Tales of a so(u)rcerer : optimal sourcing decisions under alternative capacitated suppliers and general cost structures

Abstract

Most companies must procure items necessary for their businesses from out-\nside sources, where there are typically a number of competing suppliers with varying cost\nstructures, price schemes, and capacities. This situation poses some interesting research\nquestions from the outlook of different parties in the supply chain. We consider this problem from the perspective of (i) the party that needs to outsource, (ii) the party that is willing to serve as the source, and (iii) the party that has in-house capability to spare. We allow for stochastic demand, capacitated facilities (in-house and suppliers'), and general structures for all relevant cost components. Some simpler versions of this problem are shown to be NP-hard in the literature. We make use of a novel dynamic programming model with pseudo-polynomial complexity to address all three perspectives by solving the corresponding problems to optimality. Our modeling approach also lets us analyze different aspects of the problem environment such as pricing schemes and channel coordination issues. We derive several managerial insights, some of which are counter to collective intuition.