Dual Sourcing Under Random Supply Capacities: The Role of the Slow Supplier

Abstract

S ourcing from multiple suppliers with different characteristics is common in practice for various reasons. This paper studies a dynamic procurement planning problem in which the firm can replenish inventory from a fast and a slow supplier, both with uncertain capacities. The optimal policy is characterized by two reorder points, one for each supplier. Whenever the pre-order inventory level is below the reorder point, a replenishment order is issued to the corresponding supplier. Interestingly, the reorder point for the slow supplier can be higher than that of the fast even if the former has a higher cost, lower reliability, and smaller capacity than the latter, suggesting the possibility of ordering exclusively from an inferior slow supplier in the short term. Moreover, the firm may allocate a larger portion of the long-term total order quantity to the slow supplier than to the fast, even if the former does not possess any cost or reliability advantage over the latter. Such phenomena, different from the observations made in previous studies, happen when the demand is uncertain and the supply is limited or unreliable. Our observations highlight the importance of incorporating both demand uncertainty and supplier characteristics (i.e., cost, lead time, capacity and uncertainty) in a unified framework when formulating supplier selection and order allocation strategies.

Stochastic Production Capacity: A Bane or a Boon for Quick Response Supply Chains?

“…Different from Ciarallo et al (), she found that the optimal policy is affected by the uncertain capacity. Tan et al () studied the dynamic procurement planning problem in which a firm can replenish from a fast and a slow supplier, both with random capacity. They showed that the slower supplier plays an important role in mitigating the stock‐out risk when demand and capacity uncertainty are present.…”

“…It is possible for manufacturers to mitigate and relax their capacity constraints by some measures, which however would incur a higher cost (Chen & Hu, ; Huggins & Olsen, ; Wang, Gilland, & Tomlin, ). The strategies that can be used to handle uncertain supply capacity, as well as the corresponding trade‐off between cost and supply reliability, have been explored in the recent literature (eg, Chen & Guo, ; Tan, Feng, & Chen, ). In addition, the recent literature has also shown that the retailer can provide incentives or work with the manufacturer/supplier to enhance capacity reliability (Tang, Gurnani, & Gupta, ; Wang et al, ).…”

Stochastic production capacity: A bane or a boon for quick response supply chains?

“…It is possible for manufacturers to mitigate and relax their capacity constraints by some measures, which however would incur a higher cost (Chen & Hu, 2017;Huggins & Olsen, 2003;Wang, Gilland, & Tomlin, 2010). The strategies that can be used to handle uncertain supply capacity, as well as the corresponding trade-off between cost and supply reliability, have been explored in the recent literature (eg, Chen & Guo, 2014;Tan, Feng, & Chen, 2016). In addition, the recent literature has also shown that the retailer can provide incentives or work with the manufacturer/supplier to enhance capacity reliability (Tang, Gurnani, & Gupta, 2014;Wang et al, 2010).…”

“…Different from Ciarallo et al (1994), she found that the optimal policy is affected by the uncertain capacity. Tan et al (2016) studied the dynamic procurement planning problem in which a firm can replenish from a fast and a slow supplier, both with random capacity. They showed that the slower supplier plays an important role in mitigating the stock-out risk when demand and capacity uncertainty are present.…”

Responding to Shipment Delays: The Roles of Operational Flexibility & Lead‐Time Visibility

“…Parlar and Wang (), Anupindi and Akella (), and Swaminathan and Shanthikumar () offer the use of multiple suppliers (each with random yield) to lessen the risk. In recent years, Tomlin (), Chen, Zhao, and Zhou (), Kouvelis and Li (), and Tan, Feng, and Chen () offer the use of back‐up/emergency suppliers to mitigate the risk of random yield.…”