A Single-Period Analysis of a Two-Echelon Inventory System with Dependent Supply Uncertainty

Transportation Research Part B, Vol. 45, pp. 1128-1151, 2011

24 Pages Posted: 23 Nov 2011

See all articles by Susan H. Xu

Susan H. Xu

Pennsylvania State University, University Park - Department of Supply Chain and Information Systems

Behdad Masih-Tehrani

affiliation not provided to SSRN

Soundar Kumara

affiliation not provided to SSRN

Haijun Li

affiliation not provided to SSRN

Date Written: November 21, 2011

Abstract

Disruptions and random supplies have been important sources of uncertainty that should be considered in the design and control of supply chains. There have been many real world examples in which a single catastrophic event has simultaneously degraded the capabilities of several suppliers leading to considerable erosion of profits and goodwill for a company. However, the literature on analytical models that account for the dependence nature of disruptions and its impact on supply chain performance is sparse.

In this paper, we consider an m-manufacturer, 1-retailer, newsvendor inventory system with stochastically dependent manufacturing capacities, caused by random disruptions that may simultaneously inflict damages to the capacities of the manufacturers. We develop the structural/analytical properties of key performance measures and optimal inventory policies for the multi-source and assembly inventory systems. We show that stochastic dependence in disruptions can have opposite effects on system performance in the multi-source and assembly systems. While risk diversification is preferred in the multisource system, risk concentration is preferred in the assembly system. Our results also suggest that, if the retailer ignores the effect of dependent disruptions, then in the multisource structure, it would underestimate the cost, overestimate the fill rate, and order more units than the optimum; however, in the assembly structure, the opposite would happen. We perform a comprehensive numerical study to validate our analytical results and generate useful managerial and operational insights for effective risk management of supply chains in the presence of dependent supply uncertainty.

Suggested Citation

Xu, Susan H. and Masih-Tehrani, Behdad and Kumara, Soundar and Li, Haijun, A Single-Period Analysis of a Two-Echelon Inventory System with Dependent Supply Uncertainty (November 21, 2011). Transportation Research Part B, Vol. 45, pp. 1128-1151, 2011, Available at SSRN: https://ssrn.com/abstract=1962926

Susan H. Xu (Contact Author)

Pennsylvania State University, University Park - Department of Supply Chain and Information Systems ( email )

University Park
State College, PA 16802
United States

Behdad Masih-Tehrani

affiliation not provided to SSRN

Soundar Kumara

affiliation not provided to SSRN

Haijun Li

affiliation not provided to SSRN

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