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Investing in the Supplier: Supply Improvement in a Newsvendor Setup

Author

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  • Shivanee Pethe

    (SP Jain Institute of Management and Research)

  • Balram Avittathur

    (Indian Institute of Management Calcutta)

Abstract

Firms like Walmart, Fabindia and Uniqlo have focused strongly on their supply chains through technology investments to improve production quality, monitoring, logistical support or knowledge that help their suppliers to perform better. Investing in supply networks to strengthen competitive advantage is gaining interest. We explore this relationship from two perspectives; a market-facing retailer aiming supplier improvement as a means of mitigating supply risk by making their own investment, and her supplier making a choice of whether to accept the contract offered. The retailer is modelled as a newsvendor with supply uncertainty. Keeping the choice of investment as a decision variable, we establish the benefits of investing in one’s supplier and discuss various scenarios where they may be beneficial. We simultaneously model the retailers’ optimal order quantity to maximize her expected profit. Our paper establishes a choice matrix which can be used by procurement managers and helps firms facing highly constrained or niche product supply. We find that in such cases where switching costs are high, she is still better off investing in the existing supplier, compared to if she does not make this investment.

Suggested Citation

  • Shivanee Pethe & Balram Avittathur, 2025. "Investing in the Supplier: Supply Improvement in a Newsvendor Setup," Lecture Notes in Operations Research,, Springer.
    • Handle: RePEc:spr:lnopch:978-3-031-92575-7_52
    DOI: 10.1007/978-3-031-92575-7_52
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