Sourcing under Volatility: Offshoring, Onshoring or Both?

50 Pages Posted: 18 Feb 2021 Last revised: 15 Nov 2021

See all articles by Awi Federgruen

Awi Federgruen

Columbia University - Columbia Business School, Decision Risk and Operations

Zhe Liu

Imperial College Business School

Jiaqi Lu

The Chinese University of Hong Kong, Shenzhen

Date Written: November 14, 2021

Abstract

We study a dual sourcing problem in an increasingly volatile world. We consider two types of volatilities. The first type models fluctuating economic conditions via an underlying Markov-modulated state-of-the-world which affects the two suppliers' cost structures, capacity limits and demands. The other type of volatility affects the actual outputs resulting from random supply processes. We develop two approaches to show how the optimal combined ordering strategy from the two suppliers, along with a salvaging policy, can be efficiently computed, and characterize the relatively simple structure of the optimal policies. We also present various comparison results of the expected total costs under different environments. We find that the firm can, by exploiting the dual sourcing options, benefit from environmental volatilities that affect the suppliers' cost structures or capacity limits; indeed, benefits increase as volatilities increase in specific ways. Numerical studies illustrate these results and reject other reasonable conjectures.

Keywords: dual sourcing, Markov modulated models, random supply mechanisms

Suggested Citation

Federgruen, Awi and Liu, Zhe and Lu, Jiaqi, Sourcing under Volatility: Offshoring, Onshoring or Both? (November 14, 2021). Available at SSRN: https://ssrn.com/abstract=3767670 or http://dx.doi.org/10.2139/ssrn.3767670

Awi Federgruen

Columbia University - Columbia Business School, Decision Risk and Operations ( email )

New York, NY
United States

Zhe Liu (Contact Author)

Imperial College Business School ( email )

Imperial College London
South Kensington Campus
London, SW7 2AZ
United Kingdom

Jiaqi Lu

The Chinese University of Hong Kong, Shenzhen ( email )

HOME PAGE: http://https://www.sites.google.com/view/jiaqilu

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