Quality Cost and Failure Risk in the Choice of Single versus Multiple Sourcing

Yim, Andrew (2010): Quality Cost and Failure Risk in the Choice of Single versus Multiple Sourcing.

Abstract

The advantage of multiple sourcing to protect against supplier failures arising from undependable (or even unsafe) products due to latent defects is examined using a quality-cost model of supply base composition. Prior models have focused on supplier failures arising from unreliable supply, such as late/ insufficient/ no delivery, due to random yields. This model focuses on non-linear external failure costs leading to a desire for risk diversification. I derive a closed-form characterization of the optimal production quota allocation, which determines the optimal supply base with two intuitive properties. If a supplier is selected, any supplier of higher quality must also be selected. Moreover, larger production quotas should be assigned to higher-quality suppliers. These properties hold under a mild condition on the differences among suppliers’ production costs. The condition includes the special case of equal costs but also allows unequal costs without any particular order (e.g, higher-quality suppliers may or may not have higher production costs). I also derive a necessary and sufficient condition for determining the exact size of the optimal supply base, provided the mild condition holds. An alternative necessary and sufficient condition is derived to determine whether single or multiple sourcing is optimal, without requiring any precondition.

• Item Type: MPRA Paper
• Language: English
• Keywords: Supplier selection, supply base composition, latent defects, multiple sourcing, single sourcing, total cost of purchasing.
• Subjects: M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M11 - Production Management; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics

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