Abstract: This study investigates the procurement strategies for a manufacturer who faces two suppliers with supply risks and capacity constraints. The manufacturer firstly takes one supplier as the primary supplier and another as the backup supplier, and then the primary supplier determines its wholesale price. Based on the wholesale price, the manufacturer places regular order to the primary supplier. After the random yield of the primary supplier is realized, the backup supplier determines its wholesale price and a backup order is placed by the manufacturer. The optimal decisions for the manufacturer, primary supplier and backup supplier are obtained, and the results show that the manufacturer either exercises HL strategy (i.e., taking the high-cost supplier as the primary supplier and the low-cost supplier as the backup supplier) when the capacity of the low-cost supplier is much smaller than that of the high-cost supplier, or LH strategy (i.e., taking the low-cost supplier as the primary supplier and the high-cost supplier as the backup supplier) when the opposite is the case. The domination region of HL (LH) strategy enlarges (shrinks) with the increases of both supply risk and backup production cost. Furthermore, there exists a distortion between the strategy selection of the manufacturer and that of the social optimum, and this distortion strengthens with the decrease of backup cost but weakens with the increase of supply risk.

Key words: supply chain management, dual sourcing, backup sourcing, supply risk, capacity constraint