Operational Disruption Exposure and Part Inventory Replenishment

40 Pages Posted: 24 Jan 2021

See all articles by Xiaobo Ding

Xiaobo Ding

Cornell SC Johnson College of Business

William Schmidt

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: November 27, 2020

Abstract

High impact / low probability supply chain disruptions represent a major challenge for firms. Such disruptions represent a classic bottleneck shifting problem. When the firm can backlog some portion of its unmet customer orders, its disruption exposure is driven by (i) lost demand in the disruption period due to part constraints and (ii) lost demand in the recovery period due to capacity constraints. Although holding inventory has been shown to mitigate a firm's disruption exposure, it is considered costly to do so. We address this complication by showing that the firm's disruption exposure is decreasing at a decreasing rate with the inventory quantity of the disrupted part. More surprisingly, the firm's disruption exposure is decreasing at a decreasing rate with the inventory quantity of non-disrupted parts. We exploit these findings to further show that the firm can materially reduce its disruption exposure across all parts by holding a small amount of incremental inventory of selected parts. Using these insights and the detailed supply chain and operational data from our research partner, a large manufacturer of material handling equipment, we show how targeted changes to the firm's inventory policies across many parts can achieve a significant reduction in its disruption exposure, at no cost. This "strategic pool" of parts serves as a means for the firm to effectively store its otherwise unused disruption period production capacity.

Keywords: Operational Disruption, Risk Management, Mitigation Strategy

Suggested Citation

Ding, Xiaobo and Schmidt, William, Operational Disruption Exposure and Part Inventory Replenishment (November 27, 2020). Available at SSRN: https://ssrn.com/abstract=3715203 or http://dx.doi.org/10.2139/ssrn.3715203

Xiaobo Ding (Contact Author)

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

William Schmidt

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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