Optimal newsvendor policies for dual-sourcing supply chains: A disruption risk management framework

We propose generic single period (newsvendor-type) inventory models for capturing the trade-off between inventory policies and disruption risks in a dual-sourcing supply chain network both unconstrained and under service level constraints, where both supply channels are susceptible to disruption risks. The models are developed for both risk neutral and risk-averse decision-makers and can be applicable for different types of disruptions related among others to the supply of raw materials, the production process, and the distribution system, as well as security breaches and natural disasters. Analytical closed-form solutions are obtained and interesting managerial insights on the merit of contingency strategies in managing uncertainties and risks in dual-sourcing supply chains are discussed. (C) 2011 Elsevier Ltd. All rights reserved.