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Diversification Under Supply Uncertainty

Author

Listed:
  • Ravi Anupindi

    (Graduate School of Industrial Administration and the Robotics Institute, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Ram Akella

    (Graduate School of Industrial Administration and the Robotics Institute, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

Supply chain management is becoming an increasingly important issue, especially when in most industries the cost of materials purchased comprises 40--60% of the total sales revenue. Despite the benefits cited for single sourcing in the popular literature, there is enough evidence of industries having two/three sources for most parts. In this paper we address the operational issue of quantity allocation between two uncertain suppliers and its effects on the inventory policies of the buyer. Based on the type of delivery contract a buyer has with the suppliers, we suggest three models for the supply process. Model I is a one-delivery contract with all of the order quantity delivered either in the current period with probability \beta , or in the next period with probability 1 -- \beta . Model II is also a one-delivery contract with a random fraction of the order quantity delivered in the current period; the portion of the order quantity not delivered is cancelled. Model III is similar to Model II with the remaining quantity delivered in the next period. We derive the optimal ordering policies that minimize the total ordering, holding and penalty costs with backlogging. We show that the optimal ordering policy in period n for each of these models is as follows: for x \ge \bar{u} n , order nothing; for v\bar n \le x n , use only one supplier; and for x n , order from both suppliers. For the limiting case in the single period version of Model I, we derive conditions under which one would continue ordering from one or the other or both suppliers. For Model II, we give sufficient conditions for not using the second (more expensive) supplier when the demand and yield distributions have some special form. For the single period version of Models II and III with equal marginal ordering costs we show that the optimal order quantities follow a ratio rule when demand is exponential and yields are either normal or gamma distributed.

Suggested Citation

  • Ravi Anupindi & Ram Akella, 1993. "Diversification Under Supply Uncertainty," Management Science, INFORMS, vol. 39(8), pages 944-963, August.
  • Handle: RePEc:inm:ormnsc:v:39:y:1993:i:8:p:944-963
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    File URL: http://dx.doi.org/10.1287/mnsc.39.8.944
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    References listed on IDEAS

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    1. JS Armstrong & Fred Collopy, 2004. "Causal Forces: Structuring Knowledge for Time-series Extrapolation," General Economics and Teaching 0412003, EconWPA.
    2. Fildes, Robert & Lusk, Edward J, 1984. "The choice of a forecasting model," Omega, Elsevier, vol. 12(5), pages 427-435.
    3. Scott Armstrong, J., 1988. "Research needs in forecasting," International Journal of Forecasting, Elsevier, vol. 4(3), pages 449-465.
    4. Robert Carbone & JS Armstrong, 2004. "Evaluation of Extrapolative Forecasting Methods: Results of a Survey of Academicians and Practitioners," General Economics and Teaching 0412008, EconWPA.
    5. Robert Carbone & Spyros Makridakis, 1986. "Forecasting When Pattern Changes Occur Beyond the Historical Data," Management Science, INFORMS, vol. 32(3), pages 257-271, March.
    6. Armstrong, J. Scott & Collopy, Fred, 1992. "Error measures for generalizing about forecasting methods: Empirical comparisons," International Journal of Forecasting, Elsevier, vol. 8(1), pages 69-80, June.
    7. Sanders, NR & Ritzman, LP, 1990. "Improving short-term forecasts," Omega, Elsevier, vol. 18(4), pages 365-373.
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    Keywords

    dual sourcing; supply uncertainty; inventory;

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