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Capturing the Risk-Pooling Effect through Inventory Planning and Demand Switching

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  • Hsun Chuan Cho

    (Institute of Technology Management, National Chung Hsing University, Taichung 402, Taiwan)

  • Ying Jiun Hsieh

    (Institute of Technology Management, National Chung Hsing University, Taichung 402, Taiwan)

  • Lan Ying Huang

    (Department of Business Administration, National Changhua University of Education, Changhua 500 Taiwan)

Abstract

This paper demonstrates how firms can deal with demand uncertainty through inventory planning and demand switching, which take advantage of the risk-pooling effect and contribute to supply-chain sustainability. Considering two types of products and two outsourcing strategies (competitive bidding, and consignment stock under the ( Q , R ) inventory policy with variable lead times), the study helps determine the appropriate outsourcing strategy when a firm practices demand switching. Under certain conditions, the study further identifies the proper demand-switching direction and optimum switching-rate to achieve the minimum total purchase and inventory costs in association with outsourcing. Prior research generally implies that demand switching increases costs or profit benefits. This implication, however, does not hold true in the present context. The study presents numerical examples to illustrate the derived models. The findings enrich the extant literature by incorporating demand switching into the outsourcing practices, which is beneficial to both practitioners and scholars.

Suggested Citation

  • Hsun Chuan Cho & Ying Jiun Hsieh & Lan Ying Huang, 2018. "Capturing the Risk-Pooling Effect through Inventory Planning and Demand Switching," Sustainability, MDPI, vol. 10(11), pages 1-14, November.
    • Handle: RePEc:gam:jsusta:v:10:y:2018:i:11:p:4104-:d:181549
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    References listed on IDEAS

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    1. Hyun-Joon Jo & Timothy Connerton & Hyun-Jung Kim, 2019. "Dynamic Outsourcing Development for Sustainable Competitive Advantage in a High-Tech Backend Semiconductor Equipment Firm," Sustainability, MDPI, vol. 12(1), pages 1-13, December.

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