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Product substitution and dual sourcing under random supply failures

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  • Lu, Mengshi
  • Huang, Simin
  • Shen, Zuo-Jun Max

Abstract

Product substitution can mitigate supply chain disruptions. However, it may not be very effective without multiple sourcing. In this paper, we consider a supply chain with two downward substitutable products. The products can be ordered from an unreliable supplier or a reliable but more expensive supplier. It is found that in an optimal sourcing policy the higher-grade product should be preferred over the lower-grade product. A sufficient condition is given for an optimal policy where only the higher-grade product is dual-sourced. The effect of substitution is contrasted with the non-substitution case. Numerical study shows the impact of demand variability and correlation on the effect of product substitution and the corresponding optimal sourcing policy.

Suggested Citation

  • Lu, Mengshi & Huang, Simin & Shen, Zuo-Jun Max, 2011. "Product substitution and dual sourcing under random supply failures," Transportation Research Part B: Methodological, Elsevier, vol. 45(8), pages 1251-1265, September.
    • Handle: RePEc:eee:transb:v:45:y:2011:i:8:p:1251-1265
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    2. Dmitry Ivanov, 2022. "Viable supply chain model: integrating agility, resilience and sustainability perspectives—lessons from and thinking beyond the COVID-19 pandemic," Annals of Operations Research, Springer, vol. 319(1), pages 1411-1431, December.
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    5. Song, Dong-Ping & Dong, Jing-Xin & Xu, Jingjing, 2014. "Integrated inventory management and supplier base reduction in a supply chain with multiple uncertainties," European Journal of Operational Research, Elsevier, vol. 232(3), pages 522-536.
    6. Pan, Fei & Pan, Shenle & Zhou, Wei & Fan, Tijun, 2022. "Perishable product bundling with logistics uncertainty: Solution based on physical internet," International Journal of Production Economics, Elsevier, vol. 244(C).
    7. Ivanov, Dmitry & Pavlov, Alexander & Sokolov, Boris, 2014. "Optimal distribution (re)planning in a centralized multi-stage supply network under conditions of the ripple effect and structure dynamics," European Journal of Operational Research, Elsevier, vol. 237(2), pages 758-770.
    8. Yixin Zhang & Xifu Wang, 2021. "Optimal pricing and sourcing strategies in the presence of supply uncertainty and competition," Journal of Intelligent Manufacturing, Springer, vol. 32(1), pages 61-76, January.
    9. Yang, Yuefeng & Xu, Xuerong, 2015. "Post-disaster grain supply chain resilience with government aid," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 76(C), pages 139-159.
    10. Shaofu Du & Yujiao Zhu & Tengfei Nie & Haisuo Yu, 2018. "Loss-averse preferences in a two-echelon supply chain with yield risk and demand uncertainty," Operational Research, Springer, vol. 18(2), pages 361-388, July.
    11. Freeman, Nickolas K. & Narayanan, Arunachalam & Keskin, Burcu B., 2021. "Optimal use of downward substitution in a manufacturing operation subject to uncertainty," Omega, Elsevier, vol. 103(C).
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    14. Ashutosh Sarkar & Debadyuti Das & Arindam Debroy, 2024. "Panic Buying, Product Substitution and Channel-Shifting Behaviour During Pandemic," IIM Kozhikode Society & Management Review, , vol. 13(1), pages 25-43, January.

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