A multi-supplier sourcing problem with a preference ordering of suppliers

Dorothée Honhon, Vishal Gaur, Sridhar Seshadri

Research output: Contribution to journalArticlepeer-review

Abstract

We study a sourcing problem faced by a firm that seeks to procure a product or a component from a pool of alternative suppliers. The firm has a preference ordering of the suppliers based on factors such as their past performance, quality, service, geographical location, and financial strength, which are commonly included in a supplier scorecard system. Thus, the firm first uses available inventory from supplier 1, if any, then supplier 2, if any, and so on. The suppliers differ in costs and prices. The buyer firm seeks to determine which suppliers to purchase from and in what quantities to maximize its total expected profit subject to the preference ordering constraint. We present the optimal solution to this problem, and show that it has a portfolio structure. It consists of a sub-set of suppliers that are ordered by their underage and overage costs. This portfolio achieves a substantial profit gain compared to sourcing from a unique supplier. We present an efficient algorithm to compute the optimal solution. Our model applies to component sourcing problems in manufacturing, merchandizing problems in retailing, and capacity reservation problems in services.

Original languageEnglish (US)
Pages (from-to)1028-1041
Number of pages14
JournalProduction and Operations Management
Volume21
Issue number6
DOIs
StatePublished - Nov 1 2012
Externally publishedYes

Keywords

  • inventory management
  • multi-supplier sourcing
  • procurement
  • stockout-based substitution
  • supplier scorecard

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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