On the Performance of Tailored Base-Surge Policies: Theory and Application at Walmart.Com

39 Pages Posted: 20 Dec 2017

See all articles by Linwei Xin

Linwei Xin

University of Chicago - Booth School of Business

Long He

George Washington University

Jagtej Bewli

@WalmartLabs

John Bowman

@WalmartLabs

Huijun Feng

KPMG

Zhiwei Qin

DiDi Research America; affiliation not provided to SSRN

Date Written: December 18, 2017

Abstract

Problem Definition: Many import items sold at Walmart.com have two suppliers: one is faster and has a random production capacity limit while the other is slower and has infinite capacity. The lead time difference of the two suppliers could be as large as 12 weeks. Walmart.com faces an important and challenging supply chain problem and must make routine inventory replenishment decisions.

Academic/Practical Relevance: Dual-sourcing inventory models have been extensively studied in academia and dual-sourcing strategies have been widely implemented in practice. Recently, the so-called Tailored Base-Surge (TBS) policy has begun to receive more attention and demonstrated good performance in existing dual-sourcing models. TBS is intuitive and easy to manage: a constant-order is placed from the slow (regular) supplier every period and a base-stock policy is adapted from the fast (express) supplier.

Methodology: This paper develops a new dual-sourcing inventory model incorporating large lead time difference as well as random capacity of the express supplier, and investigates the performance of TBS both theoretically and empirically by using Walmart’s data.

Results: We prove that a TBS policy is asymptotically optimal as the regular lead time grows, extending the previous asymptotic optimality of TBS policies in the dual-sourcing system without random capacities. We complement the theory and compare TBS with three well-known heuristics in a “simulated” real-world setting through model calibration by using historical sales data from Walmart.com. Our results demonstrate that TBS outperforms others as for minimizing the long-run average inventory cost. In particular, the inventory cost would be reduced by at least 33% if adapting a TBS policy. Our results also suggest that at an aggregate level, TBS could reduce Weeks of Supply by 2.7 weeks while increasing Met Demand by 3.3% compared with the single-sourcing policy using only the import supplier.

Managerial Implications: Our results show that if the proposed dual-sourcing model and algorithm are adapted, Walmart’s inventory system would be significantly improved especially for import items.

Keywords: Dual-Sourcing, Inventory, Tailored Base-Surge, Lead Time, Random Capacity, Walmart, eCommerce

Suggested Citation

Xin, Linwei and He, Long and Bewli, Jagtej and Bowman, John and Feng, Huijun and Qin, Zhiwei and Qin, Zhiwei, On the Performance of Tailored Base-Surge Policies: Theory and Application at Walmart.Com (December 18, 2017). Available at SSRN: https://ssrn.com/abstract=3090177 or http://dx.doi.org/10.2139/ssrn.3090177

Linwei Xin (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Long He

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

Jagtej Bewli

@WalmartLabs ( email )

John Bowman

@WalmartLabs ( email )

Huijun Feng

KPMG ( email )

200 E Randolph ST
suite 5500
Chicago, IL 60601
United States

Zhiwei Qin

DiDi Research America ( email )

450 National Ave
Mountain View, CA 94043
United States

affiliation not provided to SSRN

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