Analysis of dual sourcing strategies under supply disruptions

Abstract

We study a dual-sourcing problem of a firm in the face of supply disruptions from two suppliers: local and overseas. Under four different scenarios of disruption source and information availability, we characterize the optimal dynamic policy that simultaneously determines sourcing decisions to minimize the expected total discounted cost. Different from the previous dual-sourcing models without information availability in the literature, we develop a two-dimensional stochastic dynamic programming model to explicitly address this issue. Further, we analyze the impact of disruption source and information availability on cost performance. We find that (i) a supply disruption at the local source may cause a more remarkable deterioration of cost efficiency than a supply disruption at the overseas source; (ii) the information about the local source is more valuable than that about the overseas source; (iii) when a firm orders from both sources, the disruption information can achieve a significant cost saving. These findings contribute to the theory of strategic sourcing by demonstrating the value of information available at different sources. Moreover, they can also be used as a valuable guideline for managers to select an appropriate sourcing strategy in business practices.