IDEAS home Printed from https://ideas.repec.org/a/eee/jomega/v57y2015ipap22-33.html
   My bibliography  Save this article

Dual sourcing and backup production: Coexistence versus exclusivity

Author

Listed:
  • Huang, He
  • Xu, Hongyan

Abstract

Supply risk is one of the most important enterprise risks. Dual sourcing and backup production are the two operational strategies that firms most commonly use to mitigate supply risk. The base model examines the strategic use of dual sourcing and backup supply options in a two-stage dynamic programming model for one period. In the first stage the firm decides whether to employ single or dual sourcing for primary supply and whether to reserve backup option. In the second stage, if backup option has been reserved, the firm decides the backup production quantity after observing the realized primary delivery. The optimal sourcing strategies are separately characterized under deterministic and uncertain demand. The results show that dual sourcing coexists with backup production when the two primary suppliers have similar and moderate reliabilities and the backup reservation cost is relatively small. When the reliabilities of the two primary suppliers differ significantly, dual sourcing and backup can become mutually exclusive strategies. Furthermore, the existence of the backup production option decreases the probability of selecting dual sourcing; compared with deterministic demand, uncertain demand increases the area of coexistence of dual sourcing and backup production. In particular, when the firm employs dual sourcing, backup production is activated under deterministic demand only when both primary suppliers fail, while can be activated under uncertain demand when one of the primary suppliers fails. We extend the base model to a two-period structure where the reliability of one primary supplier is uncertain, and the firm updates its assessment of supplier reliability based on the delivery in previous period. Based on Bayesian forecast-updating approach, we find that reliability learning weakly increases the area of coexistence of dual sourcing and backup, and weakly decreases the probability of contingent backup production in the coexistence area.

Suggested Citation

  • Huang, He & Xu, Hongyan, 2015. "Dual sourcing and backup production: Coexistence versus exclusivity," Omega, Elsevier, vol. 57(PA), pages 22-33.
    • Handle: RePEc:eee:jomega:v:57:y:2015:i:pa:p:22-33
    DOI: 10.1016/j.omega.2015.04.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S030504831500081X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.omega.2015.04.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Narendra Agrawal & Steven Nahmias, 1997. "Rationalization Of The Supplier Base In The Presence Of Yield Uncertainty," Production and Operations Management, Production and Operations Management Society, vol. 6(3), pages 291-308, September.
    2. Wu, Desheng, 2013. "Coordination of competing supply chains with news-vendor and buyback contract," International Journal of Production Economics, Elsevier, vol. 144(1), pages 1-13.
    3. Gerry Dickinson, 2001. "Enterprise Risk Management: Its Origins and Conceptual Foundation*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 26(3), pages 360-366, July.
    4. Qi, Lian & Shi, Jim (Junmin) & Xu, Xiaowei, 2015. "Supplier competition and its impact on firm׳s sourcing strategy," Omega, Elsevier, vol. 55(C), pages 91-110.
    5. Zeng, Amy Z. & Xia, Yu, 2015. "Building a mutually beneficial partnership to ensure backup supply," Omega, Elsevier, vol. 52(C), pages 77-91.
    6. Vakharia, Asoo J. & Yenipazarli, Arda, 2009. "Managing Supply Chain Disruptions," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 2(4), pages 243-325, October.
    7. D Wu & D L Olson, 2010. "Enterprise risk management: coping with model risk in a large bank," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(2), pages 179-190, February.
    8. Desheng Dash Wu & David L. Olson, 2015. "Enterprise Risk Management," Palgrave Macmillan Books, in: Enterprise Risk Management in Finance, chapter 1, pages 1-10, Palgrave Macmillan.
    9. Schmitt, Amanda J. & Sun, Siyuan Anthony & Snyder, Lawrence V. & Shen, Zuo-Jun Max, 2015. "Centralization versus decentralization: Risk pooling, risk diversification, and supply chain disruptions," Omega, Elsevier, vol. 52(C), pages 201-212.
    10. Zhibin (Ben) Yang & Göker Ayd{i}n & Volodymyr Babich & Damian R. Beil, 2009. "Supply Disruptions, Asymmetric Information, and a Backup Production Option," Management Science, INFORMS, vol. 55(2), pages 192-209, February.
    11. Parlar, Mahmut & Wang, Dan, 1993. "Diversification under yield randomness in inventory models," European Journal of Operational Research, Elsevier, vol. 66(1), pages 52-64, April.
    12. Ebrahim Nejad, Alireza & Niroomand, Iman & Kuzgunkaya, Onur, 2014. "Responsive contingency planning in supply risk management by considering congestion effects," Omega, Elsevier, vol. 48(C), pages 19-35.
    13. Sawik, Tadeusz, 2014. "Joint supplier selection and scheduling of customer orders under disruption risks: Single vs. dual sourcing," Omega, Elsevier, vol. 43(C), pages 83-95.
    14. Tang, Christopher S., 2006. "Perspectives in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 103(2), pages 451-488, October.
    15. Heckmann, Iris & Comes, Tina & Nickel, Stefan, 2015. "A critical review on supply chain risk – Definition, measure and modeling," Omega, Elsevier, vol. 52(C), pages 119-132.
    16. Volodymyr Babich & Apostolos N. Burnetas & Peter H. Ritchken, 2007. "Competition and Diversification Effects in Supply Chains with Supplier Default Risk," Manufacturing & Service Operations Management, INFORMS, vol. 9(2), pages 123-146, October.
    17. Brian Tomlin, 2009. "Impact of Supply Learning When Suppliers Are Unreliable," Manufacturing & Service Operations Management, INFORMS, vol. 11(2), pages 192-209, August.
    18. Ravi Anupindi & Ram Akella, 1993. "Diversification Under Supply Uncertainty," Management Science, INFORMS, vol. 39(8), pages 944-963, August.
    19. Brian Tomlin, 2006. "On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks," Management Science, INFORMS, vol. 52(5), pages 639-657, May.
    20. Wu, Desheng Dash & Olson, David L. & Birge, John R., 2011. "Introduction to special issue on "Enterprise risk management in operations"," International Journal of Production Economics, Elsevier, vol. 134(1), pages 1-2, November.
    21. Mordechai Henig & Yigal Gerchak, 1990. "The Structure of Periodic Review Policies in the Presence of Random Yield," Operations Research, INFORMS, vol. 38(4), pages 634-643, August.
    22. Maqbool Dada & Nicholas C. Petruzzi & Leroy B. Schwarz, 2007. "A Newsvendor's Procurement Problem when Suppliers Are Unreliable," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 9-32, August.
    23. Ju, Wanrong & Gabor, Adriana F. & van Ommeren, J.C.W., 2015. "An approximate policy for a dual-sourcing inventory model with positive lead times and binomial yield," European Journal of Operational Research, Elsevier, vol. 244(2), pages 490-497.
    24. Yimin Wang & Wendell Gilland & Brian Tomlin, 2010. "Mitigating Supply Risk: Dual Sourcing or Process Improvement?," Manufacturing & Service Operations Management, INFORMS, vol. 12(3), pages 489-510, September.
    25. Wu, Desheng & Baron, Opher & Berman, Oded, 2009. "Bargaining in competing supply chains with uncertainty," European Journal of Operational Research, Elsevier, vol. 197(2), pages 548-556, September.
    26. Sammi Yu Tang & Panos Kouvelis, 2011. "Supplier Diversification Strategies in the Presence of Yield Uncertainty and Buyer Competition," Manufacturing & Service Operations Management, INFORMS, vol. 13(4), pages 439-451, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Yongjian & Zhen, Xueping & Qi, Xiangtong & Cai, Gangshu (George), 2016. "Penalty and financial assistance in a supply chain with supply disruption," Omega, Elsevier, vol. 61(C), pages 167-181.
    2. Gan, Xianghua & Sethi, Suresh P. & Xu, Liang, 2019. "Simultaneous Optimization of Contingent and Advance Purchase Orders with Fixed Ordering Costs," Omega, Elsevier, vol. 89(C), pages 227-241.
    3. Papachristos, Ioannis & Pandelis, Dimitrios G., 2022. "Newsvendor models with random supply capacity and backup sourcing," European Journal of Operational Research, Elsevier, vol. 303(3), pages 1231-1243.
    4. Niu, Baozhuang & Chen, Lei & Zhuo, Xiaopo & Yue, Xiaohang, 2018. "Does buy-back induce more fashion sub-sourcing? Contract property and performance analysis," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 113(C), pages 22-37.
    5. Jie Xiang & Juliang Zhang & T. C. E. Cheng & Jose Maria Sallan & Guowei Hua, 2019. "Efficient Multi-Attribute Auctions Considering Supply Disruption," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 36(03), pages 1-28, June.
    6. Sillanpää, Ville & Liesiö, Juuso & Käki, Anssi, 2021. "Procurement decisions over multiple periods under piecewise-linear shortage costs and fixed capacity commitments," Omega, Elsevier, vol. 100(C).
    7. Yixin Zhang & Xifu Wang, 2019. "Procurement Strategy with Backup Sourcing under Stochastic Supply Risk," Complexity, Hindawi, vol. 2019, pages 1-15, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Seung Hwan Jung, 2020. "Offshore versus Onshore Sourcing: Quick Response, Random Yield, and Competition," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 750-766, March.
    2. Hong, Yoo Suk & Huh, Woonghee Tim & Kang, Changmuk, 2017. "Sourcing assemble-to-order inventories under supplier risk uncertainty," Omega, Elsevier, vol. 66(PA), pages 1-14.
    3. Basu, Preetam & Avittathur, Balram, 2018. "Pricing and sourcing strategies for competing retailers in supply chains under disruption riskAuthor-Name: Kumar, Milan," European Journal of Operational Research, Elsevier, vol. 265(2), pages 533-543.
    4. Long He & Ying Rong & Zuo‐Jun Max Shen, 2020. "Product Sourcing and Distribution Strategies under Supply Disruption and Recall Risks," Production and Operations Management, Production and Operations Management Society, vol. 29(1), pages 9-23, January.
    5. Svoboda, Josef & Minner, Stefan & Yao, Man, 2021. "Typology and literature review on multiple supplier inventory control models," European Journal of Operational Research, Elsevier, vol. 293(1), pages 1-23.
    6. Pritee Ray & Mamata Jenamani, 2016. "Sourcing decision under disruption risk with supply and demand uncertainty: A newsvendor approach," Annals of Operations Research, Springer, vol. 237(1), pages 237-262, February.
    7. Pritee Ray & Mamata Jenamani, 2016. "Sourcing decision under disruption risk with supply and demand uncertainty: A newsvendor approach," Annals of Operations Research, Springer, vol. 237(1), pages 237-262, February.
    8. Erjie Ang & Dan A. Iancu & Robert Swinney, 2017. "Disruption Risk and Optimal Sourcing in Multitier Supply Networks," Management Science, INFORMS, vol. 63(8), pages 2397-2419, August.
    9. Qi, Lian & Lee, Kangbok, 2015. "Supply chain risk mitigations with expedited shipping," Omega, Elsevier, vol. 57(PA), pages 98-113.
    10. Li, Yongjian & Zhen, Xueping & Qi, Xiangtong & Cai, Gangshu (George), 2016. "Penalty and financial assistance in a supply chain with supply disruption," Omega, Elsevier, vol. 61(C), pages 167-181.
    11. Chowdhury, Md. Maruf Hossan & Quaddus, Mohammed A., 2015. "A multiple objective optimization based QFD approach for efficient resilient strategies to mitigate supply chain vulnerabilities: The case of garment industry of Bangladesh☆,☆☆☆This manuscript was pro," Omega, Elsevier, vol. 57(PA), pages 5-21.
    12. Brian Tomlin, 2009. "Impact of Supply Learning When Suppliers Are Unreliable," Manufacturing & Service Operations Management, INFORMS, vol. 11(2), pages 192-209, August.
    13. Qi Feng & J. George Shanthikumar, 2018. "Supply and Demand Functions in Inventory Models," Operations Research, INFORMS, vol. 66(1), pages 77-91, 1-2.
    14. Bo He & He Huang & Kaifu Yuan, 2016. "Managing supply disruption through procurement strategy and price competition," International Journal of Production Research, Taylor & Francis Journals, vol. 54(7), pages 1980-1999, April.
    15. Yuan, Zhennan & Chen, Frank Y. & Yan, Xiaoming & Yu, Yugang, 2020. "Operational implications of yield uncertainty in mergers and acquisitions," International Journal of Production Economics, Elsevier, vol. 219(C), pages 248-258.
    16. Merzifonluoglu, Yasemin, 2015. "Risk averse supply portfolio selection with supply, demand and spot market volatility," Omega, Elsevier, vol. 57(PA), pages 40-53.
    17. Gökçe Esenduran & John V. Gray & Burcu Tan, 2022. "A Dynamic Analysis of Supply Chain Risk Management and Extended Payment Terms," Production and Operations Management, Production and Operations Management Society, vol. 31(3), pages 1394-1417, March.
    18. Ming Zhao & Nickolas Freeman & Kai Pan, 2023. "Robust Sourcing Under Multilevel Supply Risks: Analysis of Random Yield and Capacity," INFORMS Journal on Computing, INFORMS, vol. 35(1), pages 178-195, January.
    19. Jain, Tarun & Hazra, Jishnu, 2017. "Sourcing strategies under agglomeration economies, capacity risks and retail competition," International Journal of Production Economics, Elsevier, vol. 191(C), pages 311-322.
    20. Xue, Weili & Choi, Tsan-Ming & Ma, Lijun, 2016. "Diversification strategy with random yield suppliers for a mean–variance risk-sensitive manufacturer," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 90(C), pages 90-107.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jomega:v:57:y:2015:i:pa:p:22-33. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/375/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.