Sourcing with random yields and stochastic demand: A newsvendor approach

Document Type

Article

Publication Date

12-1-2007

Abstract

We studied a supplier selection problem, where a buyer, while facing random demand, is to decide ordering quantities from a set of suppliers with different yields and prices. We provided the mathematical formulation for the buyer's profit maximization problem and proposed a solution method based on a combination of the active set method and the Newton search procedure. Our computational study shows that the proposed method can solve the problem efficiently, and is able to generate interesting and insightful results that lead us to various managerial implications. Scope and purpose: In today's globally competitive environment, decision makers in supply chains face numerous challenges particularly regarding the selection of suppliers or outsourcing partners. To assist in this endeavor, we examined a double-layered supply chain where a buyer facing the end users has the option of selecting among a cohort of suppliers. The available suppliers may have different yield rates and unit costs. The buyer has to decide, given the stochastic nature of the problem's governing parameters, whether or not to order from each supplier, and if so how much. We developed a 'newsvendor-style' model for the problem, and proposed a solution algorithm for it. Numerical studies were performed to provide some insights for supplier selection and order quantity decisions. © 2006 Elsevier Ltd. All rights reserved.

Identifier

34247525012 (Scopus)

Publication Title

Computers and Operations Research

External Full Text Location

https://doi.org/10.1016/j.cor.2006.01.015

ISSN

03050548

First Page

3682

Last Page

3690

Issue

12

Volume

34

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