Retailer’s Optimal Procurement Strategy under Supply Disruption and Stochastic Demand: Backup Sourcing or Simultaneous Sourcing

Abstract

Practically, supply disruption may lead production process to entirely halt (completely disrupted) or the output to differ in the order size (partially disrupted), which makes it more difficult for the retailer to satisfy stochastic market demand. Under the circumstance, the retailer is likely to procure products from two suppliers to effectively alleviate the demand-supply mismatches. Thus, under supply disruption and stochastic demand, this paper develops both backup sourcing and simultaneous sourcing (SS) strategies to analyze the retailer’s performance, where backup sourcing includes wholesale price priority (WPP) and supply reliability priority (SRP). Specifically, (1) under WPP, when the selling price is relatively lower (higher), the retailer is suggested to activate the reliable backup supplier after the realization of supply disruption (demand uncertainty). (2) Under SRP, two scenarios including minor disruption and major disruption can be identified, where the retailer’s order quantity from the reliable (unreliable) supplier under minor disruption scenario is more (less) than that under major. (3) Finally, this paper systematically compares the retailer’s preferences among WPP, SRP, and SS via theoretical results and numerical examples. That is, when the unreliable supplier is more likely to work normally or shortage cost (selling price) is relatively lower, the retailer prefers SPR regarding the unreliable supplier as backup sourcing due to its lower wholesale price and acceptable supply disruption. Otherwise, the retailer is inclined to WPP regarding the reliable supplier as backup sourcing for ensuring all market demand to be satisfied. In addition, unless the emergency prices of two suppliers are extremely higher, backup sourcing strategies could perform better than simultaneous sourcing strategy.