A Supplier Selection Model with Quality-Driven Demand and Capacitated Suppliers

摘要

This paper considers an OEM who outsources to external suppliers when faced with capacity shortage. We formulate a finite-horizon model with a quality-driven demand function and study the supplier selection and order allocation decisions of the OEM. We show that it is optimal for the OEM to select suppliers according to their per unit effective procurement cost in the last period. Focusing on a two-period model, we characterize the optimal policy when certain conditions are satisfied. We also explore the multiple-period problem using numerical study. We propose heuristic algorithms to find policies that work efficiently and offer managerial insights on outsourcing.