Dual Sourcing: Responsive Hedging Against Correlated Supply and Demand Uncertainty

Sting, F. J. and Huchzermeier, A. (2012), Dual sourcing: Responsive hedging against correlated supply and demand uncertainty. Naval Research Logistics, 59: 69–89. doi: 10.1002/nav.21473

Posted: 19 Jul 2011 Last revised: 1 Sep 2014

See all articles by Fabian J. Sting

Fabian J. Sting

University of Cologne; Erasmus University - Rotterdam School of Management

Arnd Huchzermeier

WHU - Otto Beisheim School of Management

Date Written: July 17, 2011

Abstract

This article analyzes dual sourcing decisions under stochastically dependent supply and demand uncertainty. A manufacturer faces the trade-off between investing in unreliable but high-margin offshore supply and in reliable but low-margin local supply, where the latter allows for production that is responsively contingent on the actual demand and offshore supply conditions. Cost thresholds for both types of supply determine the optimal resource allocation: single offshore sourcing, single responsive sourcing, or dual sourcing. Relying on the concept of concordance orders, we study the effects of correlation between supply and demand uncertainty. Adding offshore supply to the sourcing portfolio becomes more favorable under positive correlation, since offshore supply is likely to satisfy demand when needed. Selecting responsive capacity under correlated supply and demand uncertainty is not as straightforward, yet we establish the managerially relevant conditions under which responsive capacity either gains or loses in importance. Our key results are extended to the broad class of endogenous supply uncertainty developed by Dada et al. [Manufact Serv Operat Mange 9 (2007), 9–32].

Keywords: Dual Sourcing, Hedging, Correlated Supply, Demand Uncertainty

Suggested Citation

Sting, Fabian J. and Huchzermeier, Arnd, Dual Sourcing: Responsive Hedging Against Correlated Supply and Demand Uncertainty (July 17, 2011). Sting, F. J. and Huchzermeier, A. (2012), Dual sourcing: Responsive hedging against correlated supply and demand uncertainty. Naval Research Logistics, 59: 69–89. doi: 10.1002/nav.21473 , Available at SSRN: https://ssrn.com/abstract=1887790 or http://dx.doi.org/10.2139/ssrn.1887790

Fabian J. Sting (Contact Author)

University of Cologne ( email )

Albertus Magnus Platz
Cologne, NRW 50923
Germany

HOME PAGE: http://https://scm.uni-koeln.de/en/sting-f

Erasmus University - Rotterdam School of Management ( email )

Erasmus University
PO Box 1738
3000 DR Rotterdam, Zuid-Holland
Netherlands

HOME PAGE: http://www.rsm.nl/fsting

Arnd Huchzermeier

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-261-6509380 (Phone)
+49-261-6509389 (Fax)

HOME PAGE: http://www.whu.edu/prod

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