Dynamic procurement from multiple suppliers with random capacities

Wen Chen () and Burcu Tan ()
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Wen Chen: Providence College
Burcu Tan: Tulane University

Annals of Operations Research, 2022, vol. 317, issue 2, No 9, 509-536

Abstract: Abstract We study a periodic-review inventory model. In each period, the buyer can source from N suppliers that have random capacities. The optimal ordering policy for this problem has been shown to be a reorder point policy in a setting that includes price-dependent demand (Feng and Shi in Prod Oper Manag 21(3):547–563, 2012). We show that if one of the suppliers is reliable, then the optimal order quantity from each unreliable and cheaper supplier stays constant when inventory level is less than the reorder point of the reliable supplier. This implies that having one reliable supplier would result in a relatively stable ordering policy, despite the unreliability of the rest of the suppliers. For the special case of sourcing from two suppliers, we first prove that the optimal policy is monotone in the inventory level. Then, we provide insights into order allocation between an expensive but more reliable supplier and a cheaper but less reliable one. Specifically, the optimal policy tends to allocate more units to the more reliable one when inventory level is low. For the special case of all-or-nothing supply, there is a threshold such that if the inventory is below the threshold, then the expensive supplier’s order quantity is larger than that of the cheaper. Finally, we show that the marginal cost of holding inventory increases, while the optimal order quantities decrease over the planning horizon.

Keywords: Multiple suppliers; Uncertain supply; Random capacity; Inventory model (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10479-016-2285-2

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