Global dual sourcing and order smoothing: the impact of capacity and leadtimes
Boute, Robert Van Mieghem, Jan
Boute, Robert
Van Mieghem, Jan
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2015
Journal
Management Science
Book
Publication Volume
61
Publication Issue
9
Publication Begin page
2080
Publication End page
2099
Publication Number of pages
Collections
Abstract
After decades of offshoring production across the world, companies are rethinking their global networks. Local sourcing is receiving more attention, but it remains challenging to balance the offshore sourcing cost advantage against the increased inventories, because of its longer lead time, and against the cost and (volume) flexibility of each source's capacity. To guide strategic allocation in this global network decision, this paper establishes reasonably simple prescriptions that capture the key drivers. We adopt a conventional discrete-time inventory model with a linear control rule that smoothes orders and allows an exact and analytically tractable analysis of single- and dual-sourcing policies under normal demand. Distinguishing features of our model are that it captures each source's lead time, capacity cost, and flexibility to work overtime. We use Lagrange's inversion theorem to provide exact and simple square-root bound formulae for the strategic sourcing allocations and the value of dual sourcing. The formulae provide structural insight on the impact of financial, operational, and demand parameters, and a starting point for quantitative decision making. We investigate the robustness of our results by comparing the smoothing policy with existing single- and dual-sourcing models in a simulation study that relaxes model assumptions.
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Keywords
Sourcing, Inventory, Stochastic, Smoothing, Lagrange's Inversion Series