## Awi Federgruen

*Procurement Strategies with Unreliable Suppliers*

Coauthor(s): Nan Yang.

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**Abstract:**

We propose and analyze a general periodic-review model in which the firm has access to a set of potential suppliers, each with specific yield and price characteristics. Assuming that unsatisfied demand is backlogged, the firm incurs three types of costs: (i) procurement costs, (ii) inventory-carrying costs for units carried over from one period to the next, and (iii) backlogging costs. A procurement strategy requires the specification, in each period, of (i) the set of suppliers to be retained, (ii) their respective *shares* in this period's replenishments, as well as (iii) the traditional *aggregate* order placed (among the various suppliers).

We show how the optimal procurement strategy can be obtained with an efficient algorithm. A base-stock policy is no longer optimal, but in each period there exists a maximum inventory level, such that orders are placed if and only if the starting inventory is below this threshold. In each period it is optimal to retain a given number of suppliers that are cheapest in terms of that period's effective cost rates, i.e., the expected cost per usable unit. The optimal *number* of suppliers to be retained in a given period depends on all current and future parameters and distributions, but this dependence can be aggregated into a single so-called benchmark cost measure. Under Normal yield and demand distributions, the suppliers' market shares are determined by a single aggregate score, itself the product of a simple reliability score and a cost score.

**Source:** *Operations Research*

**Exact Citation:**

Federgruen, Awi, and Nan Yang. "Procurement Strategies with Unreliable Suppliers." *Operations Research* 59, no. 4 (2011): 1033-1039.

**Volume:** 59

**Number:** 4

**Pages:** 1033-1039

**Date:**
2011