Optimal sourcing from a pool of suppliers with nonidentical salvage values

We consider a firm offering a short life cycle product for sale in a single period. The product or a component incorporated in the product, we refer to either as the item in the sequel, is ordered in advance of the sales period from a pool of suppliers. Each supplier in the pool has a unique profile in terms of capacity, item price, and item salvage value. We study two cases: where supplier capacity is unlimited and where it is finite. For both cases we develop approaches managers can use to determine optimal sourcing plans. In the unlimited capacity case we use generalized versions of the newsvendor's critical ratio to select suppliers and determine order quantities, while in the case of finite capacity we develop an efficient algorithm that obtains an optimal solution. In addition we discuss how our approaches can be adapted to situations where suppliers are unreliable and where there is a service level objective. Lastly, we report the results of a numerical study in which we exercised our approaches for the problem settings considered in this paper. Our approaches generate sourcing plans that managers should find easy to appreciate: order from the lowest price supplier those units that have a high probability of selling, while for units whose sale is more doubtful, order such units from suppliers with salvage values larger than that of the lowest price supplier to hedge against high salvage costs.