Multi-Supplier Sourcing with Random Yields: A Newsvendor Approach

In today’s globally competitive environment, decision makers in supply chains are faced with numerous challenges particularly regarding the selection of suppliers. To assist in this endeavor, we examine a double-layered supply chain where a buyer (vendor) facing the end users has the option of selecting among a cohort of suppliers. The available suppliers have different yield rates and unit costs. The vendor has to decide, given the stochastic nature of the problem’s governing parameters, whether or not to order from each supplier, and if so the quantity to be ordered so as to maximize the expected profit. The newsvendor problem is extended to model the considered situation. We develop an analytical model for the problem, and propose two solution algorithms for it. Numerical studies are preformed to capture the performance nature of the developed algorithms. One of the algorithms exhibits efficient performance and utilizing it leads to many managerial insights regarding the supplier selection problem.