Managing global sourcing with disruption risks in an assemble-to-order system

Abstract

We consider an assemble-to-order (ATO) system that purchases components from both overseas and local suppliers. The overseas suppliers may be disrupted, while the local suppliers are stable. The objective is to study how the ATO system should utilize a flexible local sourcing policy to mitigate overseas disruption risks. We derive optimal sourcing decisions which are determined by local suppliers’ cost ratios between pre-purchasing and replenishing and overseas suppliers’ disruption probabilities and total procurement cost. Furthermore, we discuss the balance between cost and responsiveness, explore the value of the flexible local sourcing policy and propose a simple and effective heuristic policy.