Optimally configuring a two-stage serial line supply chain under the guaranteed service model

Abstract

Design-and-development buyers sourcing new supply chains and strategic sourcing analysts making outsourcing decisions for existing supply chains are in different organizations but share a common problem. Both determine whether an existing part should be replaced. Relative to the existing part, new candidates could be cheaper with longer leadtime, or more expensive with shorter leadtime. Furthermore, a longer leadtime part could be buffered with inventory and this could be cheaper than paying more for a shorter leadtime part.To derive analytical insights into the nature of this problem, we restrict our scope to a two-stage serial line supply chain. This restriction is consistent with sourcing analysts that consider sourcing a single part from different vendors and different transportation alternatives. The resulting two-stage supply chain configuration model jointly determines the chosen option and inventory stocking level at each stage to minimize cost of goods sold, pipeline stock cost and safety stock cost.We prove it is preferable to synchronize the supply chain by employing the same type of option, either low cost long leadtime or high cost short leadtime, at both stages. We prove that the selection threshold for high cost short lead time options is lowest at just the downstream stage, highest for just the upstream stage, and between these extremes if such a candidate is selected for both stages. If a part’s cost-time relationship follows a functional form, we establish conditions when it is optimal to choose the lowest cost, longest leadtime, option available.