Assessing the effects of supply uncertainty on inventory-related costs

This paper models supply uncertainty in the dynamic Newsboy problem context. The system consists of one supplier and one retailer who places an order to the supplier every period to meet stochastic demand. Supply uncertainty is modeled as the uncertainty in quantities delivered by the supplier. That is, the supplier delivers exactly the amount ordered by the retailer with probability of β and the amount minus K with probability of (1 − β). We formulate the problem as a dynamic programming problem and prove that retailer's optimal replenishment policy is a stationary base-stock policy. Through a numerical study, we found that the cost increase due to supply uncertainty is significant and that the costs increase more rapidly as supply uncertainty increases. We also identified the effects of various system parameters. One of the interesting results is that as retailer's demand uncertainty, the other uncertainty in our model, increases, the cost increase due to supply uncertainty becomes less significant.