Quality Cost And Failure Risk In The Choice Of Single Versus Multiple Sourcing
The advantage of multiple sourcing to protect against supplier failures arising from undependable (or even unsafe) products due to latent defects is examined using a quality-cost model of supply base composition. Prior models have focused on supplier failures arising from unreliable supply, such as late/insufficient/no delivery, due to random yields. This model focuses on non-linear external failure costs leading to a desire for risk diversification. The author derives a closed-form characterization of the optimal production quota allocation, which determines the optimal supply base with two intuitive properties.