Effect of rework strategy on sourcing decisions under uncertainty

We address the challenge of allocating orders among multiple suppliers before a sales season (modeled as a single period) with uncertain demand and unreliable suppliers, driven by two key risks: capacity uncertainty and quality variability. Using a two-stage stochastic framework, we first model the buyer's decisions on supplier order allocation and internal capacity investment, followed by a second stage where supply and demand uncertainties are realized, and the buyer utilizes internal capacity to produce new items and rework defective ones. Reworking is especially advantageous when the cost of returns is prohibitive, and it offers higher revenue potential while being less resource intensive compared to recycling. Our study examines how rework strategies affect profit, waste reduction, and yield improvement, finding that rework provides financial benefits, especially under constrained supply capacity, with greater advantages for more risk-averse buyers. The appeal of rework increases further with waste-related taxes, such as landfill levies. In addition, we show that firms investing in internal capacity for rework operations tend to rely on fewer suppliers, relying on their own production capabilities to cushion against supply volatility. Using synthetic data inspired by the fast fashion industry, we offer managerial insights to implement sustainable sourcing strategies when exposed to both demand and supply uncertainty.