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Market-Based Solutions to Vital Economic Issues
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May 1, 2015

Managing Supply Disruptions when Sourcing from Reliable and Unreliable Suppliers

Abstract

We study a manufacturer’s optimal multiple-sourcing strategies when some but not all suppliers face risks of complete supply disruptions. Using an approximate model, we show that the optimal unreliable orders are ranked by a simple and intuitive criterion, and are invariant of minor market size changes. Furthermore, when ordering from one reliable and one unreliable supplier, we show that the total order quantity and its allocation between the two suppliers are independent decisions. We then test and confirm the robustness of the insights without the approximation, as well as when we relax various assumptions.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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