Sourcing Decisions with Stochastic Supplier Reliability and Stochastic Demand
Article first published online: 9 MAR 2009
© 2009 Production and Operations Management Society
Production and Operations Management
Volume 18, Issue 4, pages 475–484, July/August 2009
How to Cite
Burke, G. J., Carrillo, J. E. and Vakharia, A. J. (2009), Sourcing Decisions with Stochastic Supplier Reliability and Stochastic Demand. Production and Operations Management, 18: 475–484. doi: 10.1111/j.1937-5956.2009.01022.x
- Issue published online: 1 JUL 2009
- Article first published online: 9 MAR 2009
- History: Received: June 2006; Accepted: September 2008, after 2 revisions.
- supplier selection;
- supply chain management
Supplier sourcing strategies are a crucial factor driving supply chain success. In this paper, we investigate the implications of uncertain supplier reliability on a firm's sourcing decisions in an environment with stochastic demand. In particular, we characterize specific conditions under which a firm should choose a single versus multiple supplier sourcing strategy. In an environment with both uncertain demand and supply, we characterize the total order quantity, the number of suppliers selected for order placement, and the allocation of the total order quantity among these selected suppliers. For deeper managerial insight, we also examine the sensitivity of the optimal sourcing decisions to interactions between uncertainties in product demand and supply reliability. We show that sourcing from a single supplier is an optimal strategy for environments characterized by high levels of demand uncertainty or high salvage values. A numerical analysis based on data obtained from an office products retailer further reinforces our analytical results. In addition, we also find that when minimal order quantities are imposed, there are situations where it is not optimal to place an order with the lowest cost supplier.