The Impact Of Supply Risks On Procurement Decisions

This thesis considers a firm that procures a seasonal product from a regular sup-plier whose production is subject to both supply disruption and random proportionalyield risks and a perfectly reliable backup supplier whose production capacity requiresreservation in advance. When the random yield of the regular supplier follows a gen-eral distribution and the customer demand is deterministic , I provide the firm's optimalprocurement decisions under di?erent parameter settings. Besides, when the randomyield follows a Uniform distribution, I provide the firm's closed-form optimal procure-ment decisions.By analyzing the firm's expected profit, I show that with the increase of supplydisruption probability, the firm should order less from the regular supplier and reservemore capacity from the backup supplier. However, when mean and variance of therandom output ratio remain the same, the numerical experiments show the followingresults. If the firm can correctly identify the source of its supply risks, then the firmis more worried about the random proportional yield risk and less concerned about thedisruption risk. That is, with the increase of supply disruption probability, the firmshould order more from the regular supplier and reserve less capacity from the backupsupplier. If the firm fails to identify the source of its supply risks, then underestima-tion of the supply disruption probability will lead the firm to underutilize the regularsupplier and overutilize the backup supplier.When the customer demand is random, I formulate two-/three-stage stochasticprograms with recourse, and get the optimal procurement decisions. In the numericalexperiment I analyze the role that the backup supplier's reserved capacity plays as anoption to hedge against the supply and/or demand risks.