Global Dual Sourcing and Order Smoothing: The Impact of Capacity and Leadtimes

Robert N. Boute, Jan A. Van Mieghem (2015) Global Dual Sourcing and Order Smoothing: The Impact of Capacity and Lead Times. Management Science 61(9):2080-2099. DOI: 10.1287/mnsc.2014.1992

34 Pages Posted: 28 Nov 2012 Last revised: 7 Oct 2015

See all articles by Robert N. Boute

Robert N. Boute

KU Leuven - Faculty of Business and Economics (FEB); Vlerick Business School - Operations & Technology Management Center

Jan A. Van Mieghem

Northwestern University - Kellogg School of Management

Date Written: April 23, 2014

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 due to its longer leadtime, 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 leadtime, 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.

Keywords: sourcing, inventory, stochastic, smoothing, Lagrange's inversion series

JEL Classification: C00, C61

Suggested Citation

Boute, Robert N. and Van Mieghem, Jan Albert, Global Dual Sourcing and Order Smoothing: The Impact of Capacity and Leadtimes (April 23, 2014). Robert N. Boute, Jan A. Van Mieghem (2015) Global Dual Sourcing and Order Smoothing: The Impact of Capacity and Lead Times. Management Science 61(9):2080-2099. DOI: 10.1287/mnsc.2014.1992, Available at SSRN: https://ssrn.com/abstract=2181542 or http://dx.doi.org/10.2139/ssrn.2181542

Robert N. Boute

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Vlerick Business School - Operations & Technology Management Center ( email )

Belgium

Jan Albert Van Mieghem (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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