A dynamic sourcing strategy considering supply disruption risks

Abstract

This study presents a formulation that supports decision-making by determining the optimal number of standby suppliers required to respond to supply failure risks. The problem of supply failure is modelled through a standby approach, in which failure is time-dependent. The probabilities of supply interruption, financial loss caused by supply failure, and operating cost of working with suppliers are modelled to yield the expected total cost, which enables organisations to determine the optimal number of suppliers. Two possible modes of substitution failure are considered in the standby model to enhance the analysis. A set of sensitivity analyses are performed for several input parameters to illustrate the model’s behaviour. The analysis provides an optimal sourcing strategy depending on a combination of supply risk, operational cost vs. loss ratio and length of the supply period. The proposed model indicates the benefits of cost savings, unlike other dynamic models that use multiple suppliers simultaneously.

Keywords:

• risk management
• supplier selection
• supplier decision-making

Funding

This work was supported by the National Science Council, Taiwan [grant number NSC 102-2410-H-214-020].

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Proof of this result may be found in many statistics texts, e.g. Ross (1987, 114–117). Since n is an integer, this is a special case of the gamma distribution, known as Erlang distribution.