Strategic sourcing for the short-lifecycle products

Motivated by the sourcing of integrated circuits in the electronics industry, we study sourcing strategies for short-lifecycle products with two substitutable parts. The first part, referred to as the fast part, is highly responsive while having negligible fixed cost but high variable cost. The second part, referred to as the slow part, is opposite in these properties. We build models starting with the fast part to target the initial market, then switching to the pre-ordered slow part for volume production, and eventually transitioning back to the fast part until the product's end of lifecycle. Assuming an optional second order for the slow part, we model the sourcing process by a two-stage stochastic program. The thresholds for the fixed costs and the optimal ordering policies for the two orders are exactly derived. Assuming the demand throughout the product lifecycle as a multivariate Normal distribution, we approximately compute the policy parameters and expected profit for the two-order problem. In comparison to the fast-part only strategy and one-order slow part strategy, the second order of the slow part could be of great value if the demand correlation across time is high and/or the cost difference between the two parts is large. We also study the joint impact of fixed cost and leadtime as well as demand variation on the sourcing strategies.