Dual Sourcing and Smoothing Under Non-Stationary Demand Time Series: Re-Shoring with Speedfactories

Abstract

We investigate near-shoring a small part of the global production to local \emph{SpeedFactories} that serve only the variable demand. The short lead time of the responsive SpeedFactory reduces the risk of making large volumes in advance, yet it does not involve a complete re-shoring of demand. Using a break-even analysis we investigate the lead time, demand, and cost characteristics that make dual sourcing with a SpeedFactory desirable compared to complete off-shoring. Our analysis employs a linear generalization of the celebrated order-up-to inventory policy to settings where capacity costs exist. The policy allows for order smoothing to reduce capacity costs and performs well relative to the (unknown) optimal policy. We highlight the significant impact of auto-correlated and non-stationary demand series, which are prevalent in practice yet challenging to analyze, on the economic benefit of re-shoring. Methodologically, we adopt a linear policy and normally distributed demand and use $Z-$transforms to present exact analyses.

Keywords: Inventory Management, Order Smoothing, Order-Up-To Policy, Auto-Regressive Demand, Integrated Moving Average Demand, Global Outsourcing, Dual Sourcing, Z−transform

JEL Classification: C44, C61