IDEAS home Printed from https://ideas.repec.org/a/spr/annopr/v241y2016i1d10.1007_s10479-013-1422-4.html
   My bibliography  Save this article

Impact of supply risks on procurement decisions

Author

Listed:
  • Shanshan Guo

    (Tsinghua University)

  • Lei Zhao

    (Tsinghua University)

  • Xiaowei Xu

    (Rutgers, The State University of New Jersey)

Abstract

We consider a firm that procures a product from a regular supplier whose production is subject to both supply disruption and random yield risks and a backup supplier whose production capacity requires reservation in advance. Under both deterministic and stochastic demand, we study the impact of the two types of supply risks on the firm’s optimal procurement decisions and the importance of correctly identifying the source of supply risks. We find that if the overall supply risk is unchanged but its main source shifts from random yield to supply disruption, the firm should order more from the regular supplier and reserve less capacity from the backup supplier. Ignoring the existence of supply disruption leads to under-utilization of the regular supplier and over-utilization of the backup supplier. Moreover, we examine the option value of the reserved capacity that is affected by the uncertainty of customer demand. We find that the option value increases/decreases in demand uncertainty if the reservation capacity is exercised after/before demand is realized.

Suggested Citation

  • Shanshan Guo & Lei Zhao & Xiaowei Xu, 2016. "Impact of supply risks on procurement decisions," Annals of Operations Research, Springer, vol. 241(1), pages 411-430, June.
    • Handle: RePEc:spr:annopr:v:241:y:2016:i:1:d:10.1007_s10479-013-1422-4
    DOI: 10.1007/s10479-013-1422-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10479-013-1422-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10479-013-1422-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Michal Kaut & Hercules Vladimirou & Stein W. Wallace & Stavros A. Zenios, 2007. "Stability analysis of portfolio management with conditional value-at-risk," Quantitative Finance, Taylor & Francis Journals, vol. 7(4), pages 397-409.
    2. Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
    3. Volodymyr Babich & Apostolos N. Burnetas & Peter H. Ritchken, 2007. "Competition and Diversification Effects in Supply Chains with Supplier Default Risk," Manufacturing & Service Operations Management, INFORMS, vol. 9(2), pages 123-146, October.
    4. Sounderpandian, Jayavel & Prasad, Sameer & Madan, Manu, 2008. "Supplies from developing countries: Optimal order quantities under loss risks," Omega, Elsevier, vol. 36(1), pages 122-130, February.
    5. Yu, Haisheng & Zeng, Amy Z. & Zhao, Lindu, 2009. "Single or dual sourcing: decision-making in the presence of supply chain disruption risks," Omega, Elsevier, vol. 37(4), pages 788-800, August.
    6. Brian Tomlin, 2006. "On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks," Management Science, INFORMS, vol. 52(5), pages 639-657, May.
    7. Tang, Christopher S. & Yin, Rui, 2007. "Responsive pricing under supply uncertainty," European Journal of Operational Research, Elsevier, vol. 182(1), pages 239-255, October.
    8. He, Yuanjie & Zhang, Jiang, 2008. "Random yield risk sharing in a two-level supply chain," International Journal of Production Economics, Elsevier, vol. 112(2), pages 769-781, April.
    9. Cyrus Derman, 1962. "On Sequential Decisions and Markov Chains," Management Science, INFORMS, vol. 9(1), pages 16-24, October.
    10. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    11. Sarkar, Ashutosh & Mohapatra, Pratap K.J., 2009. "Determining the optimal size of supply base with the consideration of risks of supply disruptions," International Journal of Production Economics, Elsevier, vol. 119(1), pages 122-135, May.
    12. Maqbool Dada & Nicholas C. Petruzzi & Leroy B. Schwarz, 2007. "A Newsvendor's Procurement Problem when Suppliers Are Unreliable," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 9-32, August.
    13. Yimin Wang & Wendell Gilland & Brian Tomlin, 2010. "Mitigating Supply Risk: Dual Sourcing or Process Improvement?," Manufacturing & Service Operations Management, INFORMS, vol. 12(3), pages 489-510, September.
    14. Tang, Christopher & Tomlin, Brian, 2008. "The power of flexibility for mitigating supply chain risks," International Journal of Production Economics, Elsevier, vol. 116(1), pages 12-27, November.
    15. Brian Tomlin & Yimin Wang, 2005. "On the Value of Mix Flexibility and Dual Sourcing in Unreliable Newsvendor Networks," Manufacturing & Service Operations Management, INFORMS, vol. 7(1), pages 37-57, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bo He & Yange Yang, 2018. "Mitigating supply risk: an approach with quantity flexibility procurement," Annals of Operations Research, Springer, vol. 271(2), pages 599-617, December.
    2. M. J. Hermoso-Orzáez & J. Garzón-Moreno, 2022. "Risk management methodology in the supply chain: a case study applied," Annals of Operations Research, Springer, vol. 313(2), pages 1051-1075, June.
    3. Gheibi, Shahryar & Fay, Scott, 2021. "The impact of supply disruption risk on a retailer’s pricing and procurement strategies in the presence of a substitute product," Journal of Retailing, Elsevier, vol. 97(3), pages 359-376.
    4. Papachristos, Ioannis & Pandelis, Dimitrios G., 2022. "Newsvendor models with random supply capacity and backup sourcing," European Journal of Operational Research, Elsevier, vol. 303(3), pages 1231-1243.
    5. Sanjoy Kumar Paul & Sobhan Asian & Mark Goh & S. Ali Torabi, 2019. "Managing sudden transportation disruptions in supply chains under delivery delay and quantity loss," Annals of Operations Research, Springer, vol. 273(1), pages 783-814, February.
    6. Tsan-Ming Choi & Ya-Jun Cai, 2020. "Impacts of lead time reduction on fabric sourcing in apparel production with yield and environmental considerations," Annals of Operations Research, Springer, vol. 290(1), pages 521-542, July.
    7. Kelei Xue & Yongjian Li & Xueping Zhen & Wen Wang, 2020. "Managing the supply disruption risk: option contract or order commitment contract?," Annals of Operations Research, Springer, vol. 291(1), pages 985-1026, August.
    8. Bo He & Guo Li & Mengqi Liu, 2018. "Impacts of decision sequences on a random yield supply chain with a service level requirement," Annals of Operations Research, Springer, vol. 268(1), pages 469-495, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pritee Ray & Mamata Jenamani, 2016. "Sourcing decision under disruption risk with supply and demand uncertainty: A newsvendor approach," Annals of Operations Research, Springer, vol. 237(1), pages 237-262, February.
    2. Schmitt, Amanda J. & Sun, Siyuan Anthony & Snyder, Lawrence V. & Shen, Zuo-Jun Max, 2015. "Centralization versus decentralization: Risk pooling, risk diversification, and supply chain disruptions," Omega, Elsevier, vol. 52(C), pages 201-212.
    3. Bo He & He Huang & Kaifu Yuan, 2016. "Managing supply disruption through procurement strategy and price competition," International Journal of Production Research, Taylor & Francis Journals, vol. 54(7), pages 1980-1999, April.
    4. Qi, Lian & Shi, Jim (Junmin) & Xu, Xiaowei, 2015. "Supplier competition and its impact on firm׳s sourcing strategy," Omega, Elsevier, vol. 55(C), pages 91-110.
    5. Pritee Ray & Mamata Jenamani, 2016. "Sourcing decision under disruption risk with supply and demand uncertainty: A newsvendor approach," Annals of Operations Research, Springer, vol. 237(1), pages 237-262, February.
    6. Long He & Ying Rong & Zuo‐Jun Max Shen, 2020. "Product Sourcing and Distribution Strategies under Supply Disruption and Recall Risks," Production and Operations Management, Production and Operations Management Society, vol. 29(1), pages 9-23, January.
    7. Cheong, Taesu & Song, Sang Hwa, 2013. "The value of information on supply risk under random yields," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 60(C), pages 27-38.
    8. Qi, Lian, 2013. "A continuous-review inventory model with random disruptions at the primary supplier," European Journal of Operational Research, Elsevier, vol. 225(1), pages 59-74.
    9. Jain, Tarun & Hazra, Jishnu, 2017. "Sourcing strategies under agglomeration economies, capacity risks and retail competition," International Journal of Production Economics, Elsevier, vol. 191(C), pages 311-322.
    10. Seung Hwan Jung, 2020. "Offshore versus Onshore Sourcing: Quick Response, Random Yield, and Competition," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 750-766, March.
    11. Zhao, Lima & Huchzermeier, Arnd, 2015. "Operations–finance interface models: A literature review and framework," European Journal of Operational Research, Elsevier, vol. 244(3), pages 905-917.
    12. Qi Feng & Justin Jia & J. George Shanthikumar, 2019. "Dynamic Multisourcing with Dependent Supplies," Management Science, INFORMS, vol. 67(6), pages 2770-2786, June.
    13. Ray, Pritee & Jenamani, Mamata, 2016. "Mean-variance analysis of sourcing decision under disruption risk," European Journal of Operational Research, Elsevier, vol. 250(2), pages 679-689.
    14. Eskandarzadeh, Saman & Eshghi, Kourosh & Bahramgiri, Mohsen, 2016. "Risk shaping in production planning problem with pricing under random yield," European Journal of Operational Research, Elsevier, vol. 253(1), pages 108-120.
    15. Qi, Lian & Lee, Kangbok, 2015. "Supply chain risk mitigations with expedited shipping," Omega, Elsevier, vol. 57(PA), pages 98-113.
    16. Jiri Chod & Nikolaos Trichakis & Gerry Tsoukalas, 2019. "Supplier Diversification Under Buyer Risk," Management Science, INFORMS, vol. 65(7), pages 3150-3173, July.
    17. Bodendorf, Frank & Sauter, Maximilian & Franke, Jörg, 2023. "A mixed methods approach to analyze and predict supply disruptions by combining causal inference and deep learning," International Journal of Production Economics, Elsevier, vol. 256(C).
    18. Xiang Li, 2017. "Optimal procurement strategies from suppliers with random yield and all-or-nothing risks," Annals of Operations Research, Springer, vol. 257(1), pages 167-181, October.
    19. Onur Boyabatlı, 2015. "Supply Management in Multiproduct Firms with Fixed Proportions Technology," Management Science, INFORMS, vol. 61(12), pages 3013-3031, December.
    20. Sarah Parlane & Ying-Yi Tsai, 2017. "Optimal Management of Supply Disruptions when Contracting with Unreliable, Risk-averse, Suppliers," Working Papers 201714, School of Economics, University College Dublin.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:annopr:v:241:y:2016:i:1:d:10.1007_s10479-013-1422-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.