Dynamic sourcing strategies for supply disruptions under consumer stockpiling

Abstract

This paper considers a make-to-order system where production gets disrupted due to a random supply failure. To avoid potential stock-out risk and responding price increase during disruption, customers might decide to stockpile extra units for future consumption. We investigate the contingent sourcing strategy for the manufacturer to cope with the disruption. To this end, we first discuss the optimal post-disruption stockpiling decision for customers. In view of expected disruption duration, price rise, and inventory holding cost, three types of stockpiling behavior are analytically provided for the customers: non-stockpiling, gradual stockpiling, and instantaneous stockpiling. Next, a model is formulated to optimize the joint decision of contingent sourcing time and quantity, with the objective of maximizing profit expectation. Finally, by conducting numerical analysis, we generate further insights into the role of relative factors and provide specific managerial suggestions on how to adapt dynamic contingent sourcing strategies to alleviate different disruptions, under different market environments and customer behaviors.