Dual sourced supply chains: The discount supplier option

In this paper, we examine the dynamics of a supply chain that has the option of using two suppliers – one reliable, and the other unreliable. We characterize the unreliable supplier with long lead-time mean and variance. Although the use of the unreliable supplier might potentially warrant high inventory and transportation costs, it is attractive because of the willingness of the supplier to provide a discount on the purchase price. We analyze the cost economics of two suppliers in a broader inventory-logistics framework, one that includes in-transit inventories and transportation costs. In this broader perspective, we provide a simple heuristic and sample exchange curves to determine: (i) if the order should be split between the suppliers; and (ii) if the order is split, the amount of discount and the fraction ordered to the secondary supplier to make order-splitting a worth-while policy.