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International Journal of Application or Innovation in Engineering & Management (IJAIEM)

Web Site: www.ijaiem.org Email: editor@ijaiem.org Volume 4, Issue 7, July 2015

ISSN 2319 - 4847

Supplier selection in supply chain disruption with credit concept and Exponential demand function

Dhirendra Singh Parihar 1 , Manmohan Rahul 2

1 Ansal University, Gurgaon-122003(India)

2 Ansal University, Gurgaon-122003(India)

ABSTRACT

In this study a supply chain model is developed to select the suppliers in a disruption state. Two critical probabilities of disruption are derived and various options of supplier’s selection are determined with the help of these critical probabilities. One buyer and two suppliers are considered in this study. One of the suppliers is located outside of the buyer’s geographical scope and offers competitive price. This supplier is prone to breakdowns. Another supplier is a local supplier more reliable but expensive. The credit concept is also included in the model. The application of the model is explained with the help of a numerical example. Sensitivity experiments are carried out to examine the effect of the variation of model parameters on buyer’s profit.

Keywords: Supply Chain Management, Demand Function, Sensitivity Analysis. Modeling

1. INTRODUCTION

When Supply chain risk management emerged as an important research area due to two reasons: i) the series of crises and catastrophes have attracted public attention. Natural disasters like hurricane Katrina devastating the Gulf coast of United States, terrorist acts as such the attacks on September 11, 2001, and epidemics like SARS in South –East Asia in 2003 are violent reminders that we live in an unpredictable and increasingly unstable world. The modern supply chain seems to be more vulnerable than ever. Almost all industries have seen increased competitive pressure in the business environment and the globalization of markets. These changes have compelled firms to make their intra-firm business processes and inter-firm supply chain either more efficient or more responsive, for instance, by outsourcing many manufacturing and R&D activities, reducing inventories, collaborating more intensively with other supply chain actors (Fisher, 1997: Hult et al, 2004:Lee2004; Wiser, Joel, D. 2003). In summary, we find a relatively unstable world on the one hand, and increasingly sensitive supply chains on the other. The supply chain perspective is predicated due to the fact, that the competition is shifting from firm verses firm to supply chain verses supply chain. A number of papers focus closely on supply chain disruptions and discuss the measures that companies should use to design better supply chains, or study different ways that could help buying firms to mitigate the consequences of a supply disruption (Horowittz, 1986, GerchakParlar, 1990; Burke et al, 2007). Supplier selection is one of the most critical activities of purchasing management in supply chain. The supply chain management as strategic sourcing has been one of the faster growing area of management. The cost of purchasing raw materials and components parts from external suppliers are very important. The decisions of purchasing activities are very important. They determine the most important part of the final cost of the product. Among the decision related to this activity, the supplier selection is most capital decision. This selection is the one of decisions which determines the long term viability of the company (Thompson, 1990). The ability to identify which supplier has greater potential of a disruption is a critical step in managing the frequency and impact of these disruptions that often significantly impact on the supply chain. The concept of credit period is considered as a strategy in SCM. In today’s business transactions, frequently allow credit for fix time periods to encourage buyers to increase the size of their orders (Huang, 2010). Allowing credit for a specific time period is advantageous for the buyer. First, under a credit contract, the buyer does not have to pay the supplier immediately and therefore it is possible to pay the supplier from future earnings. Therefore low capital buyers can enter the business. Secondly as the major portion of the inventory holding cost is associated with investment depreciation, using credit therefore reduces the cost. Third, the unpaid balance can be invested during the credit period to create additional income. Various researchers have developed SCM models including credit concept. The problem of supplier selection becomes more complex if we also take into consideration the discounts which suppliers give on the total order value within a specific period. Hauang Yong-FU et al.(2007) investigated the case where the retailer’s unit selling price and the purchasing price are not necessarily equal within the EPQ frame work under the cash discount and permissible delay in payments. Liang-Yuh et al investigated an optimal strategy for an

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International Journal of Application or Innovation in Engineering & Management (IJAIEM)

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ISSN 2319 - 4847

integrated system with variable production rate, when the freight rate and trade credit are both linked to the order quantity. Ibrahim Abdul and Atsuo Murata (2011) discussed the discounted cash flow approach to obtain the optimal results. In order to capture market share and increase sales, in highly competitive free markets of liberalized economic firms have to compete not only with their prices, but also with rebates, product quality, advertising and other promotional expenditures. The degree of effectiveness of these competitive factors in increasing sales depends on how much of these factors influence the consumer’s purchasing decisions. A considerable number of researchers in economics and different functional area of business have studied the impact of various operational and marketing activities on the consumer’s demand. These researchers have developed variety of mathematical functions to characterize the demand. The linear and exponential demand functions are two popular deterministic demand functions. Y-W Zhou and D Zhou (2013) considered a two echelon supply chain where one supplier sells through a retailer a product with a stable market demand. They find that the unconditional trade credit scenario is always beneficial to the retailer but harmful to supplier in most situations while the conditional trade conditions scenario is always beneficial to both parties. Chen L H and KANG F S (2010) proposed a mathematical model for a supply chain under the effect of unexpected disruptions in transport. The supplier offers the buyer a trade credit period and the buyer in turn offers a permissible delay period. Narain Singh et al studied order size dependent trade credit in a three echelon supply chain model. Mei-Chuan et al (2012) considered different financial environments when the supplier provides a permissible delay in payments and developed a mathematical model to find the optimal order quantity and pay off time for maximizing the buyer’s total profit for each financial environment. In this study we have followed the Yu et.al. (2009) and Ali Arkan (2011) methodology to study the selection between single and dual sourcing using exponential demand function. The effect of price sensitivity on single (main supplier) and local supplier is illustrated with the help of a numerical example. The effect of variation of demand portion allocated to local supplier, in buyer’s profit is also illustrated. In the analysis the credit given to buyer by local supplier is included in the analysis while selecting appropriate

2. MODEL

It is assumed that the supply chain deals with a single product. The supplier selection criterion is developed in the case of supply chain disruption risk. One buyer and two suppliers are considered. One supplier is located outside of the buyer’s geographical scope, and offers competitive price, but this supplier is prone to breakdowns. Another supplier is local supplier that is more reliable but more expensive. The local supplier allows credit for a fixed period to encourage buyer to increase the size of his order. The buyer has following three alternatives for outsourcing the material.

  • i) Single sourcing (outside supplier as main supplier).

ii) Single sourcing (local supplier as main supplier). iii) Dual sourcing with local supplier as secondary supplier. In Dual sourcing case the local supplier allow the credit period. The following analysis provided a criterion how to choose the sourcing out of above three alternatives to optimize the buyer’s profit. The price demand function is deterministic. The market demand Q is decreasing function of retail price p and is given by the following exponential function.

Q=D e -k p

Where D is the market scale and P denotes the product price. k price sensitivity.

Expected profit functions in the normal state.

(1)

  • i) Single sourcing (outside supplier as main supplier).

Q= D e (-kCms)

(2)

Where Cms is the outside supplier’s unit price in single sourcing.

The profit function is given as

ф nso =(S-Cms ) D e -kCms

(3)

Where ф nso denotes the profit function and S is the buyer’s unit sale price of the product. ii) Single sourcing (local supplier as main supplier). The demand function is given as

Where

Q= De -kCbn

(4)

International Journal of Application or Innovation in Engineering & Management (IJAIEM) Web Site: www.ijaiem.org Email: editor@ijaiem.org

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International Journal of Application or Innovation in Engineering & Management (IJAIEM)

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ISSN 2319 - 4847

C bn is the local supplier’s unit sales price. In this case the local supplier offers a credit period T. The buyer’s total interest saved during the credit period is given as Interest= C bn De -kCbn T i Where T and i are the length of the credit period and the buyer’s cost of capital respectively. The profit, Ψ nsl , in this case is given by following equation.

Ψ nsl = (S-C bn )De -kCbn + C bn D e -kCbn Ti

(5)

iii) Dual sourcing. The profit function when the buyer selects two suppliers is given below.

ф nd = (1-x)(S-C md ) D e -0.5k(Cmd+Cbn) +x(S-C bn )D e - .5k(Cmd+Cbn) +

C bn x D e - .5k (Cmd+Cbn)

Ti

(6)

Where Cmd and x are outside supplier’s unit sale price in dual sourcing and the portion of the demand allocated to the

secondary y supplier respectively.

Expected profit functions in the disruption state.

  • i) Single sourcing (outside supplier as main supplier).

In this case the outside supplier faces breakdown, the supply disruption occurs, therefore, the profit function is

calculated as follows.

ф dso = -De -kCms C u

(7)

Where ф dso is the profit function and C u is the buyer’s unit loss of unsatisfied demand. The breakdown occurs for the outside supplier hence the breakdown does not affects the local profit function. ii) Dual sourcing. In this alternative the local supplier allotted a portion of demand, x, of the average demand each cycle. In this case, the unit price of the product of the local supplier is different to normal state. The unit prices are C bn for x portion of the demand and C bd for (1-x) portion of demand respectively. The buyer’s profit may be expressed as

ф dd = (1-x) (S-C bd) D e - . 5k(Cmd+Cbn) +x(S-C bn )D e -.5k(Cmd+Cbn)

+ C bn x D e - . 5k (Cmd+Cbn ) Ti

(8)

It may be noted that in this case the credit period is considered just for a portion x, of the average demand hence the

buyer’s total interest saved is given by Interest saved = C bn x D e - . 5k (Cmd+Cbn) Ti

The expected profit functions of buyer in the event of disruption are given below. i) Ψ mso = (1-p)ф ns0 +pф dso Where Ψmso denotes the expected profit function of buyer. ii) Ψ d = (1-p) фnd +p ф dd Where Ψd is the profit function in dual case.

iii) Ψ msl =(S-C bn ) D

e kCbn + C bn D e -kCbn

Ti

(9)

(10)

(11)

(12)

Where Ψmsl is the profit function in the case where local supplier is selected as single source.

Sourcing methods When the probability of disruption P satisfies the relationship L p < P<U p then the buyer should prefer dual sourcing where L p and U p are given by the following equations.

L p = [1+ (ф dd - ф dso )/( ф nso -ф nd )] -1

(13)

U p = [(ф nd -Ψ dso) / (ф nd - ф dd )] -1

(14)

Where L p is the first critical probability that’s breaks even the profit with the outside supplier as the single supplier and the profit with dual sourcing and U p the second critical probability that breaks even the profit with the local supplier as

the single source and the profit with dual sources. The proof is given by Ali Arkan et al (2011) and is given in appendix. There are following three options which give optimal buyer’s profit.

  • i) If p<= L p , chose the outside supplier as the single source.

ii) If L p < p < U p chose the dual sourcing.

iii) If p >= Up chose the local supplier as the single source.

For any given p there is a lower boundary of T (T min ) given as

T min = [ (1-p) ф nd

+p ф dd

- (S-C bn

) D e - kCbn

] / C bn D e -kCbn

(15)

(See appendix) The local supplier as the only supplier out performs both the suppliers when

T=T min The range of T > T min

is very important for local supplier, because he can adjust the length of credit period and earn

the whole buyer’s purchased quantity. Thus the credit period has a critical role in supply chain. Numerical example

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In order to illustrate the application of the model ,let us consider the same hypothetical values of the model parameters as in (Ali Arkan et. al.): x=.3, C ms =330, C md =340,C bn =360,C bd =400, C u =200,S=420, k=.087,D=6* 10 6

i=0.15,T=0.15

These values of parameters are base value for further sensitivity study. Applying model to these hypothetical parameters, the lower critical probability (L P ) of disruption and the upper critical probability of disruption (Up) are calculated and found to be 0.21 and 0.47 respectively.

Fig. 1 The rxpected profits under various sourcing alternatives.

10000 0 60000 50000 40000 30000 20000 Buyer's Profit Dual sourcing Single sourcing(main supplier) Only local
10000
0
60000
50000
40000
30000
20000
Buyer's Profit
Dual sourcing
Single sourcing(main supplier)
Only local supplier(reference line)
0.4
0.6
0.2
0.8
1.2
0
1

Probability

Figure 1 The expected profits under various sourcing alternatives

Fig.1. illustrate the buyer’s profit for various options. Three options which provide the optimal profit are listed below. i) If p<= 0.21, chose the outside supplier. ii) If 0.21< p < 0.47, chose the dual sourcing. iii) If p>= 0.47, chose the local supplier as a single source.

Fig.2 The effect of price sensitivity on single sourcing(main supplier) 80000 70000 60000 50000 k=0.027 40000
Fig.2 The effect of price sensitivity on single
sourcing(main supplier)
80000
70000
60000
50000
k=0.027
40000
k=0.08
30000
k=0.09
20000
10000
0
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
probability
Buyer's profit(Rs.)

Figure 2 The effect of price sensitivity on single sourcing (main supplier)

Fig.2. shows the effect of variation of the portion of demand allocated to local supplier on dual sourcing. It is found that at lower probability of disruption the small values of the portion of demand allocated to local supplier is beneficial to buyer. At the higher values of probabilities of disruption the large values of the portion of demand allocated to local supplier provides the higher profit.

Fig. 3 Effect of price sensitivity on dual sourcing. 40000 35000 30000 25000 k=0.07 20000 k=0.08
Fig. 3 Effect of price sensitivity on dual sourcing.
40000
35000
30000
25000
k=0.07
20000
k=0.08
k=0.09
15000
10000
5000
0
0
0.2
0.4
0.6
0.8
1
1.2
Probability
Buyer's profit(Rs.)

Figure 3 The effect of price sensitivity on dual sourcing

The expected effect on buyer’s profit with the variation in product cost of local supplier in disruption state are illustrated in Fig.3. The buyer’s profit decreases with an increase in price sensitivity parameter (k). The decrease in the buyer’s profit as k varies from 0.07 to 0.09 is shown in Fig. 3.

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Fig-2 Effect of the variation of the portion of the demand allocated to local supplier on
Fig-2 Effect of the variation of the portion of the demand
allocated to local supplier on dual sourcing option
280000
260000
240000
220000
x=0.1
200000
x=0.3
180000
x=0.5
160000
140000
120000
100000
80000
60000
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
Probability
Buyer's profit x 10 (Rs.)

Figure 4 Effect of the variation of the portion of the demand allocated to local supplier on dual sourcing option

The effect of price sensitivity parameter k on the buyer’s profit in the case when single sourcing (outside supplier) is shown in Fig.4. In this case as sensitivity parameter k increases the decrease in buyer’s profit is more rapid as compared to dual source case. The profit tends to zero at higher values of disruption probabilities in this case.

Fig. 5. The effect of increase in the unit price of the local supplier on the
Fig. 5. The effect of increase in the unit price of the local supplier on
the buyer's profit in dual sourcing in disruption state.
30000
25000
20000
Incerment in price(2%)
15000
Base price
Increment in price(5%)
10000
5000
0
0
0.2
0.4
0.6
0.8
1
1.2
Probability
Buber's profit

Figure 5The effect of increase in the probe of the local supplier on the buyer’s profit in dual sourcing in disruption state In disruption state the local supplier is more expensive. The local supplier increases the price of product. The effect of increase in product price by local supplier on buyer’s profit is shown in Fig.5. In the Figure the base price corresponds to a unit price equal to Rs.400. The decrease in buyer’s profit with an increase of 2% and 5% in product price is shown in Fig.5.

3. CONCLUSIONS

Equalize the in this study, a decision making model with the consideration of buyer’s optimal profiting disruption risk is considered. Two critical probabilities of disruption are formulated and various options of supplier selection are determined with the help of these critical probabilities. Two suppliers, one outside of the buyer’s geographical scope and another local are considered. Outside supplier is prone to disruption and with competitive product price and local more expensive. The credit concept is also included in the model. A numerical example illustrates the application of the model. The sensitivity experiments conducted to show the effect of the variation of the portion of the demand allocated to local supplier, the effect of variation in price sensitivity parameter and the effect of variation in the price of the product of local supplier, on buyer’s profit.

REFERENCES

[1] Fisher, Marshall, L., 1997. What is the right supply chain for your product Harvard? Business Review, 75, 2,105-

116.

[2] Hult, G. Tomas, M., David, J., Ketchen, Jr., Stanley, F.Stater, 2004. Information processing, knowledge development and strategic supply chain performance. Academy of Management Journal, 47, 2,241-253. [3] Lee, Haul, L., 2004. Aligning supply chain strategies with product uncertainties. California Management Review, 44, 5,835-847. [4] Wisner, Joel, D. 2003. A structural equation model of supply chain management strategies and firm performance .Journal of Business Logistics, 24, 1, 1-25. [5] Thompson, 1990. Vender profile analysis. Journal of Purchasing and Material Management, 11-18. [6] Liang-Yuh Ouyang, Chia-Huei Ho, Chia-Hsein Su, 2008. Optimal strategy for an integrated system with variable production rate when the freight rate and trade credit are both linked to the order quantity. International Journal of Production Economics, 115, 1,151-162.

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[7] Ibrahim Abdul and Atsuo Murata, 2011. Optimal production strategy for deteorating items with varying demand pattern under inflammation. International Journal Engineering Computations, 2,449-466. [8] Huanf, YF, 2007. Economic order quantity under conditionally permissible delay in payments. European Journal of Operational Research, 176(2), 911-115. [9] Horwitz, I., 1986.On two source factor purchasing. Decision Science, 17,274-279. [10] Gerchak, Y., Parlar, M., 1990. Yield randomness, cost tradeoffs, and diversification in the E O Q model. Naval Research Logistics, 37,341-354. [11] Burke, G.J., Carrillo, J.E., Vakharia, A.J., 2007. Single versus multiple supplier sourcing strategies. European Journal of Operational Research, 182(1), 95-112. [12] Yu, H., Zeng, A.H. Zhao, L. Single or Dual sourcing decision making in the presence of supply chain disruption risks. Omega, 37,788-800. [13] Ali Arkan, Seyed Reza Hejazi, Vahid, G., 2011. Supplier selection in supply chain management with disruption risk and credit period concept. J.Ind.Eng.Int. 7(15), 51-59. [14] Y-W Zhou and D Zhou, 2013.Determination of optimal trade credit policy: a supplier –Stackelberg model .Journal of Operational Research Society, 64, 1030-1048. [15] Chen L H and Kang FS, 2010b. Mathematical modeling of supply chain with imperfect transport and two echelon trade credits. International Journal of Production Economics, 123(1), 52-61. [16] Narain Singh, Bindu Vaish, and S.R. Singh, 2014. Order size dependent trade credit study in a three echelon supply chain model. International Journal Computer application Technology and Research, 3, 4,193-199. [17] Mei-Chaun Cheng, Chun-Tao Chang, Liang-Yuh Ouyang, 2010. The retailer’s optimal policy with trade credit in different financial environments. Applied Mathematics and computation, 218, 9623- 9634

5. APPENDIX

The following constraint must be satisfied to choose the dual sourcing as optimal alternative.

Ψ mso < Ψ d Ψ msl d

From eq. (1) we obtain (1-P) ф nso +P ф dso < (1-P) ф nd +P ф dd Eq. (3) may be arranged as P > [1+ (ф dd -ф dso )/ (ф nd -ф nso )] -1 Hence first critical probability L p is given a L p = [1 + (ф dd - ф dso )/ (ф nd -ф nso )] -1 From eq. (2) we obtain (1-P) фnd +P ф dd msl eq.(5) may be rearranged as P < (ф nd - Ψ msl )/ (ф nd -ф dd ) The second critical probability is given as U p = (ф nd -Ψ msl )/ (ф nd - ф dd ) The expression for T min can be derived as follows eq. (2) may be written as (1-P) фnd + Pф dd > (S-c bn ) D e -kcbn +c bn D e -kcbn T i eq.(7) implies (1-P) ф nd + P ф dd > c bn D e -kcbn T T min = [(1-P) ф nd +Pф dd ]/ c bn D e-kc bn

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

AUTHORS

Dhirendra Singh Parihar received the degree of B.Sc. (Hons.) Physics and M.Sc. Physics with specialization in Materials during the year 1993 and 1995 respectively from a highly reputed central university of India. During 1996-1998, he received the degree of PGDBM with specialization in \marketing Management. After serving in some of the world’s best known MNC’s for a dacade, since last eight years he is a full time Faculty and active researcher in the areas of Inventory and Supply ChainManagement.while working at Ansal University,Gurgaon.India.

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