Impact of supply risks on procurement decisions

Shanshan Guo (), Lei Zhao () and Xiaowei Xu ()
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Shanshan Guo: Tsinghua University
Lei Zhao: Tsinghua University
Xiaowei Xu: Rutgers, The State University of New Jersey

Annals of Operations Research, 2016, vol. 241, issue 1, No 17, 430 pages

Abstract: Abstract We consider a firm that procures a product from a regular supplier whose production is subject to both supply disruption and random yield risks and a backup supplier whose production capacity requires reservation in advance. Under both deterministic and stochastic demand, we study the impact of the two types of supply risks on the firm’s optimal procurement decisions and the importance of correctly identifying the source of supply risks. We find that if the overall supply risk is unchanged but its main source shifts from random yield to supply disruption, the firm should order more from the regular supplier and reserve less capacity from the backup supplier. Ignoring the existence of supply disruption leads to under-utilization of the regular supplier and over-utilization of the backup supplier. Moreover, we examine the option value of the reserved capacity that is affected by the uncertainty of customer demand. We find that the option value increases/decreases in demand uncertainty if the reservation capacity is exercised after/before demand is realized.

Keywords: Capacity reservation; Contingent sourcing; Risk management; Random yield; Supply disruption; Stochastic programming (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s10479-013-1422-4

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