Mitigating supply risk: Dual sourcing or process improvement?

Yimin Wang, Wendell Gilland, Brian Tomlin

Research output: Contribution to journalArticle

169 Scopus citations

Abstract

Surveys suggest that supply chain risk is a growing issue for executives and that supplier reliability is of particular concern. A common mitigation strategy is for the buying firm to expend effort improving the reliability of its supply base. We explore a model in which a firm can source from multiple suppliers and/or exert effort to improve supplier reliability. For both random capacity and random yield types of supply uncertainty, we propose a model of process improvement in which improvement efforts (if successful) increase supplier reliability in the sense that the delivered quantity (for any given order quantity) is stochastically larger after improvement. We characterize the optimal procurement quantities and improvement efforts and generate managerial insights. For random capacity, improvement is increasingly favored over dual sourcing as the supplier cost heterogeneity increases, but dual sourcing is favored over improvement if the supplier reliability heterogeneity is high. In the random yield model, increasing cost heterogeneity can reduce the attractiveness of improvement, and improvement can be favored over dual sourcing if the reliability heterogeneity is high. A combined strategy (improvement and dual sourcing) can provide significant value if suppliers are very unreliable and/or capacity is low relative to demand.

Original languageEnglish (US)
Pages (from-to)489-510
Number of pages22
JournalManufacturing and Service Operations Management
Volume12
Issue number3
DOIs
StatePublished - Jun 1 2010

Keywords

  • Operations strategy
  • Risk management
  • Supply chain management

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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