an expensive and reliable supplier may be an optimal procurement strategy even when a cheaper option exists. In addition, when producing multiple products, the optimal sourcing strategy may hold inventory of one component to reduce the amount of capacity idling when the supply of a different component is disrupted. We use stochastic programming to validate our single-period findings in a multi-period setting. Although carrying inventory of finished products provides another tactic to mitigate supply uncertainty in a multi-period environment, we observe the key findings from single period, like single-sourcing from an expensive but reliable supplier, remain valid.

Increased Transparency in Procurement: The Role of Peer Effects

Motivated by recent initiatives to increase transparency in procurement, we study the effects of disclosing information about previous purchases in a setting where an organization delegates its purchasing decisions to its employees. When employees can use their own discretion, which may be influenced by personal preferences, to select a supplier, the incentives of the employees and the organization may be misaligned. Disclosing information about previous purchasing decisions made by other employees can reduce or exacerbate this misalignment, as peer effects may come into play. To understand the effects of transparency, we introduce a theoretical model that compares employees’ actions in two settings: one where employees cannot observe each other’s choices and one where they can observe the decision previously made by a peer before making their own. Two behavioral assumptions are central to our model: that employees are heterogeneous in their reciprocity toward their employer, and that they experience peer effects in the form of income inequality aversion toward their peer. As a result, our model predicts the existence of negative spillovers as a reciprocal employee is more likely to choose the expensive supplier (which gives the employee a personal reward) when the employee observes that a peer did so. A laboratory experiment confirms the existence of negative spillovers and the main behavioral mechanisms described in our model. A surprising result not predicted by our theory is that employees whose decisions are observed by their peers are less likely to choose the expensive supplier than the employees in the no-transparency case. We show that observed employees’ preferences for compliance with the social norm of appropriate purchasing behavior explain our data well. This paper was accepted by Yuval Victor Martinez de Albeniz, operations management.

Dynamic pricing and lot sizing for a newsvendor problem with supplier selection, quantity discounts, and limited supply capacity

This study considers the joint pricing and sourcing decision problem for a buyer purchasing a product from a set of suppliers who offer quantity discounts. The suppliers’ supply and/or the buyer’s warehouse capacities are bounded, causing the buyer to split its order over multiple suppliers and periods. This study assumes that demand is random over the planning horizon, divided into several periods, and dependent on price and time. The buyer, in each period, has to determine its retail price and the order quantities from the suppliers that maximize its expected profit. The problem is, therefore, formulated as mixed-integer nonlinear programming one, and an algorithm is developed to solve it. Numerical results show that the buyer may not buy up to the maximum capacity of a supplier with the lowest price when its order quantity exceeds the supply capacity of that supplier. In this case, the buyer needs to assign the remaining quantity to a more expensive supplier given that it exceeds that supplier’s minimum order quantity. The buyer could consider, as another option, convincing the low-priced supplier to increase its supply capacity in return for accepting a higher wholesale price, which only applies to the portion of an order exceeding the original supply capacity. For this to work, it should be economical for both players. Many numerical examples are provided with their results discussed to draw some insights and concluding remarks.

Pressure measurement location selection in industrial gas headers for buffering control

This paper uses a nonlinear model of the pressure and flow dynamics inside a gas header to obtain the optimal pressure measurement location for buffering control. The nonlinear model is derived from governing equations using the spectral element method (SEM). The pressure states at the collocation points are estimated using an extended Kalman filter (EKF) and subsequently used as potential measuring locations. A staggered regulatory pressure control scheme is used to evaluate the closed-loop performance of the objective function in a self-optimising control (SOC) framework. It is found that there are opposing goals in the optimisation scheme and that the final pressure location selection is dependent on the economic importance of these goals. The economic goals which cause opposing control objectives include minimising flaring, providing down-stream consumer stability, and limiting expensive supplier use.

The Effects of Global Tax Disparity on Production Outsourcing

This paper studies the effects of international taxation on multinational firms' production outsourcing strategies, which has attracted recent attention from both practitioners and legislators. We find that under the territorial tax system, the presence of global tax disparity may result in subtle changes of a firm's production outsourcing strategy. In particular, the tax consideration can make the firm more inclined to keep material procurement in house and use buy-sell arrangement to retain profit in low tax jurisdictions. Such an effect can not only cause the firm to choose a more expensive material supplier but also overproduce the products. Therefore, besides the general concern of income shifting, tax considerations can further lead to operational distortions. We show that to reduce tax disparity while preventing tax exemption for shifted foreign profit may lead to a win-win outcome for the firm and the stakeholders. The firm will make more efficient operational decisions to obtain a higher after-tax profit at certain reduced tax rate, while the home country stakeholders can receive more tax income. Interestingly, the foreign contract manufacturer may also benefit from such a change.

Strategic sourcing in forward and spot markets with reliable and unreliable suppliers

We study sourcing and purchasing strategies of a monopolistic retailer in a market with a reliable but expensive supplier and an unreliable but cheap supplier with random yield. The retailer can solely source from either supplier or adopt dual sourcing in the forward market while engaging in spot trade. Our study shows that the retailer's relative reliance on forward sourcing is lessened in the presence of a reliable supplier with higher cost, an unreliable supplier with more variable yield, and a more sensitive spot market. Moreover, highly variable forward supply enhances the value of a spot market when compared with high forward cost. Regarding the forward sourcing decision, we find that dual sourcing always benefits the retailer as well as the whole society, whereas upstream competition is not definitely harmful to suppliers. Dual sourcing might benefit the reliable supplier when its cost is sufficiently low or the unreliable supplier when its yield variability is sufficiently small. Besides, dual sourcing could degrade into unreliable sole sourcing when the reliable supplier is relatively expensive. Moreover, in spite of the competition between suppliers in the forward market, dual sourcing does not definitely increase the retailer's reliance on forward sourcing relative to spot trade.

Increased Transparency in Procurement: The Role of Peer-Effects

Motivated by recent initiatives to increase transparency in procurement, we study the effects of disclosing information about previous purchases in a setting where an organization delegates its purchasing decisions to its employees. When employees can use their own discretion —which may be influenced by personal preferences— to select a supplier, the incentives of the employees and the organization may be misaligned. Disclosing information about previous purchasing decisions made by other employees can reduce or exacerbate his misalignment, as peer effects may come into play. To understand the effects of transparency, we introduce a theoretical model that compares employees’ actions in a setting where they cannot observe each other’s choices, to a setting where they can observe the decision previously made by a peer before making their own. Two behavioral considerations are central to our model: that employees are heterogeneous in their reciprocity towards their employer, and that they experience peer effects in the form of income inequality aversion towards their peer. As a result, our model predicts the existence of negative spillovers as a reciprocal employee is more likely to choose the expensive supplier (which gives him a personal reward) when he observes that a peer did so. A laboratory experiment confirms the existence of negative spillovers and the main behavioral mechanisms described in our model. A surprising result not predicted by our theory, is that employees whose decisions are observed by their peers are less likely to choose the expensive supplier than the employees in the no transparency case. We show that observed employees’ preferences for compliance with the social norm of “appropriate purchasing behavior” explain our data well.

Pricing and sourcing strategies for competing retailers in supply chains under disruption risk

Supply disruption has become a critical concern for businesses around the world. The extant literature has dealt mainly with the sourcing decision for a price-taking retailer. In this paper, we study how a retailer can use pricing decisions along with sourcing strategies under disruption risk while competing against another retailer with a more reliable supply chain. The retailer uses two decision levers namely, price adjustment, and split of order between reliable but expensive supplier and/or cheap but unreliable supplier to compete in the end market. Our analyses show that the competitive dynamics is shaped by the cost structure of the players, relative market potential and disruption risk. We find that the retailer focuses on reliable supplies with less price adjustment when it enjoys procurement cost advantage and higher market potential. On the other hand, as the procurement cost advantage and market potential shifts to the competitor; the retailer opts for cheaper but risky supplies and relies on drastic price adjustments. These results have important managerial implications and provide critical guidelines for retailers involved in pricing and sourcing decisions under the threat of supply disruptions.

Dynamic procurement from multiple suppliers with random capacities

We study a periodic-review inventory model. In each period, the buyer can source from N suppliers that have random capacities. The optimal ordering policy for this problem has been shown to be a reorder point policy in a setting that includes price-dependent demand (Feng and Shi in Prod Oper Manag 21(3):547–563, 2012). We show that if one of the suppliers is reliable, then the optimal order quantity from each unreliable and cheaper supplier stays constant when inventory level is less than the reorder point of the reliable supplier. This implies that having one reliable supplier would result in a relatively stable ordering policy, despite the unreliability of the rest of the suppliers. For the special case of sourcing from two suppliers, we first prove that the optimal policy is monotone in the inventory level. Then, we provide insights into order allocation between an expensive but more reliable supplier and a cheaper but less reliable one. Specifically, the optimal policy tends to allocate more units to the more reliable one when inventory level is low. For the special case of all-or-nothing supply, there is a threshold such that if the inventory is below the threshold, then the expensive supplier’s order quantity is larger than that of the cheaper. Finally, we show that the marginal cost of holding inventory increases, while the optimal order quantities decrease over the planning horizon.

Sourcing Strategies and Supplier Incentives for Short-Life-Cycle Goods

Multiple sourcing with quick response has been recognized as a useful tool to manage demand risk for short-life-cycle goods. However, general wisdom has traditionally ignored the effect of these practices on supplier incentives. In this paper we find that, when suppliers make pricing decisions, dual sourcing does not always lead to higher supply chain efficiency or buyer profits as compared to single sourcing. This loss takes place when suppliers commit to prices up front, before any possible forecast change, but not when they delay the price quotes after demand forecasts have been updated. Specifically, with up-front price commitment, dual sourcing leads to inflation of supplier prices because expensive suppliers will still receive part of the business if they are sufficiently quick. Thus, when supplier prices are endogenous, double marginalization may offset the additional buyer profit enabled by higher ordering flexibility. In contrast, with delayed price quotes, a buyer will find dual sourcing beneficial because single sourcing locks it into a monopolistic supplier that extracts most of the available rent. This paper was accepted by Martin Lariviere, operations management.

Optimal procurement strategies from suppliers with random yield and all-or-nothing risks

Supply uncertainty has been elevated to a strategic level concern in driving supply chain success. This paper considers that a firm faces a deterministic demand and procures from two unreliable suppliers: one is subject to a random disruption and might deliver all or nothing of the firm’s order, while the other one exposes to a random yield risk for the firm’s order. We explore the models of no recourse and ordering with recourse, and derive optimal solutions for each model. We provide the conditions under which single or dual sourcing strategy should be used. We also compare the decisions and profits among different models through computational experiments and find that it is more beneficial to order from the relatively expensive supplier as a backup source.

Do Responsible Buyers Source from Responsible Suppliers? Buyer-Supplier Ties and Corporate Social Responsibility

Abstract: In this paper, we examine the role of corporate social responsibility (CSR) in supply-chain formation and the consequence of buyers’ initiatives in promoting CSR. Using firm-level CSR measures from the KLD dataset and buyer-supplier pairs from the Compustat Segment dataset, we first introduce CSR similarity between buyers and suppliers as a selection criterion for supply-chain formation and examine why socially responsible (irresponsible) buyers often source from responsible (irresponsible) suppliers. Although social status (i.e., CSR) similarity derived from matching theory can partially explain such supply-chain formation, this similarity fails to explain fully why these formations occur. Concerns over sourcing cost moderates the effect of responsible buyers sourcing from responsible (and usually expensive) suppliers, leading to situations in which responsible buyers source from irresponsible suppliers. Moreover, supplier information transparency offered by a firm’s CSR status moderates irresponsible buyers’ sourcing from irresponsible suppliers. Finally, we find supportive evidence that if one party improves its CSR, then the other party will do the same, irrespective of the selection made. Such a relation sheds us understand a key aspect of CSR promotion: CSR pressure placed upon downstream firms could be propagated along the chains, thus forcing firms on these chains to be more responsible.

The Impact of Bakery Industry Supply Chain on the Pricing of Bread in Zimbabwe

The paper sets out to carry an exploratory study for improving supply chain activities in an effort to reduce the bread retail price. The price of bread in Zimbabwe is more than that of most African countries such as Zambia, Namibia and Malawi whose prices range from US$0.50 to US$0.75 per loaf of bread. The major problem with the bread industry today is that there seems to be a hiking of raw materials prices, labour and production costs. The major question then is why bread costs 30 cents more in Zimbabwe than in other African countries. Data was collected using100 consumer questionnaires, 100 bakery/retailer and 5 in-depth interviews. Convenience, judgemental, quota and stratified random sampling methods were used to select the respondents. Purchasing side findings were that 59% to 65% of the bakeries stated the shortage of flour in the country as the major cause behind the high price of bread Most of the flour being used by bakeries is import flour. The second purchasing side problem is that of expensive suppliers of flour. Electricity shortages and untimely stoppages of power were sited by 76% of the production side players as the major impediment to the efficient production of bread. Their assertion was that the power cuts led to low production which inturn led to high inefficiencies in the production line. Fortytwo percent (42%) of customers said that bread needed improvement in quality issues such as packaging and ingredients used. They agreed that if the quality improved they would pay more for it. The paper therefore concluded that the high price of bread in Zimbabwe as compared to other countries is a result of the use of expensive suppliers along the line coupled with low capacity machinery that has led to lowered output. In the long run the lowered output has resulted in sub-optimal operations in bread factories. The researchers recommended a Government intervention through policy change in terms of reduction in duty and tariffs levels on imported raw materials. Government could also intervene through capital injection into the supply chain. Other recommendations include business to business (B2B) collaboration and partnerships between wheat suppliers, marketing boards, millers, bakeries and retailers. Backward integration and rationalisation of the supplier base by bakeries is likely to lower the price of producing bread and hence its retail price.

Integrated Supply Chain Scheduling under Multi-Level Disruptions

A stochastic mixed integer programming formulation is proposed for integrated supplier selection and production and distribution scheduling in the presence of supply chain disruption risks. The suppliers are located in different geographic regions and the supplies are subject to multi-level local disruptions of each supplier individually and to two-level regional disruptions of all suppliers in the same region. The two conflicting objectives are considered: expected cost and expected service level, and optimized simultaneously using the weighted- sum aggregation approach. Numerical examples are presented and some managerial insights are reported. The main findings indicate that the service-oriented supply portfolio is more diversified than the cost-oriented portfolio. For the minimum cost objective the cheapest supplier from among the most reliable suppliers is usually selected, while for the maximum service level objective most reliable and most expensive suppliers dominate in the supply portfolio.

On the fair optimization of cost and customer service level in a supply chain under disruption risks

This paper presents a new decision-making problem of a fair optimization with respect to the two equally important conflicting objective functions: cost and customer service level, in the presence of supply chain disruption risks. Given a set of customer orders for products, the decision maker needs to select suppliers of parts required to complete the orders, allocate the demand for parts among the selected suppliers, and schedule the orders over the planning horizon, to equitably optimize expected cost and expected customer service level. The supplies of parts are subject to independent random local and regional disruptions. The fair decision-making aims at achieving the normalized expected cost and customer service level values as much close to each other as possible. The obtained combinatorial stochastic optimization problem is formulated as a stochastic mixed integer program with the ordered weighted averaging aggregation of the two conflicting objective functions. Numerical examples and computational results, in particular comparison with the weighted-sum aggregation of the two objective functions are presented and some managerial insights are reported. The findings indicate that for the minimum cost objective the cheapest supplier is usually selected, and for the maximum service level objective a subset of most reliable and most expensive suppliers is usually chosen, whereas the equitably efficient supply portfolio usually combines the most reliable and the cheapest suppliers. While the minimum cost objective function leads to the largest expected unfulfilled demand and the expected production schedule for the maximum service level follows the customer demand with the smallest expected unfulfilled demand, the equitably efficient solution ensures a reasonable value of expected unfulfilled demand.

Investigating the potential effects of U.S. LNG exports on global natural gas markets

There have been increasing debates regarding whether the United States should export liquefied natural gas (LNG) to the global market. Using the World Gas Model, a large-scale game theoretic model, this paper investigates the potential effects of U.S. LNG exports on the domestic and global markets. U.S. LNG export scenarios relate to a Global 20/20/20 policy and competition with new pipeline projects (e.g., Nord Stream, South Stream, and Southern Corridor projects) are also considered. We find that the average U.S. domestic natural gas prices increase approximately 10.9% given 123 billion cubic meters of LNG exports and that natural gas prices in Europe and Asia decrease significantly. In addition, less expensive U.S. LNG is competitive in European and Asian gas markets and displaces more expensive suppliers in European and Asian gas markets. Under the European pipeline scenario, Russia is expected to reduce natural gas flows to transit countries by more than 50% when the Nord Stream and South Stream pipelines become available.

Adapting importation policy to global commodity markets: implications of rice import allocation in Singapore

Structural changes in the global commodity markets have particularly serious implications to the food security of import-dependent countries. Adapting importation policy to that global change is essential given that many commodities are imported to fulfill domestic demand. Using Singapore as a case study, this paper examines rice (Oryza) import allocation for seeking adaptive measures, which have broad implications to import-dependent countries. Its quarterly trade data (between 1999 and 2008) have been analyzed using an almost ideal demand system (AIDS) model. Our findings in respect to expenditure elasticity reveal that Singapore will continue its importation from its current range of suppliers, and add new import sources, fulfilling its national diversification strategy. New sources that located in different regions will also strengthen Singapore’s regional diversification strategy. Both national and regional diversification strategies enable any country to tap into associative import sources when unfavorable events deplete supply from a normally preferred supplier. In addition, the results in respect to own-price elasticity suggest that Thailand is Singapore’s primary preferred source while other exporters are secondary suppliers. Supported by the outputs of cross-price elasticity, secondary sources are substitutable. Within a diversified import portfolio, their competitive relationship gives an import-dependent country a strategic position to hedge against price manipulation and escalation, and to substitute expensive suppliers with cheaper alternatives. For these reasons, an import diversification policy is recommended both as an adaptive measure in response to the global change in commodity markets and, at the same time, as a mean for sustaining food security in import-dependent countries.