Journal
JOURNAL OF PURCHASING AND SUPPLY MANAGEMENT
Volume 16, Issue 1, Pages 27-40Publisher
ELSEVIER SCI LTD
DOI: 10.1016/j.pursup.2009.08.001
Keywords
Sourcing strategy; Risk management; Real options approach; Monte Carlo simulation
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The selection of a given purchasing strategy is a central activity in risky environments. Single sourcing, a powerful approach in a stable environment, can amplify a firm's exposure to risk (e.g., supplier's default) in the presence of uncertainty. Multiple sourcing, however, presents higher costs due to the management of more than one supplier. A correct evaluation from a risk management perspective is needed. This paper proposes the Real Options approach for valuing the probabilistic benefits of multiple sourcing in managing the supplier default risk (to be compared with the related higher costs). A computational model, based on the Monte Carlo simulation, was developed. The results show the (probabilistic) advantages of adopting the multiple sourcing strategy in risky environments for a specific case. The proposed sensitivity analysis is aimed at identifying the impact of the most important transactional parameters on the differential benefits of the two sourcing strategies. Thus, the model and its managerial implications represent a valid support for the decision-making process in the presence of uncertainty. (C) 2009 Elsevier Ltd. All rights reserved.
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