Production and pricing policies in dual sourcing supply chains

• Effect of reactive ordering in the price-setting newsvendor problem is investigated.
• Introduction of an emergency supply source may decrease selling price.
• Uncoordinated price and inventory decisions result in a higher selling price.
• Model can be used to analyze global supply chains with offshore and domestic suppliers.
• Conclusions with regard to the practice of drop shipping in Internet retailing.

We analyze optimal production and pricing strategies in the single period (newsvendor) dual sourcing problem that entails local and offshore suppliers. The local supplier is used reactively as an emergency source following the realization of random demand. A multiplicative demand model is employed. We show that dual sourcing flexibility may decrease optimal price when emergency supply cost is sufficiently low. We also find that optimizing price for a given stocking factor yields a price which is always higher than the price in the case where both price and stocking factor are selected to be jointly optimal.