Production planning and backup sourcing strategy of a buyer-dominant supply chain with random yield and demand

Abstract

This paper studies the backup sourcing strategy of the buyer and the production planning of the supplier in presence of both random yield and random demand. Since the production is susceptible to the randomness of yield beyond the control of the supplier, the buyer may access to a backup sourcing option for the finished items. We analyse the value of backup sourcing for both the decentralised and centralised channels. Backup sourcing strategy of the buyer may lower the supply chain's performance. We show that the order quantity of the buyer does not change the stocking factor of the supplier's input. Meanwhile, compared with the centralised operation, the decentralised operation is more dependent on the backup sourcing to reduce supply shortage of the contracting supplier. From the channel's perspective, an incentive scheme is developed to facilitate the coordination of both the buyer and the contracting supplier, we show that the proposed option contract can allow the supply chain members to share the respective risks involved in the production and selling processes. Finally, we also provide qualitative insights based on numerical examples of the centralised and decentralised solutions.

Keywords:

• supply chain management
• backup sourcing
• random yield
• channel coordination
• game theory

Acknowledgements

The authors thank an associate editor and two anonymous referees for their numerous constructive comments and encouragement that have helped improve this paper greatly.

Additional information

Funding

This work was partly supported by the National Natural Science Foundation of China [grant number 71201083], [grant number 71371093], [grant number 70971060]; the National Planning Office of Philosophy and Social Science [grant number 11&ZD169]; Jiangsu Province Science Foundation for Youths [grant number BK2012379]; the Fundamental Research Funds for the Central Universities [grant number NZ2012311].

Notes on contributors

Kebing Chen

Kebing Chen is currently an associate professor in the Department of Mathematics, Nanjing University of Aeronautics and Astronautics, Nanjing, China. He received his PhD and MS in School of Mathematics and Statistics at Wuhan University, China. He is an editor of the International Journal of Engineering and Industries. His research interests include logistics and supply chain management, and risk management. He has published papers in several journals, including European Journal of Operational Research, International Journal of Production Economics, Computers & Industrial Engineering, Journal of Industrial and Management Optimization, Journal of Systems Science and Systems Engineering, etc.

Tiaojun Xiao

Tiaojun Xiao is currently a professor in the School of Management Science and Engineering, Nanjing University, Nanjing, China. He received his MS from Central South University of Technology and his PhD from Southeast University, China. His research interests include applied game theory, and logistics and supply chain management. He is the Far East Editor of International Journal of Information & Decision Sciences, Board of Editors member of Journal of Industrial and Management Optimization, and Editorial Board member of The Scientific World Journal, International Journal of Applied Management Science etc. He has published papers in academic journals such as Decision Sciences, IIE Transactions, Service Science, Automatica, Omega, International Journal of Production Economics, International Journal of Production Research, Computers & Industrial Engineering, Annals of Operations Research, European Journal of Operational Research, Journal of Industrial and Management Optimization, and Production Planning & Control.