Manufacturer's procurement decision considering correlation of default risk between suppliers

This paper analyses the procurement decision of a manufacturer who deals with two correlated suppliers who may default on their obligations to deliver order quantities at the end of the production lead time. Distinguished from the most studies about the supply disruption management by establishing multiple sources of supplies, this paper especially studies the effect of the suppliers' correlation of default on the manufacturer's order policy and supply disruption risk and it also uses CVaR (conditional value at risk) as the measure of risk. We first obtain the formula for the order quantities, which indicates that the correlation of default is negatively related to the order quantities, while positively related to the manufacturer' CVaR. We then find the identical point where the manufacturer orders the same quantities from two different suppliers, and the decline of the correlation of default between the suppliers can still stimulate the manufacturer to order more.