Journal
COMPUTERS & OPERATIONS RESEARCH
Volume 39, Issue 4, Pages 850-862Publisher
PERGAMON-ELSEVIER SCIENCE LTD
DOI: 10.1016/j.cor.2010.08.004
Keywords
Supply chain risk management; Supply disruptions; Yield uncertainty; Dual-sourcing; Inventory management
Categories
Funding
- National Science Foundation [DGE-9972780, DMI-0522725]
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We consider a firm facing supply chain risk in two forms: disruptions and yield uncertainty. We demonstrate the importance of analyzing a sufficiently long time horizon when modeling inventory systems subject to supply disruptions. Several previous papers have used single-period newsboy-style models to study supply disruptions, and we show that such models underestimate the risk of supply disruptions and generate sub-optimal solutions. We consider one case where a firm's only sourcing option is an unreliable supplier subject to disruptions and yield uncertainty, and a second case where a second, reliable (but more expensive) supplier is available. We develop models for both cases to determine the optimal order and reserve quantities. We then compare these results to those found when a single-period approximation is used. We demonstrate that a single-period approximation causes increases in cost, under-utilizes the unreliable supplier, and distorts the order quantities that should be placed with the reliable supplier in the two-supplier case. Moreover, using a single-period model can lead to selecting the wrong strategy for mitigating supply risk. (C) 2010 Elsevier Ltd. All rights reserved.
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