Product Sourcing and Distribution Strategies under Supply Disruption and Recall Risks

30 Pages Posted: 3 May 2017 Last revised: 27 Feb 2019

See all articles by Long He

Long He

NUS Business School, National University of Singapore

Ying Rong

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

Date Written: May 2, 2017

Abstract

When product recalls happen, firms not only have to incur additional logistics costs but also suffer from a damaged reputation. Besides, they may also supply disruption risk, under which a supplier could fail to deliver the quantity ordered at all. In this paper, we discuss how to mitigate supply disruption and recall risks in the perspective of (outbound) product distribution strategy in joint with (inbound) sourcing decision. Specifically, we compare the dedicated and uniform distribution strategies as follows: in the dedicated strategy, the firm divides its market into several regions, and ships products from different suppliers based on the regions; whereas, in the uniform strategy, the firm serves the entire market by randomly shipping the products from several suppliers without distinguishing their sources. Through the comparison of both strategies, we show that the role of recall risk is different from that of supply disruption on the sourcing and distribution decision. In particular, single sourcing is optimal when both recall risk and disruption probability are low; dual sourcing with the dedicated strategy is optimal when the disruption probability is moderate and the recall risk is high; dual sourcing with the uniform strategy is optimal when the disruption probability is high. We also find that the positive correlation in recalls improves (undermines) the performance of the uniform (dedicated) strategy. In contrast, the positive correlation in supply disruptions only undermines the performance of the uniform strategy.

Keywords: product recall, supply disruption, operations strategy, product distribution

Suggested Citation

He, Long and Rong, Ying and Shen, Zuo-Jun Max, Product Sourcing and Distribution Strategies under Supply Disruption and Recall Risks (May 2, 2017). Available at SSRN: https://ssrn.com/abstract=2961881 or http://dx.doi.org/10.2139/ssrn.2961881

Long He (Contact Author)

NUS Business School, National University of Singapore ( email )

15 Kent Ridge Drive
Mochtar Riady Building, BIZ1 #8-73
Singapore, 119245
Singapore

Ying Rong

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR) ( email )

IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States

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