Procurement under uncertain supply lead times — A dual- sourcing technique could save costs

Abstract

Inventory system costs tend to be higher if uncertainty prevails in the supply lead times and consequently in the demand during the lead time because of the possibility of shortages or the need to maintain larger safety stocks. In this paper we explore a dual-sourcing technique in which the replenishment order quantity for the inventoried item with stochastic lead times is split between two sources of supply, and split-orders are placed simultaneously. It is shown that this results in effective lead times with lower variability and hence savings in the inventory holding and shortage costs are possible. If these savings exceed the incremental ordering costs associated with procurement from two sources overall cost economies result. In this paper, the theoretical concepts underlying the dual-sourcing technique and its implications for implementation in procurement management are presented along with an overview of the recent research in the area of dual sourcing.