A comparison of the constant-order and dual-index policy for dual sourcing
We analyze a single-product, periodic-review, stochastic demand inventory model with backorders and two supply options, a regular and a more expensive expedited one, with deterministic, offsetting lead times. Since the optimal policy for such a problem is generally unknown, several simpler policies have been proposed in the literature, e.g., the single-index (SIP), dual-index (DIP), or constant-order policy (COP). In previous research the DIP has been found to perform closely to the optimal policy in specific numerical settings. The COP, on the other hand, is very appealing from a practical point of view. We explore the relative cost performance of these two policies in a numerical study to gain insights into appropriate policy choices. We find that in settings, where dual sourcing is most valuable, the simpler COP delivers satisfactory results, sometimes even better ones than the DIP, and therefore represents a legitimate policy alternative for practical situations.
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