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A Newsvendor Model with Unreliable Suppliers

Author

Listed:
  • Dada, Maqbool

    (Purdue U)

  • Petruzzi, Nicholas C.

    (U of Illinois at Urbana-Champaign)

  • Schwarz, Leroy B.

    (Purdue U)

Abstract

We consider the problem of a newsvendor that is served by multiple suppliers, where any given supplier may be unreliable. By unreliable we simply mean that the marginal amount received from a supplier is no more than, and typically is less than, the marginal amount ordered from the supplier. In this setting, the newsvendor needs to determine (1) whether or not to place an order with a given supplier, and (2) if so, then for how much? To address these questions, we develop a general framework in which the newsvendor can diversify its risk of inadequate delivery amounts by spreading its orders among any number and combination of available suppliers that differ in terms of cost and (delivery) reliability. Ultimately, we find that the newsvendor model with unreliable suppliers has the same structural properties as a newsvendor model in which all suppliers are reliable but have limited capacity. Our resulting contribution is two?fold: First, we establish properties of the optimal solution and develop corresponding insights into the trade?off between cost and reliability. Second, we perform comparative statics on the optimal solution, with a particular emphasis on investigating how changes in suppliers cost or reliability affect the newsvendor's ordering decisions and customer service level.

Suggested Citation

  • Dada, Maqbool & Petruzzi, Nicholas C. & Schwarz, Leroy B., 2003. "A Newsvendor Model with Unreliable Suppliers," Working Papers 03-0112, University of Illinois at Urbana-Champaign, College of Business.
    • Handle: RePEc:ecl:illbus:03-0112
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Rezapour, Shabnam & Srinivasan, Ramakrishnan & Tew, Jeffrey & Allen, Janet K. & Mistree, Farrokh, 2018. "Correlation between strategic and operational risk mitigation strategies in supply networks," International Journal of Production Economics, Elsevier, vol. 201(C), pages 225-248.
    3. Rezapour, Shabnam & Allen, Janet K. & Mistree, Farrokh, 2016. "Reliable product-service supply chains for repairable products," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 95(C), pages 299-321.
    4. Tilson, Vera, 2008. "Monotonicity properties of wholesale price contracts," Mathematical Social Sciences, Elsevier, vol. 56(1), pages 127-143, July.
    5. Sunil Chopra & Gilles Reinhardt & Usha Mohan, 2007. "The importance of decoupling recurrent and disruption risks in a supply chain," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(5), pages 544-555, August.
    6. Brian Tomlin & Yimin Wang, 2005. "On the Value of Mix Flexibility and Dual Sourcing in Unreliable Newsvendor Networks," Manufacturing & Service Operations Management, INFORMS, vol. 7(1), pages 37-57, June.
    7. Lian Qi & Zuo‐Jun Max Shen, 2007. "A supply chain design model with unreliable supply," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(8), pages 829-844, December.

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