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Operational Hedging through Dual-Sourcing under Capacity Uncertainty

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  • Chen, Xin

Abstract

This paper studies a periodic-review dual-sourcing inventory system with demand and supply capacity uncertainty. Compared with dual-sourcing models with deterministic supply capacities, a challenge here is that the objective functions in the dynamic programming recursions are not convex in the ordering quantities. To address this challenge, a powerful transformation technique is developed which converts a non- convex minimization problem to an equivalent convex minimization problem. In addition, the transformation preserves L\-convexity, allowing one to derive structural properties of the optimal policies for the dual-sourcing problem with random supply capacity. Dual-index policies are shown to be optimal under certain conditions. The effects of supply capacity uncertainties on the system performance are investigated.

Suggested Citation

  • Chen, Xin, 2017. "Operational Hedging through Dual-Sourcing under Capacity Uncertainty," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 11(1-2), pages 46-64, December.
    • Handle: RePEc:now:fnttom:0200000078
    DOI: 10.1561/0200000078
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    Cited by:

    1. Wang, Moran & Guo, Xiaolong & Wang, Shouyang, 2022. "Financial hedging in two-stage sustainable commodity supply chains," European Journal of Operational Research, Elsevier, vol. 303(2), pages 803-818.
    2. Awi Federgruen & Zhe Liu & Lijian Lu, 2022. "Dual sourcing: Creating and utilizing flexible capacities with a second supply source," Production and Operations Management, Production and Operations Management Society, vol. 31(7), pages 2789-2805, July.

    More about this item

    Keywords

    Operational risk management; Contingency planning; Commodity price risk; Supply chain disrutpions;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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