Supplier selection and order allocation problem under demand and supply uncertainty with return policy

Demand and supply uncertainties are the two challenges of any supply chain. Supply uncertainty can happen if suppliers' production systems generate defective units. Demand uncertainty also indicates that the demand fluctuates over time. Suppliers may share the risk of uncertain demand with buyers by agreeing to buy back unsold inventory at the end of the season. Also, a multisourcing scenario can be an effective strategy to handle both uncertainties. We consider in this paper an inventory problem where a buyer purchases an item from multiple suppliers. The suppliers may have limited production capacity, produce defective units, and allow the buyer to return unsold units at the end of the season with a buyback price. To determine the order quantities from the suppliers, the buyer must evaluate them based on wholesale price, buyback price, and defective rate. We first develop a solution algorithm to solve the problem and then provide some managerial insights for both the buyers and the suppliers.