Volume Flexibility at Responsive Suppliers in Reshoring Decisions

30 Pages Posted: 11 Jun 2021 Last revised: 10 Dec 2021

See all articles by Joren Gijsbrechts

Joren Gijsbrechts

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Robert N. Boute

KU Leuven - Faculty of Business and Economics (FEB); Vlerick Business School - Operations & Technology Management Center

Stephen M. Disney

Centre for Simulation, Analytics, and Modelling, The University of Exeter Business School

Jan A. Van Mieghem

Northwestern University - Kellogg School of Management

Date Written: December 9, 2021

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 on 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-stocklevels Sf2, Sf1, and Ss. The replenishment orders are generated by first placing a base order from the fastsupplier of at most k units to raise the inventory position to Sf1, if that is possible. If, after this base order, the adjusted inventory position is still below Sf2, additional units are ordered from the fast supplier at an overtime premium to reach Sf2. Finally, if the adjusted inventory position is below Ss, an order from the slow supplier is placed to bring the final inventory position to Ss. Surprisingly, in contrast to single sourcing with limited volume flexibility, a more complex dual sourcing model often 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.

Keywords: Dual Sourcing, Flexibility, Reshoring, Optimal Policy, Modified Dual Base-Stock

Suggested Citation

Gijsbrechts, Joren and Boute, Robert N. and Disney, Stephen M. and Van Mieghem, Jan Albert, Volume Flexibility at Responsive Suppliers in Reshoring Decisions (December 9, 2021). Available at SSRN: https://ssrn.com/abstract=3864475 or http://dx.doi.org/10.2139/ssrn.3864475

Joren Gijsbrechts (Contact Author)

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Robert N. Boute

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Vlerick Business School - Operations & Technology Management Center ( email )

Belgium

Stephen M. Disney

Centre for Simulation, Analytics, and Modelling, The University of Exeter Business School ( email )

Streatham Court
Exeter, EX1 3XN
United Kingdom

Jan Albert Van Mieghem

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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