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Analysis of Tailored Base-Surge Policies in Dual Sourcing Inventory Systems

Author

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  • Ganesh Janakiraman

    (Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080)

  • Sridhar Seshadri

    (Indian School of Business, Gachibowli, Hyderabad 500032, India)

  • Anshul Sheopuri

    (Business Insight Group, IBM Thomas J. Watson Research Center, New York, New York 10532)

Abstract

We study a model of a firm managing its inventory of a single product by sourcing supplies from two supply sources, a regular supplier who offers a lower unit cost and a longer lead time than a second, emergency, supplier. A practically implementable policy for such a firm is a tailored base-surge (TBS) policy [Allon G, Van Mieghem JA (2010) Global dual sourcing: Tailored base-surge allocation to near- and offshore production. Management Sci. 56(1):110–124] to manage its inventory. Under this policy, the firm procures a constant quantity from the regular supplier in every period and dynamically makes procurement decisions for the emergency supplier. Allon and Van Mieghem describe this practice as using the regular supplier to meet a base level of demand and the emergency supplier to manage demand surges , and they conjecture that this practice is most effective when the lead time difference between the two suppliers is large. We confirm these statements in two ways. First, we show the following analytical result: when demand is composed of a base demand random component plus a surge demand random component, which occurs with a certain small probability, the best TBS policy is close to optimal (over all policies) in a well-defined sense. Second, we also numerically investigate the cost effectiveness of the best TBS policy on a test bed of problem instances. The emphasis of this investigation is the study of the effect of the lead time difference between the two suppliers. Our study reveals that the cost difference between the best TBS policy and the optimal policy decreases dramatically as the lead time of the regular supplier increases. On our test bed, this cost difference decreases from an average (over the test bed) of 21% when the lead time from the regular supplier is two periods (the emergency supplier offers instant delivery) to 3.5% when that lead time is seven periods. This paper was accepted by Martin Lariviere, operations management .

Suggested Citation

  • Ganesh Janakiraman & Sridhar Seshadri & Anshul Sheopuri, 2015. "Analysis of Tailored Base-Surge Policies in Dual Sourcing Inventory Systems," Management Science, INFORMS, vol. 61(7), pages 1547-1561, July.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:7:p:1547-1561
    DOI: 10.1287/mnsc.2014.1971
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    References listed on IDEAS

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    1. Woonghee Tim Huh & Ganesh Janakiraman & Mahesh Nagarajan, 2011. "Average Cost Single-Stage Inventory Models: An Analysis Using a Vanishing Discount Approach," Operations Research, INFORMS, vol. 59(1), pages 143-155, February.
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    Cited by:

    1. Jing-Sheng Song & Li Xiao & Hanqin Zhang & Paul Zipkin, 2017. "Optimal Policies for a Dual-Sourcing Inventory Problem with Endogenous Stochastic Lead Times," Operations Research, INFORMS, vol. 65(2), pages 379-395, April.
    2. Linwei Xin & David A. Goldberg, 2018. "Asymptotic Optimality of Tailored Base-Surge Policies in Dual-Sourcing Inventory Systems," Management Science, INFORMS, vol. 64(1), pages 437-452, January.
    3. Sean X. Zhou & Chaolin Yang, 2016. "Continuous-Review ( R, nQ ) Policies for Inventory Systems with Dual Delivery Modes," Operations Research, INFORMS, vol. 64(6), pages 1302-1319, December.
    4. Jing-Sheng Song & Yue Zhang, 2020. "Stock or Print? Impact of 3-D Printing on Spare Parts Logistics," Management Science, INFORMS, vol. 66(9), pages 3860-3878, September.
    5. Dong, Chuanwen & Transchel, Sandra, 2020. "A dual sourcing inventory model for modal split transport: Structural properties and optimal solution," European Journal of Operational Research, Elsevier, vol. 283(3), pages 883-900.
    6. Tong Wang & Xiting Gong & Sean X. Zhou, 2017. "Dynamic Inventory Management with Total Minimum Order Commitments and Two Supply Options," Operations Research, INFORMS, vol. 65(5), pages 1285-1302, October.
    7. Robert N. Boute & Jan A. Van Mieghem, 2015. "Global Dual Sourcing and Order Smoothing: The Impact of Capacity and Lead Times," Management Science, INFORMS, vol. 61(9), pages 2080-2099, September.

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