Dual Sourcing Problem with Capacities and Setup Cost

This paper studies the ordering problem of a retailer, sourcing from two suppliers (i.e., domestic and offshore suppliers). Compared to the domestic sourcing, the offshore sourcing is cheaper with larger capacity, but it incurs additional costs (i.e., setup costs), such as cross transaction and quality control costs. We characterize the retailer’s optimal order quantities from domestic and offshore suppliers. Our analytical result shows that the retailer’s ordering policy is not affected by the setup cost when the setup cost is large enough. Numerical analysis reveals that the setup cost and the capacity of the offshore supplier have negative effects on the total order quantity.