Dual sourcing under internal and external volatilities
File(s)
Accepted version
Author(s)
Federgruen, Awi
Liu, Zhe
Lu, Tiaqi
Type
Journal Article
Abstract
Problem definition: We study a dual sourcing problem in an increasingly volatile world. We consider two types of volatilities. External volatilities reflect fluctuating economic conditions via an underlying Markov-modulated state-of-the-world that affects the two suppliers’ cost structures, capacity limits, supply mechanisms, and demands. Internal volatilities affect the actual outputs resulting from random supply processes. Demand distributions are impacted by both types of volatilities. Methodology/results: We show how the optimal combined ordering strategy from the two suppliers, along with a salvaging policy, can be efficiently computed under the conventional assumption of consecutive lead times. We characterize the relatively simple structure of the optimal policies and systematically compare the two types of volatilities. Managerial implications: By exploiting dual sourcing options, we find that the firm can benefit from external volatilities; indeed, benefits increase as volatilities increase in specific ways. Numerical studies illustrate these results and reject other reasonable conjectures.
Date Issued
2025-05-01
Date Acceptance
2025-01-27
Citation
Manufacturing & Service Operations Management, 2025, 27 (3)
ISSN
1523-4614
Publisher
Institute for Operations Research and Management Sciences
Journal / Book Title
Manufacturing & Service Operations Management
Volume
27
Issue
3
Copyright Statement
Copyright © 2025, INFORMS. This is the author’s accepted manuscript made available under a CC-BY licence in accordance with Imperial’s Research Publications Open Access policy (www.imperial.ac.uk/oa-policy)
License URL
Subjects
Business & Economics
DECISIONS
DEMAND
dual sourcing
external volatilities
FLEXIBILITY
internal volatilities
INVENTORY MANAGEMENT
Management
Operations Research & Management Science
OPTIMAL POLICIES
random supply mechanisms
Science & Technology
Social Sciences
SUPPLIERS
Technology
Publication Status
Published
Date Publish Online
2025-02-14