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Sustainability 2018, 10(11), 4104; https://doi.org/10.3390/su10114104

Capturing the Risk-Pooling Effect through Inventory Planning and Demand Switching

1
Institute of Technology Management, National Chung Hsing University, Taichung 402, Taiwan
2
Department of Business Administration, National Changhua University of Education, Changhua 500 Taiwan
*
Author to whom correspondence should be addressed.
Received: 22 October 2018 / Revised: 31 October 2018 / Accepted: 6 November 2018 / Published: 8 November 2018
(This article belongs to the Section Economic, Business and Management Aspects of Sustainability)
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Abstract

This paper demonstrates how firms can deal with demand uncertainty through inventory planning and demand switching, which take advantage of the risk-pooling effect and contribute to supply-chain sustainability. Considering two types of products and two outsourcing strategies (competitive bidding, and consignment stock under the (Q, R) inventory policy with variable lead times), the study helps determine the appropriate outsourcing strategy when a firm practices demand switching. Under certain conditions, the study further identifies the proper demand-switching direction and optimum switching-rate to achieve the minimum total purchase and inventory costs in association with outsourcing. Prior research generally implies that demand switching increases costs or profit benefits. This implication, however, does not hold true in the present context. The study presents numerical examples to illustrate the derived models. The findings enrich the extant literature by incorporating demand switching into the outsourcing practices, which is beneficial to both practitioners and scholars. View Full-Text
Keywords: demand switching; risk pooling; outsourcing strategies; inventory planning; sustainability demand switching; risk pooling; outsourcing strategies; inventory planning; sustainability
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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Cho, H.C.; Hsieh, Y.J.; Huang, L.Y. Capturing the Risk-Pooling Effect through Inventory Planning and Demand Switching. Sustainability 2018, 10, 4104.

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