Volume Flexibility at Responsive Suppliers in Reshoring Decisions

23 Pages Posted: 11 Jun 2021

See all articles by Joren Gijsbrechts

Joren Gijsbrechts

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Robert N. Boute

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

Stephen M. Disney

Centre for Simulation, Analytics, and Modelling, The University of Exeter Business School

Jan A. Van Mieghem

Northwestern University - Kellogg School of Management

Date Written: June 10, 2021

Abstract

We investigate how volume flexibility, defined 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 to volume flexibility. We show that with unit lead time difference between both suppliers, the optimal dual sourcing policy is a modified dual base-stock policy with three base-stock levels. Fast orders follow a modified base-stock policy with two base-stock levels: the inventory position is raised to the higher base-stock level by using the base capacity; no overtime is used if this order increases the inventory position above the lower base-stock level. Else, the base capacity and overtime are used to raise the inventory position up to the low base-stock level. After ordering from the fast supplier, an order to the slow supplier is placed to raise the inventory position to a third base-stock level. Surprisingly, in contrast to single sourcing with limited volume flexibility, a more complex dual sourcing model 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 flexibility at responsive suppliers promotes the decision to reshore operations and effectively serves as a (cost) benefit. It also shows how investing in base capacity or additional volume flexibility act as strategic substitutes.

Keywords: Dual Sourcing, Flexibility, Reshoring, Optimal Policy, Modified Dual Base-Stock

Suggested Citation

Gijsbrechts, Joren and Boute, Robert N. and Disney, Stephen M. and Van Mieghem, Jan Albert, Volume Flexibility at Responsive Suppliers in Reshoring Decisions (June 10, 2021). Available at SSRN: https://ssrn.com/abstract=3864475 or http://dx.doi.org/10.2139/ssrn.3864475

Joren Gijsbrechts (Contact Author)

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

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

Stephen M. Disney

Centre for Simulation, Analytics, and Modelling, The University of Exeter Business School ( email )

Streatham Court
Exeter, EX1 3XN
United Kingdom

Jan Albert Van Mieghem

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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