Supplier Selection Decision in the Consideration of Supply Chain Disruption Risks

A typical and commonly observed phenomenon in today's increased global sourcing environment is when foreign suppliers often offer competitive prices, but have lower reliability or higher risk, while the local or domestic vendors are more reliable, but more expensive. Consider a sourcing decision problem faced by a manufacturer (a buyer) and suppose that there are two suppliers that have the capacity and technology to provide a needed critical part for the manufacturer's final product. Supplier A offers a competitive price, but is prone to breakdowns or the supplied material experiences substantial loss during transit due to long lead-times and distance. Supplier B is relatively reliable, but is more expensive. The buying firm thus, has three supplying modes to select: selecting either supplier A, or B, or both of them. We obtain the expected profit functions of the three supplying modes in the presence of the supply chain disruption risks by constructing a decision-making model. Finally, the sensitivity of the buyer's expected profit to various input factors is examined through numerical examples, which provide guidelines for buying firms.