Product substitution and dual sourcing under random supply failures

Mengshi Lu, Simin Huang and Zuo-Jun Max Shen

Transportation Research Part B: Methodological, 2011, vol. 45, issue 8, 1251-1265

Abstract: Product substitution can mitigate supply chain disruptions. However, it may not be very effective without multiple sourcing. In this paper, we consider a supply chain with two downward substitutable products. The products can be ordered from an unreliable supplier or a reliable but more expensive supplier. It is found that in an optimal sourcing policy the higher-grade product should be preferred over the lower-grade product. A sufficient condition is given for an optimal policy where only the higher-grade product is dual-sourced. The effect of substitution is contrasted with the non-substitution case. Numerical study shows the impact of demand variability and correlation on the effect of product substitution and the corresponding optimal sourcing policy.

Keywords: Supply; chain; disruptions; Product; substitution; Dual; souring (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (15)

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