Operational Hedging through Dual-Sourcing under Capacity Uncertainty

Xin Chen

Foundations and Trends(R) in Technology, Information and Operations Management, 2017, vol. 11, issue 1-2, 46-64

Abstract: This paper studies a periodic-review dual-sourcing inventory system with demand and supply capacity uncertainty. Compared with dual-sourcing models with deterministic supply capacities, a challenge here is that the objective functions in the dynamic programming recursions are not convex in the ordering quantities. To address this challenge, a powerful transformation technique is developed which converts a non- convex minimization problem to an equivalent convex minimization problem. In addition, the transformation preserves L\-convexity, allowing one to derive structural properties of the optimal policies for the dual-sourcing problem with random supply capacity. Dual-index policies are shown to be optimal under certain conditions. The effects of supply capacity uncertainties on the system performance are investigated.

Keywords: Operational risk management; Contingency planning; Commodity price risk; Supply chain disrutpions (search for similar items in EconPapers)
JEL-codes: G20 G32 M11 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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