Managing inventory with two suppliers under yield uncertainty and risk aversion

Managing inventory with two suppliers under yield uncertainty and risk aversion

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Article ID: iaor20116576
Volume: 133
Issue: 1
Start Page Number: 80
End Page Number: 85
Publication Date: Sep 2011
Journal: International Journal of Production Economics
Authors:
Keywords: management, supply & supply chains
Abstract:

In this paper, we consider a single‐product single‐period inventory model in which the retailer can source from two suppliers. The primary supplier is cheaper but unreliable in the sense that it generates supply yield uncertainty, whereas the secondary supplier is perfectly reliable but more expensive. The reliable supplier's capacity is fixed and the retailer cannot order more than the quantity reserved in advance. We study the problem in the context of a risk‐averse retailer who has to determine the optimal order quantity from the primary supplier and the optimal reserved quantity from the secondary supplier. We develop the model in the perspective of a low risk averse retailer and quantify the risk via an exponential utility function. We show by numerical experiments how the resulting dual sourcing strategies differ from those obtained in the risk‐neutral analysis. We also examine the sensitivity of some model‐parameters on the optimal decisions.

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