Production Disruptions and Inventory Policy

An overview of the high cost of supply disruptions in lost productivity, loss of goodwill, and damage to facilities. Supply uncertainty and demand uncertainty in supply chain have several similarities, and that firms have used similar strategies such as holding inventory or using multiple suppliers to protect against both supply and demand uncertainty. However, many of the lessons learned for addressing demand uncertainty do not hold for supply uncertainty. Potential responses to supply chain disruptions based on their classification. Classifications include acts of nature or acts of humans, the point the disruption occurs in the supply chain life cycle, the type of disruption, and the managerial impact. Hereunder five mitigation strategies are given to encounter disruption:

1. Inventory

Inventory – holding inventory to protect against possible future disruptions.

2. Routine Sourcing

Routine sourcing – source products from more than one sup plier. For the strategy of routine sourcing, when there is a disruption, the continued receipt of routine orders from the other suppliers is sufficient to reduce the impact of the disruption.

3. Contingent Rerouting

Contingent rerouting – similar to routine sourcing, there are multiple suppliers. However, in this strategy in the case of disruption, additional orders are made to the non-disrupted sources to mitigate disruption.

4. Demand Substitution

Demand substitution – if one product is out of stock due to a disruption, a firm may attempt to shift demand to a product that is available.

5. Financial Mitigation

Financial mitigation – purchase insurance to protect against disruption, or provide subsidies to supplier in order to stabilize the supply base.

Finally, there is a sixth strategy which is to do nothing, which is “Acceptance” – accept the risk of disruptions and the consequences.

Companies follow inventory policies in the presence of supply or production disruptions can be grouped into three following groups.

1. Base stock policies with supplier disruption

2. Production disruption with constant demand and capacitated production

3. Production disruption with stochastic demands

In the case of severe disruptions, a target service level can be achieved using moderate levels of mitigation in the form of excess capacity and finished goods inventory (base stock level) and by following policies with supplier disruption. However, managers must develop analytical methods to establish the performance of produce-to-stock systems with interruptions for given production capacity and base stock level, according to demand and product type. In addition, it should be recognizes that decision makers often have to balance multiple decisions without full knowledge of the complete cost structure, requiring that analysts present results in terms of trade-offs instead of optimizations.

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