On the benefit of dual-sourcing in managing perishable inventory

We consider inventory systems for perishables with two-supply modes (a regular mode and an emergency one) characterized by different lead-times and costs. We investigate the value of dual-sourcing in the context of perishable items with a fixed or exponential lifetime. The inventory is controlled according to a base-stock policy where the emergency source is only used when the stock level is below a threshold level and by taking into account the age of pipeline orders. By using the information on the age of orders, which nowadays can be obtained in real time through technologies such as Radio Frequency Identification, we derive the steady-state behavior of the operating characteristics and thereby obtain the exact optimal expected total cost. Our results indicate that dual-sourcing can lead to substantial cost savings depending on the lifetime distribution. Under a fixed (exponential) lifetime, the shorter (the longer) the mean lifetime is, the higher the cost reduction, due to the reduced effect of the perishability when using dual sourcing. We also show that dual-sourcing exhibits higher savings when the excess demand is backordered as compared to the Case of lost sales. We show that the savings increase when the shortage cost and the outdating cost increase.