Disruption-management strategies for short life-cycle products

Supplier diversification, contingent sourcing, and demand switching (whereby a firm shifts customers to a different product if their preferred product is unavailable), are key building blocks of a disruption-management strategy for firms that sell multiple products over a single season. In this article, we evaluate 12 possible disruption-management strategies (combinations of the basic building-block tactics) in the context of a two-product newsvendor. We investigate the influence of nine attributes of the firm, its supplier(s), and its products on the first preference for the various strategies. These attributes include supplier reliability, supplier failure correlation, payment responsibility in the event of a supply failure, product contribution margin, product substitutability, demand uncertainties and correlation, and the decision maker's risk aversion. Our results show that contingent sourcing is preferred to supplier diversification as the supply risk (failure probability) increases, but diversification is preferred to contingent sourcing as the demand risk (demand uncertainty) increases. We find that demand switching is not effective at managing supply risk if the products are sourced from the same set of suppliers. Demand switching is effective at managing demand risk and so can be preferred to the other tactics if supply risk is low. Risk aversion makes contingent sourcing preferable over a wider set of supply and demand-risk combinations. We also find a two-tactic strategy provides almost the same benefit as a three-tactic strategy for most reasonable supply and demand-risk combinations.