DUAL SOURCING COST-OPTIMIZATION WITH UNRESTRICTED LEAD-TIME DISTRIBUTIONS AND ORDER-SPLIT PROPORTIONS

Among recent studies considering the splitting of an order among sever al suppliers (i.e., in ''multiple sourcing'', one group considered onl y the favorable effect of multiple suppliers on the effective lead tim e demand and required safety stock, but its effects on the annual orde r and holding cost components have been ignored. Another group that co nsiders the effect of using two suppliers on all relevant cost compone nts imposes severe restrictions on the suppliers' lead-time distributi ons as well as the proportion of order-split between the suppliers. Ou r primary purpose is to present easily-solvable decision models for mi nimizing the sum of annual holding and ordering costs with two supplie rs, subject to a maximum allowable stockout risk; restrictions on lead -time distributions and order-split proportion are completely eliminat ed. Solving these models gives the optimal total order quantity, reord er point and proportion of split between the two suppliers. Numerical results from our models reveal some unexpected observations; e.g.: (i) In using two suppliers, the reduction of inventory carrying cost (a h itherto unrecognized component) is at least as important, and often co nsiderably more important than the effect of safety-stock-cost reducti on. (ii) Although intuitively one might use suppliers with the shortes t (mean) lead times, it is actually better to have two suppliers such that the second supplier's mean lead time is ''suitably'' larger than the first's; this could mean excluding the one with lowest mean lead t imes among the candidates for the second supplier. (iii) The optimal p roportion of split varies with, among other factors, the difference in the suppliers' mean lead times.