Asymptotic Optimality of Inventory Projection in Dual-Sourcing Systems

Abstract

We consider a single-echelon inventory system under periodic review with two suppliers facing stochastic demand, where excess demand is backlogged. The expedited supplier has a shorter lead time than the regular supplier but charges a higher unit price. We introduce the Projected Expedited Inventory Position (PEIP) policy. We show that this policy is asymptotically optimal in two regimes of practical interest: (i) when the lead time of the regular supplier becomes large and (ii) when both the shortage cost and the cost premium for expedited units become large, with their ratio held constant. We show through an extensive numerical investigation that the PEIP policy outperforms the current best performing heuristic policies in literature.