Yield Uncertainty and Tardiness Penalties: A Comparison of Offshoring and Nearshoring

The extreme congestion caused by the pandemic at shipment routes demonstrated the potential damage fluctuations in customer order lead time could cause in global supply chains. Furthermore, if the order arrives with missing items, it will exacerbate the already disrupted flow of goods in the supply chain. Hence, yield uncertainty needs to be considered, especially when coupled with lead time fluctuations. Thus, supplier selection mechanisms could benefit from a comparison of supplier performances combining yield and lead time uncertainty under different combinations of other factors. To demonstrate the consequences of supplier selection based on these effects, we developed a stochastic optimization model for an order placed by a Tier 1 supplier with a Tier 2 supplier. We generated scenarios via 2k factor representation to calculate the effect of increasing production yield and mean lead time on supply chain costs. We have found that the magnitude of the effect of increasing the lead time on total supply chain costs was much higher than the magnitude of the effect of increasing the production yield. We further found that the magnitude of the effects of these two supplier characteristics was more pronounced if at least two of the other three factors -unit underage cost, order amount, and unit procurement or tardiness cost- were high. Our numerical analysis also demonstrated that it was very important to put effort into estimating lead time parameters and distribution correctly, as making incorrect assumptions could cause severe underestimation of supply chain costs.