Examining Option and Dual Supplier Strategies for Multi-Stage Stochastic Problems Under Demand Uncertainty and Supplier Disruptions

Uncertainty is becoming a constant throughout the global supply chain as reliability of suppliers and fluctuations in demand are increasingly prevalent worries for companies today. To account for this uncertainty, it is vital to implement mitigation strategies, such as purchasing and exercising options, holding inventory, and contracting with multiple suppliers. This paper develops a multi-stage stochastic model that incorporates uncertainty in the reliability of the supplier as well as uncertainty in both mean and realized demand over a time horizon. We show that the decision making of producers changes as the supplier becomes less reliable and there is a larger demand uncertainty. We also see that as the standard deviation in the demand distribution increases, the likelihood of dual suppliers and increased inventory increases. These supply chain insights can aid companies when they make sourcing decisions under uncertainty for an extended product rollout horizon