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Dual Sourcing Under Random Supply Capacities: The Role of the Slow Supplier

Production and Operations Management (Forthcoming)

40 Pages Posted: 7 Dec 2015  

Burcu Tan

Tulane University

Qi Feng

Purdue University - Krannert School of Management

Wen Chen

Providence College

Date Written: December 5, 2015

Abstract

Sourcing from multiple suppliers with different characteristics is common in practice for various reasons. This paper studies a dynamic procurement planning problem in which the firm can replenish inventory from a fast and a slow supplier, both with uncertain capacities. The optimal policy is characterized by two reorder points, one for each supplier. Whenever the pre-order inventory level is below the reorder point, a replenishment order is issued to the corresponding supplier. Interestingly, the reorder point for the slow supplier can be higher than that of the fast even if the former has a higher cost, lower reliability, and smaller capacity than the latter, suggesting the possibility of ordering exclusively from an inferior slow supplier in the short term. Moreover, the firm may allocate a larger portion of the long-term total order quantity to the slow supplier than to the fast, even if the former does not possess any cost or reliability advantage over the latter. Such phenomena, different from the observations made in previous studies, happen when the demand is uncertain and the supply is limited or unreliable. Our observations highlight the importance of incorporating both demand uncertainty and supplier characteristics (i.e., cost, lead time, capacity and uncertainty) in a unified framework when formulating supplier selection and order allocation strategies.

Keywords: Inventory Model, Random Supply Capacity, Convexity

Suggested Citation

Tan, Burcu and Feng, Qi and Chen, Wen, Dual Sourcing Under Random Supply Capacities: The Role of the Slow Supplier (December 5, 2015). Production and Operations Management (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2699569

Burcu Tan (Contact Author)

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

Qi Feng

Purdue University - Krannert School of Management ( email )

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

Wen Chen

Providence College ( email )

United States

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