A framework for comparing outsourcing strategies in multi-layered supply chains

The growth in the use of the Internet as one of today's main tools of business communications has drastically increased competitiveness and changed many of the existing axioms creating more complex supply chains that consist of several layers. In this paper, we develop a framework to assess the performance of these emerging types of multi-layered supply chains when coupling the outsourcing strategies, whether it is based on competitive bidding/E-bidding or long-term partnerships, with the required level of safety stock that the parent company sets to satisfy the quality of its services. In order to estimate the safety stock for each of the outsourcing strategies, the supply chain is modeled as a series of tandem queues. Based on the sojourn times that a particular order spends in process at the various levels of the chain, the lead time is estimated and, consequently, one can determine the needed safety stock as well as draw a first cut comparison for the annual cost estimates of each of the possible outsourcing options. We include an illustrative example for the application of the proposed framework as well as simulation experiments for cases when closed-form solutions of the queuing models are difficult to obtain. (c) 2004 Elsevier B.V. All rights reserved.