Global Dual Sourcing and Order Smoothing:The Impact of Capacity and Leadtime

Motivated by the recent trend of offshoring manufacturing facilities to seek lower production cost, while keeping some costly local facilities to better respond to changes in market demand, this paper studies a dual sourcing policy and characterizes the average sourcing allocation. We consider the total landed cost from origin (combining a cheap but slow source and a fast but expensive source) to destination (finished goods warehouse), including sourcing, capacity and inventory related costs. We adopt a conventional discrete time inventory model with a linear control rule that smoothes orders and allows an exact and analytically-tractable analysis of a dual sourcing or mixed-mode transportation policy that is easy to implement. Two distinguishing features of our model are that it captures the capacities of, and the leadtime difference between, both sources. We use Lagrange’s inversion theorem to provide exact and simple square-root bound formulae for the strategic base or offshore allocation and the value of dual sourcing. The formulae provide structural insight on the impact of financial, operational and demand parameters, and a starting point for data-driven decision making. With uncapacitated sources this dual sourcing smoothing policy is only effective when the leadtime difference is less than 3 periods. When the local source is capacitated, however, the value of dual sourcing smoothing greatly increases and more so as the leadtime increases. We demonstrate the robustness of our results by comparing the policy with existing single and dual sourcing models in a simulation study that relaxes model assumptions.