Operational Hedging through Dual-Sourcing under Capacity Uncertainty

This paper studies a periodic-review dual-sourcing inventory system with demand and supply capacity uncertainty. Compared with dual-sourcing models with deterministic supply capacities, a challenge here is that the objective functions in the dynamic programming recursions are not convex in the ordering quantities. To address this challenge, a powerful transformation technique is developed which converts a non- convex minimization problem to an equivalent convex minimization problem. In addition, the transformation preserves L\-convexity, allowing one to derive structural properties of the optimal policies for the dual-sourcing problem with random supply capacity. Dual-index policies are shown to be optimal under certain conditions. The effects of supply capacity uncertainties on the system performance are investigated.