We study dual sourcing inventory systems with backordering and with stationary, stochastic demands. The two supply sources differ in their unit prices and lead times. We focus on the option of making costless returns to the cheaper, longer leadtime supplier. We show that the value of this option is zero. Our analysis leading to this result includes the derivation of several structural properties of the optimal policies for dual sourcing systems with and without the return option.
AllonG.Van MieghemJ. A.. 2010. Global dual sourcing: Tailored base‐surge allocation to near‐ and offshore production. Management Sci.56(1) 110–124.
2.
HuaZ.YuY.ZhangW.XuX.. 2015. Structural properties of the optimal policy for dual‐sourcing systems with general lead times. IIE Trans.47(8): 841–850.
3.
HuhW.JanakiramanG.NagarajanM.. 2011. Average cost single‐stage inventory models: An analysis using a vanishing discount approach. Oper. Res.59(1): 143–155.
4.
JanakiramanG.SeshadriS.SheopuriA.. 2015. Analysis of tailored base‐surge policies in dual sourcing inventory systems. Management Sci.61(7): 1547–1561.
5.
LiQ.YuP.. 2014. Multimodularity and its applications in three stochastic dynamic inventory problems. Manuf. Serv. Oper. Manag.16(3): 455–463.
6.
MinnerS.2003. Multiple‐supplier inventory models in supply chain management: A review. Int. J. Prod. Econ.81–82, 265–279.
7.
MortonT. E.1969. Bounds on the solution of the lagged optimal inventory equation with no demand backlogging and proportional costs. SIAM Rev.11(4): 572–596.
8.
SchälM.1993. Average optimality in dynamic programming with general state space. Mathemat. Oper. Res.18(1): 163–172.
9.
SheopuriA.JanakiramanG.SeshadriS.. 2010. New policies on the stochastic inventory control problem with two supply sources. Oper. Res.58(3): 734–745.
10.
SongJ.ZipkinP.. 2009. Inventories with multiple supply sources and networks of queues with overflow bypasses. Management Sci.55(3): 362–372.
11.
VeeraraghavanS.Scheller‐WolfA.. 2008. Now or later: A simple policy for effective dual sourcing in capacitated systems. Oper. Res.56(4): 850–864.