Volume Flexibility at Responsive Suppliers in Reshoring Decisions

Abstract

We investigate how volume flexibility, defined by a sourcing cost premium beyond a base capacity, at a local responsive supplier impacts the decision to reshore supply. The buyer also has access to a remote supplier that is cheaper with no restrictions to volume flexibility. We show that with unit lead time difference between both suppliers, the optimal dual sourcing policy is a modified dual base-stock policy with three base-stock levels. Fast orders follow a modified base-stock policy with two base-stock levels: the inventory position is raised to the higher base-stock level by using the base capacity; no overtime is used if this order increases the inventory position above the lower base-stock level. Else, the base capacity and overtime are used to raise the inventory position up to the low base-stock level. After ordering from the fast supplier, an order to the slow supplier is placed to raise the inventory position to a third base-stock level. Surprisingly, in contrast to single sourcing with limited volume flexibility, a more complex dual sourcing model results in a “simpler policy that replaces demand in each period. The latter allows analytical insights into the sourcing split between the responsive and the remote supplier. Our analysis shows how increased volume flexibility at responsive suppliers promotes the decision to reshore operations and effectively serves as a (cost) benefit. It also shows how investing in base capacity or additional volume flexibility act as strategic substitutes.