Optimal ordering policies with two suppliers when lead times and demands are all stochastic

Splitting orders among several suppliers is a common practice. Earlier theoretical studies considered only the strategy of splitting an order equally among the suppliers; they concentrated on the effects of order splitting on reducing the ‘effective’ lead time demand and safety stocks, but the effects on the overall ordering policy have not been considered. This paper presents a procedure for determining the optimal order policy; i.e., the total order quantity, reorder point and proportion of split between two suppliers. The optimization objective is: minimize the sum of annual holding and order costs, subject to a maximum stockout risk. The present procedure handles any stochastic form of daily demand and lead times. Some interesting observation from the solutions are: (i) The major advantage of order splitting is in the reduction of cycle inventory cost, whereas the safety-stock reduction is usually unimportant (contrary to earlier findings); (ii) although intuitively one might use suppliers with the shortest (mean) lead times lower cost is actually achieved if the second supplier’s mean lead time is ‘suitably’ larger than the first’s; this often means excluding suppliers with the lowest mean lead times; (iii) the optimal proportion of order split varies with, among other factors, the difference in the suppliers’ mean lead times.