The Value of Flexible Backup Suppliers and Disruption Risk Information: Newsvendor Analysis with Recourse

IIE Transactions

52 Pages Posted: 25 Aug 2011 Last revised: 7 Jan 2012

See all articles by Soroush Saghafian

Soroush Saghafian

Harvard University - Harvard Kennedy School (HKS)

Mark P. Van Oyen

University of Michigan at Ann Arbor

Date Written: July 30, 2011

Abstract

We develop a model and analysis to provide insight into two effective remedies to increase supply chain resilience: (1) contracting with a secondary flexible backup supplier, and (2) monitoring primary suppliers to obtain disruption risk information. To investigate the true value of these strategies, we perform our analysis under imperfect information concerning the disruption risks and consider a two-stage setting with recourse. In this setting, the firm first monitors its suppliers and then utilizes a recourse option subject to the limited quantity of a capacity reserved a priori via a contract with a flexible backup supplier. We analytically characterize the firm's jointly optimal behavior (utilizing only the information available to the firm) regarding two interconnected decisions: (a) the advance capacity investment/reservation level with a flexible backup supplier, and (b) the inventory ordering policy of the underlying products from both primary and backup suppliers. Our results quantify effective disruption risk mitigation strategies for firms and provide managerial insights into the value of (a) a flexible backup supplier, (b) disruption risk information, (c) a contracted recourse option, and (d) flexibility in the backup system.

Keywords: Flexible Backup Supplier, Disruption Risk Information, Disruption Risk Mitigation, Backup Capacity Reservation

Suggested Citation

Saghafian, Soroush and Van Oyen, Mark P., The Value of Flexible Backup Suppliers and Disruption Risk Information: Newsvendor Analysis with Recourse (July 30, 2011). IIE Transactions, Available at SSRN: https://ssrn.com/abstract=1323534 or http://dx.doi.org/10.2139/ssrn.1323534

Soroush Saghafian (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Mark P. Van Oyen

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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