Sourcing assemble-to-order inventories under supplier risk uncertainty. (January 2017)

• Record Type: Journal Article
• Authors: Hong, Yoo Suk; Huh, Woonghee Tim; Kang, Changmuk
• Is Part Of: Omega. Volume 66:Part A(2017:Jan.)
• Page Start: 1
• Page End: 14
• Publication Date: 2017-01
• Subjects: Supply risk -- Newsvendor inventory -- Assemble-to-order -- Supply diversification -- Uncertain reliability; Management -- Periodicals; 658.4005
• DOI: 10.1016/j.omega.2015.06.011
• Languages: English
• ISSNs: 0305-0483

Abstract

Abstract: In this paper, we consider sourcing and inventory spare-parts decisions in an assemble-to-order setting wherein components are subject to defect risk. Sourcing from dual suppliers diversifies the defect risk and reduces the variability of random defects. Upon careful consideration of assemble-to-order (ATO)-type repair and uncertainty of supplier reliability, we found that dual sourcing minimizes spare-part inventory cost by reducing the shortage cost or enabling storage of lesser amounts of the common resource. This paper identifies the conditions under which dual sourcing is better than sourcing from a single supplier in spite of lost pooling effect, higher procurement cost, and failure to achieve higher reliability. Abstract : Highlights: Dual sourcing diversifies the risk of supplier reliability while loses risk pooling effect of single sourcing. In an assemble-to-order repair inventory, the diversification effect may decrease expected inventory cost larger than the increased cost by lost pooling effect. Magnitude of the dual sourcing advantage varies on reliability specifications of suppliers and the procurement cost of the components.