Backup supplier

The concept of backup supplier is derived from multiple sourcing strategies. Several researches have proven that multiple sourcing strategies can create benefits when disruption happens, for instance, Burke, Carrillo and Vakharia (2006) and Pochard (2003). According to Gurnani, Mehrotra and Ray (2011), they describe backup supplier like this: Rather than routinely source from multiple suppliers, a firm might instead single source under normal circumstances but rely on an emergency backup supplier in the event of a disruption to its primary supplier. If the emergency backup can respond rapidly when called upon, then an adequate flow of material can be maintained. They also mention that an effective backup sourcing requires proactive planning, and, if necessary, the firm should work to outline better plans to provide backups for certain critical facilities to prevent backups from disruption risk.

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Lots of researches about backup supplier investigate the usage of contract. Hou, Zeng and Zhao (2010) use buy-back contract to decide the optimal order quantity to backup supplier and the value of using backup supplier. Saghafian and Van Oyen (2011) use option contract to determine the advance capacity investment/reservation level with a flexible backup supplier and the inventory ordering policy of the underlying products from both primary and backup suppliers. And in this research, they also give us a clue about how important it is to have flexible backup suppliers to use. They investigate the value of implementing flexibility in the backup system showing that contracting with a single flexible backup supplier is better rather than contracting with two inflexible ones.

Their study show an average cost reduction of 36%, so flexibility can indeed be highly beneficial; furthermore, it becomes more beneficial as the backup premium increases.

Kouvelis and Li (2008) also consider the same point of view. They show that companies should consider the emergency order like this: the later the delivery of the original order, the higher the possibility of using the flexible backup supply. The flexible backup supply is used only when the delivery of the original order is “late” enough. Therefore, from previous researches, this study finds out that not only the contract is important, but also the flexibility, which can be response time and emergency capacity.

For response time, Gurnani, Mehrotra and Ray (2011) show that the backup strategy profit exhibits increasing returns to response time reductions; that is, the incremental

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benefit to reducing response time is higher the faster the response time. Furthermore, the nature of the disruption (short-frequent or long-rare) plays a crucial role. The profit falls off rapidly in the case of short-frequent disruption; if the emergency supplier cannot respond very quickly then the backup strategy is not effective at mitigating short-frequent disruptions. The profit falls off much more slowly in the case of long-rare disruptions; therefore, there may be a tradeoff between cost, response time and capacity.

In the case of long-rare disruptions it may make sense to sacrifice some response time to gain on the other dimensions. Besides, Schmitt (2011) also use response time to be a parameter of backup supplier and use it as a variable in model to decide the expected service level.

As for emergency capacity, Gurnani, Mehrotra and Ray (2011) also show that the profit of a company increases gradually as its emergency capacity of backup supplier increases. The amount of available capacity from backup supplier is a crucial factor to company’s profit. Hence, ensuring additional capacity at an external backup source is very important; however, this might require the firm to pay an ongoing fee to reserve a desired level emergency capacity or to contract with multiple suppliers to provide enough backup capacity. In addition, the nature of the disruption also plays a significant role in here. For short-frequent disruptions, the profit is somewhat insensitive to capacity when the response time is long. On the other hand, in the case of rare-long

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disruptions, the profit increases significantly in capacity even at these longer response times. Therefore, there is a tradeoff between these two flexible factors. If the firm needs short response time, it may face lack of available capacity and vice versa. Thus, simply speaking, when decision makers have to select backup supplier, they can depend on the nature of their possible disruption to deicide the properest backup supplier. For example, response time is a crucial concern for short-frequent disruptions whereas emergency capacity is important for long-rare disruptions.

From these researches, this study notices that response time and emergency capacity play crucial roles in backup supplier strategy; however, in our research, this study will assume our backup supplier is completely flexible, which means it can response quickly to our requirements and always has abundant capacity for us to use, and will not discuss specific details about response time and emergency capacity further in order to simplify the model, but this study suggests that the later research can base on our model and add these two factors to make this model more sophisticated and realistic.

To summarize, supplier diversification and backup sourcing offer alternatives to stockpiling inventory as a means of mitigating disruption risks. By adopting backup supplier strategy, decision makers do not have to stock extra inventory and carry the holding cost. Therefore, this study will use both backup supplier and safety stock in our model and to see which should be adopted more when under different situations.

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