Reducing inventory costs and choosing suppliers with order splitting

Splitting orders among several suppliers is a common business practice. Two earlier studies pointed out that, when splitting an order between two suppliers, the major benefit in inventory-related costs is in the reduction of stockouts due to the reduction of the effective lead time and the effective lead time demand. This conclusion implies that, among several suppliers, one should select the two suppliers with the lowest average lead times. In contrast, the present study shows that: (i) an important benefit is in the reduction of average inventory; (ii) this benefit can only be realized when one selects a second supplier with a ‘suitably’ larger average lead time than the first supplier-a strategy that contradicts the selection rule implied by the earlier studies. Therefore, there is an economic trade off between this benefit and the more well-known benefit of lower lead time demand achieved by using suppliers with the lowest average lead times.