Retailer’s Procurement Strategy under Endogenous Supply Stability

In this paper, a dynamic model is presented to study retailer’s procurement strategy when supply stability is endogenously determined. The optimal supply stability as well as the optimal purchasing strategy are characterized with a quadratic cost function. Based on these models, the following findings are brought about. Firstly, when the difficulty level of building supply stability exceeds a certain threshold, it would be more profitable for the retailer to choose a less reliable supplier. Secondly, given that the suppliers can get positive profit, the retailer would choose the one who has the strongest ability to be reliable. Thirdly, the equilibrium supply to the retailer would always meet the demand on the retailing market. Finally, emergency procurement is shown to be an effective way to reduce the risk of supply chain disruptions. To better fit the real situations, an extended model which considers the impact of the stability on costs is further discussed.