A Multi-Supplier Sourcing Problem with a Preference Ordering of Suppliers

34 Pages Posted: 17 Sep 2010 Last revised: 4 Oct 2011

See all articles by Dorothee Honhon

Dorothee Honhon

University of Texas at Dallas

Vishal Gaur

Cornell University - Samuel Curtis Johnson Graduate School of Management

Sridhar Seshadri

University of Illinois at Urbana Champaign; Indian School of Business

Date Written: September 3, 2010

Abstract

We study a sourcing problem faced by a firm that seeks to procure a product or a component from a pool of alternative suppliers. The firm has a preference ordering of the suppliers based on factors such as their past performance, quality, service, geographical location and financial strength, which are commonly included in a supplier scorecard system. Thus, the firm first uses available inventory from supplier 1, if any, then supplier 2, if any, and so on. The suppliers differ in costs and prices. The buyer firm seeks to determine which suppliers to purchase from and in what quantities in order to maximize its total expected profit subject to the preference ordering constraint. We present the optimal solution to this problem, and show that it has a portfolio structure. It consists of a subset of suppliers that are ordered by their underage and overage costs. This portfolio achieves a substantial profit gain compared to sourcing from a unique supplier. We present an ecient algorithm to compute the optimal solution. Our model applies to component sourcing problems in manufacturing, merchandising problems in retailing, and capacity reservation problems in services.

Keywords: Sourcing, Procurement, Supplier Scorecards, Stockout Based Substitution, Inventory Management

JEL Classification: C61, M11, M21

Suggested Citation

Honhon, Dorothee and Gaur, Vishal and Seshadri, Sridhar, A Multi-Supplier Sourcing Problem with a Preference Ordering of Suppliers (September 3, 2010). Johnson School Research Paper Series No. 22-2011. Available at SSRN: https://ssrn.com/abstract=1678520 or http://dx.doi.org/10.2139/ssrn.1678520

Dorothee Honhon (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Vishal Gaur

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Gaur/

Sridhar Seshadri

University of Illinois at Urbana Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

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