Capturing the Risk-Pooling Effect through Inventory Planning and Demand Switching

Hsun Chuan Cho, Ying Jiun Hsieh and Lan Ying Huang
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Hsun Chuan Cho: Institute of Technology Management, National Chung Hsing University, Taichung 402, Taiwan
Ying Jiun Hsieh: Institute of Technology Management, National Chung Hsing University, Taichung 402, Taiwan
Lan Ying Huang: Department of Business Administration, National Changhua University of Education, Changhua 500 Taiwan

Sustainability, 2018, vol. 10, issue 11, 1-14

Abstract: This paper demonstrates how firms can deal with demand uncertainty through inventory planning and demand switching, which take advantage of the risk-pooling effect and contribute to supply-chain sustainability. Considering two types of products and two outsourcing strategies (competitive bidding, and consignment stock under the ( Q , R ) inventory policy with variable lead times), the study helps determine the appropriate outsourcing strategy when a firm practices demand switching. Under certain conditions, the study further identifies the proper demand-switching direction and optimum switching-rate to achieve the minimum total purchase and inventory costs in association with outsourcing. Prior research generally implies that demand switching increases costs or profit benefits. This implication, however, does not hold true in the present context. The study presents numerical examples to illustrate the derived models. The findings enrich the extant literature by incorporating demand switching into the outsourcing practices, which is beneficial to both practitioners and scholars.

Keywords: demand switching; risk pooling; outsourcing strategies; inventory planning; sustainability (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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