Dual Sourcing Inventory Systems: On Optimal Policies and the Value of Costless Returns

We study dual sourcing inventory systems with backordering and with stationary, stochastic demands. The two supply sources differ in their unit prices and lead times. We focus on the option of making costless returns to the cheaper, longer-leadtime supplier. We show that the value of this option is zero. Our analysis leading to this result includes the derivation of several structural properties of the optimal policies for dual sourcing systems with and without the return option.