Compensating for Dynamic Supply Disruptions: Backup Flexibility Design

Operations Research, Forthcoming

28 Pages Posted: 25 Nov 2012 Last revised: 16 Dec 2015

See all articles by Soroush Saghafian

Soroush Saghafian

Harvard University - Harvard Kennedy School (HKS)

Mark P. Van Oyen

University of Michigan at Ann Arbor

Date Written: September 25, 2015

Abstract

To increase resilience in supply chains, we investigate the optimal design of flexibility in the backup system. We model the dynamics of disruptions as Markov chains, and consider a multi-product, multi-supplier supply chain under dynamic disruption risks. Using our model, we first show that a little flexibility in the backup system can go a long way in mitigating dynamic disruption risks. This raises an important and fundamental question in designing flexibility in the backup system: to achieve the benefits of full backup flexibility, which unreliable suppliers should be backed up? To answer this question, we connect the supply chain to various queueing and dam models by analyzing the dynamics of the inventory shortfall process. Using this connection, we show that backing up suppliers merely based on first moment considerations such as their average reliability or average product demand can be misleading. All else equal, it is better to back up suppliers with (1) longer but less frequent disruptions, and (2) lower demand uncertainty. In addition to such second moment effects, by employing the Renyi's Theorem, we demonstrate that when disruptions are relatively long (if they occur), backing up the suppliers for which the expected wasted backup capacity is minimum provides the best backup flexibility design. We also develop easy-to-compute and yet effective indices that (a) guide the supply chain designer in deciding which suppliers to backup, and (b) provide insights into the role of various factors such as inventory holding and shortage costs, purchasing costs, suppliers reliabilities, and product demand distributions in designing backup flexibility.

Keywords: Backup Capacity, Flexibility, Dynamic Disruption Risk, Inventory shortfall Process

JEL Classification: D24

Suggested Citation

Saghafian, Soroush and Van Oyen, Mark P., Compensating for Dynamic Supply Disruptions: Backup Flexibility Design (September 25, 2015). Operations Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2180355 or http://dx.doi.org/10.2139/ssrn.2180355

Soroush Saghafian (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Mark P. Van Oyen

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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