Procurement under incomplete information about the supply disruption

Abstract

In the past decade, disasters such as earthquakes, hurricanes, terrorist attacks and snowstorms happened frequently around the world, which greatly increased the risk of supply disruption. Meanwhile, the wide spread of outsourcing intensify this kind of risk. How to ensure the sustainability of supply has attracted extensive interesting from industry and academy, and numerous literature appeared. In this paper, we study the supply disruption management problem under incomplete information on disruption probability. Specifically, a manufacturer wants to buy a material facing a set of unreliable suppliers with the private information on the disruption probability of is information for every supplier. How to incentive the suppliers reveal their disruption is an important problem for the manufacturer to make a good purchase decision. A two-stage auction mechanism is designed to address this problem. In the first stage, each potential supplier bids a unit penalty if he can't deliver the order quantity. At the second stage, the manufacturer chooses the winners and places an order to the winners based on the unit penalty costs bid by the suppliers. We show that the mechanism can help the manufacturer get the suppliers' disruption information and make a right purchase decision under incomplete disruption information. Furthermore, we extend the model to the case including a spot market.