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

The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
senthilv{at}wharton.upenn.edu
awolf{at}andrew.cmu.edu

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.

Subject classifications: inventory/production; infinite horizon; policies; review/lead times; dual index; dual supply; uncertainty; stochastic.
History: Received January 2005; revision received January 2006; accepted May 2006.

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