Global Dual Sourcing and Order Smoothing

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 linear control rule that allows an exact and analytically-tractable analysis of a dual sourcing or mixed-mode transportation policy that is easy to implement. Another distinguishing feature of our model is that it captures the leadtime difference between both sources. We provide an exact lower bound formula on the strategic base or offshore allocation when this leadtime difference equals one review period, and a close approximation for longer leadtime differences. This formula provides structural insight on the impact of financial, operational and demand parameters, and a starting point for data-driven decision making. We demonstrate the robustness of our results by showing that this dual sourcing smoothing policy is near optimal in terms of total cost minimization compared to existing single sourcing and dual sourcing models in the literature. We describe under which practical conditions the dual sourcing smoothing policy is advisable and when it can even outperform the other policies.