Dual Sourcing Strategy With Real Options In The Presence Of Supply Uncertainty

With the development of economic globalization, more and more companies have been extending their supply chain globally in order to find new markets and low-cost supplies. These companies enjoy the profits brought by new markets and low-cost supplies and face a number of risk challenges.This paper addresses a purchasing problem with uncertain supply and demand under real option. A retailer, who faces the uncertain market demand, can source from a low-price but unreliable supplier and an expensive but reliable supplier. In order to manage the uncertainties and decrease the cost, the retailer orders product from the unreliable supplier and buys option from the reliable one at the beginning of the selling season. After the demand realizes and the order is delivered, the option is executed.First, we develop a single-period model for this problem and characterize the optimal policy. The impact of some parameters on the optimal policy under special distribution functions is investigated and some managerial insights are obtained. Then we compare the new strategy with the traditional dual sourcing strategy and the instant replenishment strategy with capacity constraint. The conditions that our strategy has an advantage over the other ones are given.Furthermore, we consider a multi-period dual sourcing problem, and develop its Markov decision model. The structural property of this multi-period decision model is characterized. And we also tend to explore the optimal inventory and purchasing policy.