Study on the effects of the interactions between demand and supply uncertainties on supply chain cost

This paper models supply chain uncertainties in the dynamic Newsboy problem context. The system consists of one supplier and one retailer who place an order to the supplier every period. Demand uncertainty is modeled as stochastic period demand, and supply uncertainty as the uncertainty in quantities delivered by the supplier. 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 derive the first-order optimality condition. Through a numerical study, we measure the extent to which the cost decrease due to the reduction in supply uncertainty depends on the level of demand uncertainty. One of the most important findings in the paper is that this cost decrease is relatively small if demand uncertainty is kept high, and vice versa. We also backup this numerical result by analyzing the distribution of ending inventory under the supply and demand uncertainties.