Dual sourcing under disruption risk and cost improvement through learning

As suppliers are crucial for successful supply chain management, buying companies have to deal with the risks of supply disruptions due to e.g. labor strikes, natural disasters, supplier bankruptcy, and business failures. Dual sourcing is one potential countermeasure, however, when applying it one loses the full potential of economies of scale. To provide decision support, we analyze the trade-off between risk reduction via dual sourcing under disruption risk and learning benefits on sourcing costs induced by long-term relationships with a single supplier from a buyer’s perspective. The buyer’s optimal volume allocation strategy over a finite dynamic planning horizon is identified and we find that a symmetric demand allocation is not optimal, even if suppliers are symmetric. We obtain insights on how reliability, cost and learning ability of potential suppliers impact the buyer’s sourcing decision and find that the allocation balance increases with learning rate and decreases with reliability and demand level. Further, we quantify the benefit of dual sourcing compared to single sourcing, which increases with learning rate and decreases with reliability. When comparing the optimal policy to heuristic dual sourcing policies, a simple 75:25 allocation rule turns out to be a very robust policy. Finally, we perform sensitivity analysis and find that increasing certainty about supplier reliability and increasing risk aversion of a buyer yield more balanced supply volume allocations among the available suppliers and that the advantage of dual sourcing decreases with uncertainty about supplier reliability. Further, we discuss the impact of demand uncertainty.