Infinite-horizon models for inventory control under yield uncertainty and disruptions. Working paper

In this paper, we examine a supply chain with an unreliable supplier who is subject to supply yield uncertainty as well as complete supply disruptions. We consider one case where the unreliable supplier is the only supply option, and a second case where a second, reliable (but more expensive) supplier is available. We develop cost models for both cases to determine the optimal order and reserve quantities. We then compare these results to those of two approximate methods. The approximate methods considered are variance-bundling, where the standard deviation from the mean is calculated with disruption data included, and a single-period-truncation method that assumes each period is independent of the previous one. We demonstrate that bundling and truncating cause increases in cost, distort the order quantities which should be placed with the unreliable supplier, under-utilize the reliable supplier in the two-supplier case, and can lead to selecting the wrong overall strategy for supply risk mitigation.