Optimal Inventory Policy Through Dual Sourcing

We consider a risk-averse firm that utilizes dual-sourcing for perishable or seasonal goods with uncertain customer demand. Using real options theories, we provide two models aimed at determining optimal order quantities to maximize the firm's expected profit. Furthermore, we can consider the demand to be an observable process correlated to a traded, which can be hedged to reduce profit uncertainty. A single offshore single local order period (SOSLOP) model provides a pseudo-analytical solution which can be easily solved to determine an optimal offshore and local order quantities based on the manufacturers' lead times, and a more realistic single offshore multiple local order period (SOMLOP) model uses numerical methods to determine optimal order quantities. Finally, a method for matching distributions of expected demands based on managerial estimates can be applied to any of the aforementioned models and be easily incorporated into the industry.M.A.S