Now or Later: A Simple Policy for Effective Dual Sourcing in Capacitated Systems

Senthil Veeraraghavan () and Alan Scheller-Wolf ()
Additional contact information
Senthil Veeraraghavan: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
Alan Scheller-Wolf: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213

Operations Research, 2008, vol. 56, issue 4, 850-864

Abstract: We examine a possibly capacitated, periodically reviewed, single-stage inventory system where replenishment can be obtained either through a regular fixed lead time channel, or, for a premium, via a channel with a smaller fixed lead time. We consider the case when the unsatisfied demands are backordered over an infinite horizon, introducing the easily implementable, yet informationally rich dual-index policy. We show very general separability results for the optimal parameter values, providing a simulation-based optimization procedure that exploits these separability properties to calculate the optimal inventory parameters within seconds. We explore the performance of the dual-index policy under stationary demands as well as capacitated production environments, demonstrating when the dual-sourcing option is most valuable. We find that the optimal dual-index policy mimics the behavior of the complex, globally optimal state-dependent policy found via dynamic programming: the dual-index policy is nearly optimal (within 1% or 2%) for the majority of cases, and significantly outperforms single sourcing (up to 50% better). Our results on optimal dual-index parameters are generic, extending to a variety of complex and realistic scenarios such as nonstationary demand, random yields, demand spikes, and supply disruptions.

Keywords: inventory/production; infinite horizon; policies; review/lead times; dual index; dual supply; uncertainty; stochastic (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (77)

Downloads: (external link)
http://dx.doi.org/10.1287/opre.1080.0552 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:56:y:2008:i:4:p:850-864

Access Statistics for this article

More articles in Operations Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().