Infinite-Horizon Models for Inventory Control under Yield Uncertainty and Disruptions

32 Pages Posted: 3 Apr 2008 Last revised: 24 Aug 2010

Amanda J. Schmitt

MIT Center for Transportation & Logistics

Lawrence V. Snyder

Lehigh University - Department of Industrial and Systems Engineering

Date Written: August 23, 2010

Abstract

We consider a firm facing supply chain risk in two forms: disruptions and yield uncertainty. We demonstrate the importance of analyzing a sufficiently long time horizon when modeling inventory systems subject to supply disruptions. Several previous papers have used single-period newsboy-style models to study supply disruptions, and we show that such models underestimate the risk of supply disruptions and generate sub-optimal solutions. We consider one case where a firm's only sourcing option is an unreliable supplier subject to disruptions and yield uncertainty, and a second case where a second, reliable (but more expensive) supplier is available. We develop models for both cases to determine the optimal order and reserve quantities. We then compare these results to those found when a single-period approximation is used. We demonstrate that a single-period approximation causes increases in cost, under-utilizes the unreliable supplier, and distorts the order quantities that should be placed with the reliable supplier in the two-supplier case. Moreover, using a single-period model can lead to selecting the wrong strategy for mitigating supply risk.

Keywords: supply chain disruptions, yield uncertainty, dual-sourcing, inventory management

Suggested Citation

Schmitt, Amanda J. and Snyder, Lawrence V., Infinite-Horizon Models for Inventory Control under Yield Uncertainty and Disruptions (August 23, 2010). Available at SSRN: https://ssrn.com/abstract=1115443 or http://dx.doi.org/10.2139/ssrn.1115443

Amanda J. Schmitt (Contact Author)

MIT Center for Transportation & Logistics ( email )

77 Massachusetts Ave., E40
Cambridge, MA 02139
United States

Lawrence V. Snyder

Lehigh University - Department of Industrial and Systems Engineering ( email )

Harold S. Mohler Laboratory
200 West Packer Avenue
Bethlehem, PA 18015-1582
United States

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