Sourcing decisions with uncertain time-dependent supply from an unreliable supplier

ABSTRACT

Recently, an increasing number of companies have encountered random production disruptions due to the COVID-19 pandemic. In this study, we investigate a two-stage supply chain in which a retailer can order products from a low-price ("cheap”) unreliable supplier (who may be subject to an uncertain production disruption and partially deliver the order) and an "expensive” reliable supplier at Stage 1 and a more "expensive” backup supplier at Stage 2. If the disruption happens, only the products that were produced before the disruption time can be obtained from the unreliable supplier. It is found that in the case with imperfect demand information updating, the unreliable supplier is always used while the reliable supplier can be abandoned. The time-dependent supply property of the unreliable supplier reduces the retailer's willingness of adopting the dual sourcing strategy at Stage 1, compared with the scenario with all-or-nothing supply. Different from the case with imperfect demand information updating, either the reliable or unreliable supplier can be abandoned in the case with perfect demand information updating. We derive the optimal ordering decisions and the conditions where single sourcing or dual sourcing is adopted at Stage 1. We conduct numerical experiments motivated by the sourcing problem of 3M Company in the US during the COVID-19 and observe that the unreliable supplier is more preferable when the demand uncertainty before or after the emergency order is higher. Interestingly, the retailer tends to order more from the unreliable supplier when the production disruption probability is larger in some cases. © 2022 The Author(s)