Optimal Flexibility Configurations in Newsvendor Networks: Going beyond Chaining and Pairing

Management Science, Vol. 56, No. 8, August 2010, pp. 1285–1303

19 Pages Posted: 7 Feb 2013

Date Written: 2010

Abstract

We study the classical problem of capacity and flexible technology selection with a newsvendor network model of resource portfolio investment. The resources differ by their level of flexibility, where “level-k flexibility” refers to the ability to process k different product types. We present an exact set-theoretic methodology to analyze newsvendor networks with multiple products and parallel resources. This simple approach is sufficiently powerful to prove that (i) flexibility exhibits decreasing returns and (ii) the optimal portfolio will invest in at most two, adjacent levels of flexibility in symmetric systems, and to characterize (iii) the optimal flexibility configuration for asymmetric systems as well. The optimal flexibility configuration can serve as a theoretical performance benchmark for other configurations suggested in the literature. For example, although chaining is not optimal in our setting, the gap is small and the inclusion of scale economies quickly favors chaining over pairing. We also demonstrate how this methodology can be applied to other settings such as product substitution and queuing systems with parameter uncertainty.

Keywords: inventory production, stochastic models, programming, linear, applications, queues, networks, flexibility, newsvendor networks

Suggested Citation

Bassamboo, Achal and Van Mieghem, Jan Albert and Randhawa, Ramandeep S., Optimal Flexibility Configurations in Newsvendor Networks: Going beyond Chaining and Pairing (2010). Management Science, Vol. 56, No. 8, August 2010, pp. 1285–1303 , Available at SSRN: https://ssrn.com/abstract=2212283

Achal Bassamboo

Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS) ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Jan Albert Van Mieghem (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Ramandeep S. Randhawa

University of Southern California ( email )

Marshall School of Business
BRI 401, 3670 Trousdale Parkway
Los Angeles, CA 90089
United States

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