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

See all articles by Andrew Yim

Andrew Yim

Cass Business School, City, University of London

Date Written: March 18, 2013

Abstract

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

Yim, Andrew, Failure Risk and Quality Cost Management in Single versus Multiple Sourcing Decision (March 18, 2013). Decision Sciences, Volume 45 (2014), Issue 2 (April), 341-354., Available at SSRN: https://ssrn.com/abstract=1630570 or http://dx.doi.org/10.2139/ssrn.1630570

Andrew Yim (Contact Author)

Cass Business School, City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.cass.city.ac.uk/faculties-and-research/experts/andrew-yim

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