Sourcing from Multiple Suppliers for Price-Dependent Demands

Production and Operations Management, 21(3) 547-563

31 Pages Posted: 30 Oct 2011 Last revised: 12 Nov 2012

See all articles by Qi Feng

Qi Feng

Purdue University - Krannert School of Management

Ruixia (Sandy) Shi

University of Richmond - Robins School of Business, Management Department

Date Written: June 14, 2011

Abstract

We analyze a model that integrates demand shaping via dynamic pricing and risk mitigation via supply diversification. The firm under consideration replenishes a certain product from a set of capacitated suppliers for a price-dependent demand in each period. Under deterministic capacities, we derive a multilevel base stock list price policy and establish the optimality of cost-based supplier selection, i.e., ordering from a cheaper source before more expensive ones. With general random capacities, however, neither result holds. While it is optimal to price low for a high inventory level, the optimal order quantities are not monotone with respect to the inventory level. In general, a near reorder-point policy should be followed. Specifically, there is a reorder point for each supplier such that no order is issued to him when the inventory level is above this point and a positive order is placed almost everywhere when the inventory level is below this point. Under this policy, it may be profitable to order exclusively from the most expensive source. We characterize conditions under which a strict reorder-point policy and a cost-based supplier-selection criterion become optimal. Moreover, we quantify the benefit from dynamic pricing, as opposed to static pricing, and the benefit from multiple sourcing, as opposed to single sourcing. We show that these two strategies exhibit a substitutable relationship. Dynamic pricing is less effective under multiple sourcing than under single sourcing, and supplier diversification is less valuable with price adjustments than without. Under limited supply, dynamic pricing yields a robust, long-term profit improvement. The value of supply diversification, in contrast, mainly comes from added capacities and is most significant in the short run.

Keywords: Procurement Policies, Dynamic Pricing, Supplier Diversification, Random Supply Capacity

Suggested Citation

Feng, Qi and Shi, Ruixia, Sourcing from Multiple Suppliers for Price-Dependent Demands (June 14, 2011). Production and Operations Management, 21(3) 547-563, Available at SSRN: https://ssrn.com/abstract=1951105

Qi Feng (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Ruixia Shi

University of Richmond - Robins School of Business, Management Department ( email )

1 Gateway Road
University of Richmond
Richmond, VA 23173
United States

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