Volume flexibility at responsive suppliers in reshoring decisions: Analysis of a dual sourcing inventory model

Abstract

We investigate how volume flexibility, defined by a sourcing cost premium beyond a base capacity, at a local responsive supplier impacts the decision to reshore supply. The buyer also has access to a remote supplier that is cheaper with no restrictions on volume flexibility. We show that with unit lead time difference between both suppliers, the optimal dual sourcing policy is a modified dual base-stock policy with three base-stock levels S_2^f , S_1^f, and S_s. The replenishment orders are generated by first placing a base order from the fast supplier of at most k units to raise the inventory position to S_1^f, if that is possible. After this base order, if the adjusted inventory position is still below S_2^f, additional units are ordered from the fast supplier at an overtime premium to reach S_2^f. Finally, if the adjusted inventory position is below S_s, an order from the slow supplier is placed to bring the final inventory position to S_s. Surprisingly, in contrast to single sourcing with limited volume flexibility, a more complex dual sourcing model often results in a “simpler” policy that replaces demand in each period. The latter allows analytical insights into the sourcing split between the responsive and the remote supplier. Our analysis shows how increased volume flexibility at the responsive supplier promotes the decision to reshore operations and effectively serves as a cost benefit. It also shows how investing in base capacity or additional volume flexibility act as strategic substitutes.