Increasing Supply Chain Robustness through Process Flexibility and Inventory

We study a hybrid strategy that uses both process flexibility and inventory to mitigate risks of plant disruption. In this setting, a firm allocates inventory before disruption while facing demand uncertainties; demand is realized after disruption, and the firm schedules its production using process flexibility to minimize lost sales. This interplay between process flexibility and inventory is modeled as a two-stage robust optimization problem. We show that the robust optimization model can be formulated as a linear program and solved efficiently. Using analytical and numerical analysis, we study the impact of different process flexibility designs on the firm’s inventory decisions. Our analysis reveals three important insights regarding the impact of process flexibility on (i) total inventory level; (ii) freedom in inventory placement; and (iii) inventory allocation strategy. In particular, we find that under designs with high degrees of process flexibility, the firm allocates more inventory to low demand variability products and less inventory to high demand variability products.