The Decisions on Backup Supply in the Presence of Supply Disruptions

As supply chains are becoming more dependent upon suppliers, the importance of using backup supply is receiving increasing attention. The objective of this paper is to develop a set of models to facilitate manufacturers/buyers’ decision as to when to use a backup supply if the main supply source is interrupted. The authors take a number of cost factors such as production, purchasing and inventory holding during the disruption cycle into consideration. The impacts of the duration and the magnitude of the main supplier’s breakdown are explicitly studied, and the effect of demand change during disruption is also examined. Numerical illustrations are given to show the applications of the decision-making models developed in the paper. DOI: 10.4018/jisscm.2012040102 22 International Journal of Information Systems and Supply Chain Management, 5(2), 21-38, April-June 2012 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. tinue the production if the manufacturer operates under a make-to-stock policy. However, if the amount of inventory cannot cover the demand during the entire disruption period, then the manufacturer has to find alternatives for replenishment, such as using a backup supplier. The decision not only has to be made quickly, but also should take numerous factors into consideration, including the main supplier’s disruption duration, the magnitude of the disruption, the manufacturer’s inventory level, the difference between the two suppliers’ wholesale prices, the financial loss of the unsatisfied demand, and many others. A framework and associated tools for decision comparison and selection are thus needed to guide the manufacturer to make a cost-effective decision. We examine such a decision based on the manufacturer’s profit when using and not using a backup supplier, respectively. Sensitivity analysis of several critical input parameters on the decision is given after the profit functions are established. Furthermore, the impact of demand change in conjunction with supply disruption on the decision is also analyzed. The remainder of the paper is organized as follows. First, we summarize the literature related to supply chain risk management. We analyze the entire disruption cycle and magnitude, and provide a list of notations that will be used for model development. The next section focuses on the sensitivity analysis of various parameters through algebraic analysis and numerical examples. The demand change that occurs concurrently with the supply disruption is considered to show how the decision regarding the use or not use of a backup supplier is made. Finally, we provide concluding remarks and directions for future research.