Managing Client Portfolio in a Two-Tier Supply Chain

Abstract

Suppliers in a variety of industries today face the challenge of managing their business where the utilization of their capacities fluctuates dramatically over time. The fluctuations can be attributed to the business cycle of the economy, as well as to the amplification of demand variability as one moves upstream (i.e., the bullwhip effect). In this chapter, we investigate the source of the fluctuations by analyzing a two-tier supply chain where the supplier serves many clients whose demands are subject to individual trends and the business cycle of the general economy. We present conditions under which the bullwhip effect or the stabilizing effect of the clients’ orders is felt by the supplier. We also analyze how the supplier can build an efficient client portfolio by analyzing the impact of a new client on the expected profit to the supplier in a newsvendor setting. We derive the key performance indicators that can guide a supplier in the right direction of the client portfolio. Thus, by understanding the clients’ ordering behaviors and its impact on capacity decisions, the supplier can strategically select an efficient client portfolio, so that the risk-neutral supplier would maximize the expected long-term profit.