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Mitigating supply risk: an approach with quantity flexibility procurement

Author

Listed:
  • Bo He

    (Chongqing University)

  • Yange Yang

    (China Coal Technology Engineering Group Chongqing Research Institute)

Abstract

This paper considers a buyer that procures from its major supplier whose production is subject to random yield risk. To mitigate supply risk, the buyer can procure from another reliable supplier who provides quantity flexibility (QF) contract. Under both deterministic and stochastic demand, we study the buyer’s optimal procurement decisions. We analyze the structural properties of optimal solutions and identify the conditions under which the quantity flexibility procurement policy should be used. We also examine the effect of supply risk, flexibility, wholesale price and demand risk on the procurement decisions. We find that the higher supply risk and demand risk reduce the buyer’s profit but have different impact on the buyer’s order policy. For the QF supplier, it may not obtain more orders by providing larger flexibility to the buyer, on the contrary, doing this may benefit the risky supplier. For the QF supplier or risky supplier, given its competitor’s wholesale price, it can increase its order share by lower wholesale price.

Suggested Citation

  • Bo He & Yange Yang, 2018. "Mitigating supply risk: an approach with quantity flexibility procurement," Annals of Operations Research, Springer, vol. 271(2), pages 599-617, December.
    • Handle: RePEc:spr:annopr:v:271:y:2018:i:2:d:10.1007_s10479-018-2840-0
    DOI: 10.1007/s10479-018-2840-0
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    References listed on IDEAS

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    2. Pereira, Daniel Filipe & Oliveira, José Fernando & Carravilla, Maria Antónia, 2023. "Design of a sales plan in a hybrid contractual and non-contractual context in a setting of limited capacity: A robust approach," International Journal of Production Economics, Elsevier, vol. 260(C).

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