Supplier diversification: effect of discrete demand

Diversification under supply uncertainty has been adopted by manufacturers in order to improve performance. In the presence of multiple suppliers, it is essential to develop an operational policy in order to utilize the services of different suppliers effectively. Anupindi and Akella consider two suppliers differing in cost and reliability and develop the optimal inventory policy for the manufacturer under continuous demand distribution. The policy obtained by them indicates that the manufacturer should never order products from the more expensive supplier alone. In this paper, we consider the case where demand is discrete and provide examples to show that ordering products from the more expensive (and more reliable) supplier alone is optimal. We also provide sufficient conditions under which it is optimal to order a larger share from the more expensive supplier when demand is discrete.