Volume flexibility at responsive suppliers in reshoring decisions: Analysis of a dual sourcing inventory model
Publication typeFT ranked journal article
JournalProduction and Operations Management
MetadataShow full item record
AbstractWe investigate how volume exibility, de ned by a sourcing cost premium beyond a base capacity, at a local responsive supplier impacts the decision to reshore supply. The buyer also has access to a remote supplier that is cheaper with no restrictions on volume exibility. We show that with unit lead time difference between both suppliers, the optimal dual sourcing policy is a modi ed dual base-stock policy with three base-stock levels Sf2 , Sf1 , and Ss. The replenishment orders are generated by rst placing a base order from the fast supplier of at most k units to raise the inventory position to Sf 1 , if that is possible. After this base order, if the adjusted inventory position is still below Sf 2 , additional units are ordered from the fast supplier at an overtime premium to reach Sf 2 . Finally, if the adjusted inventory position is below Ss, an order from the slow supplier is placed to bring the nal inventory position to Ss. Surprisingly, in contrast to single sourcing with limited volume exibility, a more complex dual sourcing model often results in a \simpler" policy that replaces demand in each period. The latter allows analytical insights into the sourcing split between the responsive and the remote supplier. Our analysis shows how increased volume exibility at the responsive supplier promotes the decision to reshore operations and effectively serves as a cost bene t. It also shows how investing in base capacity or additional volume exibility act as strategic substitutes.
Knowledge Domain/IndustryOperations & Supply Chain Management