The Impact of Demand Uncertainty on Decisions of Sourcing Strategies under Supply Disruption Risks

This paper investigates the impacts of both the demand uncertainty and the supply disruption probability on the decisions of two sourcing strategies: one is dual sourcing and the other is single sourcing with contingent supply. The expected profit functions and the optimal decisions of the buyer are derived and compared. Then sensitivity analysis is given through numerical examples. Explicit insights are given into how (a) the buyer’s order quantity decisions under both sourcing strategies are affected by the variability in demand; (b) demand uncertainty moderates the effects of the wholesale prices; and (c) the buyer’s expected profit changes with the demand uncertainty under different supply disruption frequencies.