Dual-source Purchasing Strategy under the Risk of Supply Disruption

Abstract

When facing a supplier with risks, retailers usually seek a stable supplier as well to mitigate the risks and ensure a relatively stable supply. Therefore, the retailers need to decide how to procure from these two types of suppliers. To address this problem, this paper develops a dual-sourcing procurement newsvendor model that takes supply risks into account. It analyzes how retailers should procure from both high-cost but risk-free suppliers and low-cost but risky suppliers separately, to maximize their expected profits. We determine the retailer's optimal procurement strategy and observe that when the supply disruption risk is low, the retailer maintains its optimal strategy without altering it to address the risk. However, as the risk becomes more significant, the retailer tends to prefer selecting a more stable supplier.