Procurement Strategies with Unreliable Suppliers Under Correlated Random Yields

Lingxiu Dong (), Xin Geng (), Guang Xiao () and Nan Yang ()
Additional contact information
Lingxiu Dong: Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130
Xin Geng: Miami Herbert Business School, University of Miami, Coral Gables, Florida 33146
Guang Xiao: Faculty of Business, The Hong Kong Polytechnic University, Hung Hom, Hong Kong, China
Nan Yang: Miami Herbert Business School, University of Miami, Coral Gables, Florida 33146

Manufacturing & Service Operations Management, 2022, vol. 24, issue 1, 179-195

Abstract: Problem definition : This paper studies the sourcing of a monopoly firm that procures from multiple unreliable suppliers to meet its deterministic/price-dependent demand. The suppliers’ production processes are unreliable and are modeled by correlated proportional random yields. Academic/practical relevance : As a proactive risk-mitigation tool, supply diversification has been widely studied in the literature, with the primary focus on independent supply risks. However, supply risks in practice may be correlated in nature for various reasons. By accounting for yield correlation among suppliers’ production processes, our work aims to help firms better manage their supply base and fully exploit the benefit of risk pooling through diversification. Methodology : Stochastic optimization serves as our main tool for analysis. Results : We formulate the firm’s problem in a general n -supplier setting and prove its structural properties. For a two-supplier case, we fully characterize the firm’s optimal sourcing decision and provide a unified measurement to quantify how yield correlation and characteristics jointly affect the supply base selection. Specifically, we show that when the two suppliers are highly positively correlated, the firm may sole-source from the supplier with higher effective procurement cost (the procurement cost per expected delivered unit) and also higher reliability. In addition, as the production yields become more positively correlated, supply diversification becomes less likely, and the firm’s profit decreases. Moreover, assuming multivariate normally distributed yields, we generalize those results and relevant insights to the multiple-supplier case. We uncover the critical role played by yield correlation and illustrate the insufficiency of using effective procurement cost alone to qualify a supplier. Finally, we incorporate demand uncertainty to confirm the robustness of our findings. Managerial implications : Our results urge caution in selecting the optimal supply base when the yield risks are correlated. Particularly, yield correlation, effective procurement costs, and supplier reliability should be jointly taken into account; otherwise, ignoring any one of these factors may lead to suboptimal outcomes.

Keywords: supply diversification; correlated random yields; newsvendor model; pricing; multivariate dependence order (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/msom.2020.0918 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:24:y:2022:i:1:p:179-195

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().