Supply-Cost Risk The Benefit of Flexibility via Multiple Suppliers

1 Supply-Cost Risk The Benefit of Flexibility via Multiple Suppliers 

Firms faced with uncertain suppher costs may choose to maintain an active set of suppliers so that, at at r given time, it can place orders with those supphers who currently offer the lowest cost. Consider the following styhzed example in which a manufacturer has an unlimited number of pre-qualified suppliers with uncertain supply costs. Let the unit cost of supplier j = 1,2. oo, denoted by Cj, be 5, 10, or 15 with equal probabihty 1/3. To satisfy the demand in each period, we assume that the manufacturer always orders from the supplier who offers the lowest unit cost. In this case, the flexibility level /can be defined in terms of the number of active supphers and the performance metric P(J) can be defined as the expected unit cost associated with sourcing from/suppliers. 

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