Now or Later: A Simple Policy for Effective Dual Sourcing in Capacitated Systems

Senthil K. Veeraraghavan · Alan Andrew Scheller-Wolf

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Supply Chain and Inventory Management Management and Optimization Techniques Facility Location and Emergency Management

Abstract

We examine a possibly capacitated, periodically reviewed, single-stage inventory system where replenishment can be obtained either through a regular fixed lead time channel, or, for a premium, via a channel with a smaller fixed lead time. We consider the case when the unsatisfied demands are backordered over an infinite horizon, introducing the easily implementable, yet informationally rich dual-index policy. We show very general separability results for the optimal parameter values, providing a simulation-based optimization procedure that exploits these separability properties to calculate the optimal inventory parameters within seconds. We explore the performance of the dual-index policy under stationary demands as well as capacitated production environments, demonstrating when the dual-sourcing option is most valuable. We find that the optimal dual-index policy mimics the behavior of the complex, globally optimal state-dependent policy found via dynamic programming: the dual-index policy is nearly optimal (within 1% or 2%) for the majority of cases, and significantly outperforms single sourcing (up to 50% better). Our results on optimal dual-index parameters are generic, extending to a variety of complex and realistic scenarios such as nonstationary demand, random yields, demand spikes, and supply disruptions.

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References

2006On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks 1999Quantitative Models for Supply Chain Management 2005Association Between Supply Chain Glitches and Operating Performance 2005Strategic sourcing: from periphery to the core.1999Flexible and Risk-Sharing Supply Contracts Under Price Uncertainty 1964Optimal Policies for the Inventory Problem with Negotiable Leadtime 1977Optimal Inventory Under Stochastic Demand with Two Supply Options 1988A Continuous Review Model for an Inventory System with Two Supply Modes

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