Transportation’s role  in sole- versus dual-sourcing decision

John E. Tyworth and Alex Ruiz-Torres

International Journal of Physical Distribution & Logistics Management

2000, Vol. 30, No. 2, p. 128-144

 

1)      Introduction

  1. a) Sole-Supplier partnerships
  2. i) Support JIT
  3. ii) Facilitate quick response
  4. b) Multiple-Supplier partnerships
  5. i) Promotes competitive bidding
  6. ii) Reduces risk of nonperformance

iii)     Can improve lead-time by splitting orders

(1)   Shipping costs increase disproportionately as the size of shipment decreases

  1. c) The role of transportation
  2. i) How does the treatment of transportation affect the decision?
  3. ii) When is dual sourcing likely to be a viable policy from a total logistics cost perspective?

2)      Methodology

  1. a) Setting
  2. i) Two suppliers at different locations
  3. ii) One buyer
  4. b) Cost of placing an order
  5. i) Preparing specifications
  6. ii) Obtaining letters of credit

iii)     Complying with import restrictions

  1. iv) Foreign exchange controls
  2. v) Quality inspections
  3. c) Transportation cost per unit
  4. i) A rational function of fixed cost per shipment on a particular lane over quantity
  5. ii) Generate rates over a realistic range of quantities for a lane and then fit a curve having some functional form to the rate data

3)      Computational Experiments

  1. a) 42 experiments to examine the effect of transportation cost on the decision
  2. b) Design variables
  3. i) Supplier price
  4. ii) Annual volume

iii)     Length and reliability of lead times

  1. iv) Length of supplies lines
  2. c) Results
  3. i) General

(1)   Favorable payoffs for dual sourcing in all 54 experiments

(2)   Some false positives of Type I errors

(3)   For shorter distances, lower prices and more reliable lead times reduce the relative importance of inventory cost elements

(4)   For longer distances increased importance of transportation costs

  1. ii) Clear patters emerge

(1)   Payoff from dual sourcing decreases as lead time becomes shorter and less reliable

(2)   Payoff increases for all levels of lead times and distance when supplier price is increased

(3)   Annual volume of traffic increases the payoff from dual sourcing

4)      Conclusions / Key points

  1. a) Evidence factors procurement from two sources when lead times are unreliable
  2. b) Transportation cost plays a pivotal role in the decision to procure from two sources
  3. c) The payoff from dual sourcing is sensitive to annual demand, lead time performance, supplier prices and line-haul distance
  4. d) When confronted with lone and unreliable lead times, managers should view dual sourcing only as a short-term tactic that may reduce costs