Supply chain management under simultaneous supply and demand risks

In this chapter, we characterize how supply risks arising from yield uncertainties impact on supply chain management. We first consider the implications for the procurement strategies of a firm which has access to a set of potential suppliers which differentiate themselves in terms of their prices and yield distributions. The fundamental questions that arise here are (i) how many suppliers to maintain and diversify one's purchase orders amongst; (ii) how to select the desired number of suppliers from the set of potential suppliers; (iii) how to adjust one's inventory strategy to account for the supply risk, in particular how total purchase quantities should be set in the simultaneous presence of supply and demand risks; (iv) the final question is how aggregate orders are to be split among the selected suppliers and whether the tradeoffs between reliability and cost differentials among the suppliers can be captured in terms of simple allocation rules. We first characterize the answers to the above questions assuming given cost and reliability profiles of the potential suppliers. In the last part of this chapter, we proceed to analyze how these competing suppliers may wish to invest in process and technology improvements so as to optimally affect their reliability characteristics and resulting market shares.