A single-period analysis of a two-echelon inventory system with dependent supply uncertainty

Behdad Masih-Tehrani, Susan H. Xu, Soundar Rajan Tirupatikumara, Haijun Li

Research output: Contribution to journalArticle

25 Citations (Scopus)

Abstract

Disruptions and random supplies have been important sources of uncertainty that should be considered in the design and control of supply chains. There have been many real world examples in which a single catastrophic event has simultaneously degraded the capabilities of several suppliers leading to considerable erosion of profits and goodwill for a company. However, the literature on analytical models that account for the dependence nature of disruptions and its impact on supply chain performance is sparse. In this paper, we consider an m-manufacturer, 1-retailer, newsvendor inventory system with stochastically dependent manufacturing capacities, caused by random disruptions that may simultaneously inflict damages to the capacities of the manufacturers. We develop the structural/analytical properties of key performance measures and optimal inventory policies for the multi-source and assembly inventory systems. We show that stochastic dependence in disruptions can have opposite effects on system performance in the multi-source and assembly systems. While risk diversification is preferred in the multi-source system, risk concentration is preferred in the assembly system. Our results also suggest that, if the retailer ignores the effect of dependent disruptions, then in the multi-source structure, it would underestimate the cost, overestimate the fill rate, and order more units than the optimum; however, in the assembly structure, the opposite would happen. We perform a comprehensive numerical study to validate our analytical results and generate useful managerial and operational insights for effective risk management of supply chains in the presence of dependent supply uncertainty.

Original languageEnglish (US)
Pages (from-to)1128-1151
Number of pages24
JournalTransportation Research Part B: Methodological
Volume45
Issue number8
DOIs
StatePublished - Jan 1 2011

Fingerprint

uncertainty
supply
Supply chains
Risk management
performance
Analytical models
Erosion
Profitability
diversification
risk management
supplier
Uncertainty
Inventory systems
Supply uncertainty
Disruption
erosion
manufacturing
profit
damages
Costs

All Science Journal Classification (ASJC) codes

  • Transportation
  • Management Science and Operations Research

Cite this

@article{cba1905a1acd4b38879d268539ea94f3,
title = "A single-period analysis of a two-echelon inventory system with dependent supply uncertainty",
abstract = "Disruptions and random supplies have been important sources of uncertainty that should be considered in the design and control of supply chains. There have been many real world examples in which a single catastrophic event has simultaneously degraded the capabilities of several suppliers leading to considerable erosion of profits and goodwill for a company. However, the literature on analytical models that account for the dependence nature of disruptions and its impact on supply chain performance is sparse. In this paper, we consider an m-manufacturer, 1-retailer, newsvendor inventory system with stochastically dependent manufacturing capacities, caused by random disruptions that may simultaneously inflict damages to the capacities of the manufacturers. We develop the structural/analytical properties of key performance measures and optimal inventory policies for the multi-source and assembly inventory systems. We show that stochastic dependence in disruptions can have opposite effects on system performance in the multi-source and assembly systems. While risk diversification is preferred in the multi-source system, risk concentration is preferred in the assembly system. Our results also suggest that, if the retailer ignores the effect of dependent disruptions, then in the multi-source structure, it would underestimate the cost, overestimate the fill rate, and order more units than the optimum; however, in the assembly structure, the opposite would happen. We perform a comprehensive numerical study to validate our analytical results and generate useful managerial and operational insights for effective risk management of supply chains in the presence of dependent supply uncertainty.",
author = "Behdad Masih-Tehrani and Xu, {Susan H.} and Tirupatikumara, {Soundar Rajan} and Haijun Li",
year = "2011",
month = "1",
day = "1",
doi = "10.1016/j.trb.2011.04.003",
language = "English (US)",
volume = "45",
pages = "1128--1151",
journal = "Transportation Research, Series B: Methodological",
issn = "0191-2615",
publisher = "Elsevier Limited",
number = "8",

}

A single-period analysis of a two-echelon inventory system with dependent supply uncertainty. / Masih-Tehrani, Behdad; Xu, Susan H.; Tirupatikumara, Soundar Rajan; Li, Haijun.

In: Transportation Research Part B: Methodological, Vol. 45, No. 8, 01.01.2011, p. 1128-1151.

Research output: Contribution to journalArticle

TY - JOUR

T1 - A single-period analysis of a two-echelon inventory system with dependent supply uncertainty

AU - Masih-Tehrani, Behdad

AU - Xu, Susan H.

AU - Tirupatikumara, Soundar Rajan

AU - Li, Haijun

PY - 2011/1/1

Y1 - 2011/1/1

N2 - Disruptions and random supplies have been important sources of uncertainty that should be considered in the design and control of supply chains. There have been many real world examples in which a single catastrophic event has simultaneously degraded the capabilities of several suppliers leading to considerable erosion of profits and goodwill for a company. However, the literature on analytical models that account for the dependence nature of disruptions and its impact on supply chain performance is sparse. In this paper, we consider an m-manufacturer, 1-retailer, newsvendor inventory system with stochastically dependent manufacturing capacities, caused by random disruptions that may simultaneously inflict damages to the capacities of the manufacturers. We develop the structural/analytical properties of key performance measures and optimal inventory policies for the multi-source and assembly inventory systems. We show that stochastic dependence in disruptions can have opposite effects on system performance in the multi-source and assembly systems. While risk diversification is preferred in the multi-source system, risk concentration is preferred in the assembly system. Our results also suggest that, if the retailer ignores the effect of dependent disruptions, then in the multi-source structure, it would underestimate the cost, overestimate the fill rate, and order more units than the optimum; however, in the assembly structure, the opposite would happen. We perform a comprehensive numerical study to validate our analytical results and generate useful managerial and operational insights for effective risk management of supply chains in the presence of dependent supply uncertainty.

AB - Disruptions and random supplies have been important sources of uncertainty that should be considered in the design and control of supply chains. There have been many real world examples in which a single catastrophic event has simultaneously degraded the capabilities of several suppliers leading to considerable erosion of profits and goodwill for a company. However, the literature on analytical models that account for the dependence nature of disruptions and its impact on supply chain performance is sparse. In this paper, we consider an m-manufacturer, 1-retailer, newsvendor inventory system with stochastically dependent manufacturing capacities, caused by random disruptions that may simultaneously inflict damages to the capacities of the manufacturers. We develop the structural/analytical properties of key performance measures and optimal inventory policies for the multi-source and assembly inventory systems. We show that stochastic dependence in disruptions can have opposite effects on system performance in the multi-source and assembly systems. While risk diversification is preferred in the multi-source system, risk concentration is preferred in the assembly system. Our results also suggest that, if the retailer ignores the effect of dependent disruptions, then in the multi-source structure, it would underestimate the cost, overestimate the fill rate, and order more units than the optimum; however, in the assembly structure, the opposite would happen. We perform a comprehensive numerical study to validate our analytical results and generate useful managerial and operational insights for effective risk management of supply chains in the presence of dependent supply uncertainty.

UR - http://www.scopus.com/inward/record.url?scp=80051952996&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=80051952996&partnerID=8YFLogxK

U2 - 10.1016/j.trb.2011.04.003

DO - 10.1016/j.trb.2011.04.003

M3 - Article

VL - 45

SP - 1128

EP - 1151

JO - Transportation Research, Series B: Methodological

JF - Transportation Research, Series B: Methodological

SN - 0191-2615

IS - 8

ER -