Failure Risk and Quality Cost Management in Single versus Multiple Sourcing Decision
Decision Sciences, Volume 45 (2014), Issue 2 (April), 341-354.
23 Pages Posted: 27 Jun 2010 Last revised: 30 Apr 2014
Date Written: March 18, 2013
The advantage of multiple sourcing to protect against supplier failures arising from undependable products due to latent defects is examined using a model with non-linear external failure costs. Prior research has focused only on supplier failures arising from unreliable supply, such as late/insufficient/no delivery. I derive a closed-form characterization of the optimal production quota allocation for the LUX (Latent defect-Undependable product-eXternal failure) setting. The allocation determines the optimal supply base, with intuitive properties that hold under a mild requirement. The requirement includes the special case of equal procurement costs charged by suppliers but also allows unequal costs without any particular order. The key result of the paper is a necessary and sufficient condition determining whether single or multiple sourcing is optimal. Another condition is obtained to determine the exact size of the optimal supply base, provided the mild requirement holds. With minor modifications, the results also hold when a buyer-initiated procurement contract can be used to elicit private information on the suppliers’ unit variable production costs.
Keywords: Supplier selection, latent defects, multiple sourcing, single sourcing, quality cost, total cost of purchasing
JEL Classification: L22, L24, M11, M21, M40
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Inventory Systems with Stochastic Demand and Supply: Properties and Approximations
By Amanda J. Schmitt, Lawrence V. Snyder, ...
Infinite-Horizon Models for Inventory Control under Yield Uncertainty and Disruptions
A Quantitative Analysis of Disruption Risk in a Multi-Echelon Supply Chain
By Amanda J. Schmitt and Mahender Singh
Strategies for Customer Service Level Protection under Multi-Echelon Supply Chain Disruption Risk
Disruptions in One-Warehouse Multiple-Retailer Systems
By Zumbul Atan and Lawrence V. Snyder
Centralization versus Decentralization: Risk Pooling, Risk Diversification, and Supply Chain Disruptions
By Amanda J. Schmitt, Siyuan Sun, ...
A Single-Period Analysis of a Two-Echelon Inventory System with Dependent Supply Uncertainty
By Susan H. Xu, Behdad Masih-tehrani, ...
OR/MS Models for Supply Chain Disruptions: A Review
By Lawrence V. Snyder, Zumbul Atan, ...
Sharing Capacity Cost in Shared Services Centre
By Tomas Buus