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

We demonstrate the importance of using a sufficiently long time horizon analysis when modeling inventory systems subject to supply disruptions. Several publications use singleperiod newsboy models to study supply disruptions, and we show that such models underestimate the risk of supply disruptions and generate sub-optimal solutions. We examine a firm with an unreliable supplier that 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 models for both cases to determine the optimal order and reserve quantities. We then compare these results to those found when a single-period approximation is used. We demonstrate that a single-period approximation causes increases in cost, under-utilizes the unreliable supplier, and distorts the order quantities which should be placed with the reliable supplier in the two-supplier case. Moreover, using a single-period model can lead to selecting the wrong strategy for mitigating supply risk.