Strategic sourcing in forward and spot markets with reliable and unreliable suppliers

Abstract

We study sourcing and purchasing strategies of a monopolistic retailer in a market with a reliable but expensive supplier and an unreliable but cheap supplier with random yield. The retailer can solely source from either supplier or adopt dual sourcing in the forward market while engaging in spot trade. Our study shows that the retailer's relative reliance on forward sourcing is lessened in the presence of a reliable supplier with higher cost, an unreliable supplier with more variable yield, and a more sensitive spot market. Moreover, highly variable forward supply enhances the value of a spot market when compared with high forward cost. Regarding the forward sourcing decision, we find that dual sourcing always benefits the retailer as well as the whole society, whereas upstream competition is not definitely harmful to suppliers. Dual sourcing might benefit the reliable supplier when its cost is sufficiently low or the unreliable supplier when its yield variability is sufficiently small. Besides, dual sourcing could degrade into unreliable sole sourcing when the reliable supplier is relatively expensive. Moreover, in spite of the competition between suppliers in the forward market, dual sourcing does not definitely increase the retailer's reliance on forward sourcing relative to spot trade.

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