Exploring the economic consequences of letting a supplier hold reserve storage

Abginehchi, Soheil; Larsen, Christian; Thorstenson, Anders

doi:10.1016/j.cor.2014.08.009

Cited by 2 publications

(1 citation statement)

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“…In our setting, the mainstream (long‐leadtime) supplier is needed only because the local supplier does not have sufficient capacity, whereas in the dual sourcing literature, the long‐leadtime supplier could be preferred because it is lower cost. Abginehchi, Larsen, and Thorstenson () also consider a capacity‐constrained responsive supply, but this supply source is a fixed quantity reserve inventory that is more expensive than the normal supplier. The decision studied is also different from our setting in that the buyer either uses the entire reserve inventory or none of it.…”

Section: Introductionmentioning

confidence: 99%

Mechanisms for Increasing Sourcing from Capacity‐Constrained Local Suppliers

2016

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The fresh produce supply chain is characterized by large (mainstream) farms that are located far from consumers, and capacity-constrained (local) farms that are located close to the consumer. In this setting, we study: (i) how leadtime and capacity asymmetry between mainstream and local farms affect a retail grocer's order policy for fresh produce, and (ii) how various operational mechanisms can increase the amount sourced from local farms. We show that this supply chain structure is disadvantageous for local suppliers (farms) because it induces the retailer to treat the local supply as a de facto responsive supply without paying a premium for the responsiveness. This disadvantage is exacerbated when the retailer's objective is to achieve a high service level. We study three mechanisms that can improve conditions for local farms: working with an intermediary, backhauling, and a retail order policy, purchase guarantee, that explicitly supports local farms. The intermediary and backhauling mechanisms help the local farm by making local supply more attractive to the retailer, inducing her to order more locally sourced produce. The intermediary reduces the retailer's overstock and stockout costs whereas backhauling increases the average margin. The purchase guarantee order policy helps local farms at the expense of retail profit. However, we show that purchase guarantee and * We are grateful to the food industry managers and experts who have graciously spent their time and lent their expertise to help us understand the evolution and current operations of the fresh produce supply chain.

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Section: Introductionmentioning

confidence: 99%