Newsvendor models with random supply capacity and backup sourcing

•Firms need mitigation strategies against supply risks.•We consider newsvendor model with supplier having random capacity.•We analyze contingency plan using reliable supplier as backup.•The capacity of backup supplier is reserved in advance.•We characterize the optimal order and reservation quantiti...

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Bibliographic Details
Published inEuropean journal of operational research Vol. 303; no. 3; pp. 1231 - 1243
Main Authors Papachristos, Ioannis, Pandelis, Dimitrios G.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.12.2022
Subjects
Backup supplier
Capacity reservation
Newsvendor
Random capacity
Supply chain management
Supply chain management
Random capacity
Newsvendor
Backup supplier
Capacity reservation
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Summary:•Firms need mitigation strategies against supply risks.•We consider newsvendor model with supplier having random capacity.•We analyze contingency plan using reliable supplier as backup.•The capacity of backup supplier is reserved in advance.•We characterize the optimal order and reservation quantities. We consider newsvendor models with a primary supplier whose production is subject to random capacity. In order to hedge against this supply risk the retailer contracts with a reliable backup supplier to reserve capacity in advance, acquiring the option to use it after the delivery from the primary supplier and either before or after the demand realization. For both cases we identify the conditions under which the use of the backup supplier is beneficial and characterize the optimal order and reservation quantities. Furthermore, we examine how these optimal procurement quantities are affected by various model parameters.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2022.03.036