Evaluating Procurement Strategies under Uncertain Demand and Risk of Component Unavailability

In high-technology manufacturing, failure to access non-commodity components can interrupt production, because there are typically no substitute suppliers. Moreover, demand and supply uncertainties can be interdependent, because supplier problems are more probable when demand is high. Most earlier risk management models treat these uncertainties as independent risk factors. We present a framework where judgmental information is captured with a scenario tree and a stochastic decision model is used to evaluate alterative procurement strategies consisting fixed quantity contracts for cost minimization and flexible quantity contracts for risk management.