Sourcing Decisions with Stochastic
Supplier
Reliability and Stochastic Demand
Jerry Burke, Janice Carrillo and Asoo
Vakharia
Decision and Information Sciences Department
Supplier
sourcing strategies are a crucial factor driving supply chain success. In particular, a firm’s allocation decision
for determining an appropriate supplier set and order allotment impacts all
competitive dimensions for the delivery of finished goods to its
customers. While many firms utilize a
single supplier strategy, others diversify their supply risk by sourcing from
multiple suppliers. We investigate the
implications of uncertain supplier reliability on a firm’s sourcing decisions
in an environment with stochastic demand.
In particular, we characterize conditions under which a firm should
choose a single versus multiple supplier sourcing strategy. We also show that a supplier’s unit cost
dominates any reliability considerations when determining whether a particular
supplier receives an order. A
counterintuitive result is that placing a single order with the lowest cost
supplier is preferable when demand is highly uncertain. Based on numerical examples, we also
illustrate the impact of minimum order quantities on supplier sourcing
decisions.