Global dual sourcing: ARMA(1,1) market demand and its decomposition

Abstract

We consider the case of reshoring, where a global firm takes back a portion of its low-cost offshore supply to be produced in nearshore factory in order to establish a dual sourcing supply chain equipped with both low cost and responsiveness. We first establish the performance benchmark of a single (nearshore or offshore) supplier model. In the dual sourcing setting, a firm decomposes the first order auto-regressive moving average, ARMA(1,1), market demand process into two parts: one for the nearshore source and one for the offshore source. Order-up-to policies determine the order quantities for both sources. We show how to reduce inventory costs in the dual-sourcing case to a level identical to the near-shore single-source case. Furthermore, if certain conditions are met, the nearshore manufacturing cost reduces in the offshore lead-time. This suggests low-cost and low-emission transport modes should be utilized (slow steaming vessels which are both low cost and environmentally friendly, but may endure longer offshore lead-times come to mind), breaking the trade-off between economic and environmental performance.