Infinite‐horizon models for inventory control under yield uncertainty and disruptions

We consider a firm facing supply chain risk in two forms: disruptions and yield uncertainty. We demonstrate the importance of analyzing a sufficiently long time horizon when modeling inventory systems subject to supply disruptions. Several previous papers have used single‐period newsboy‐style models to study supply disruptions, and we show that such models underestimate the risk of supply disruptions and generate sub‐optimal solutions. We consider one case where a firm's only sourcing option is an unreliable supplier subject to disruptions and yield uncertainty, and a second case where a second, reliable (but more expensive) supplier is available. We develop models for both cases to determine the optimal order and reserve quantities. We then compare these results to those found when a single‐period approximation is used. We demonstrate that a single‐period approximation causes increases in cost, under‐utilizes the unreliable supplier, and distorts the order quantities that should be placed with the reliable supplier in the two‐supplier case. Moreover, using a single‐period model can lead to selecting the wrong strategy for mitigating supply risk.