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Sourcing decision under disruption risk with supply and demand uncertainty: A newsvendor approach

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  • Pritee Ray

    (Indian Institute of Technology Kharagpur)

  • Mamata Jenamani

    (Indian Institute of Technology Kharagpur)

Abstract

Multi-sourcing is considered as a common practice to hedge against supply disruption risk. In this context, this paper proposes two models for optimal order allocation in newsvendor setting, where both supply and demand are uncertain. The first model considers a risk neutral decision maker who maximizes the total expected profit under disruption risk. The second one is for a risk averse decision maker who does so under service level constraints. Analytical closed form solutions for both the models are derived. To overcome the computational complexity of the exact optimal solution, two algorithms are developed to generate optimal order quantity and the corresponding set of suppliers. The solutions with exact optimization algorithms and the proposed ones are illustrated and compared with numerical examples. The results show that the proposed algorithms give the exact optimal solution while being tractable. Finally, a case study is used to illustrate the applicability of the proposed model.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:annopr:v:237:y:2016:i:1:d:10.1007_s10479-014-1649-8
    DOI: 10.1007/s10479-014-1649-8
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