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Process flexibility, whereby a production facility can produce multiple products, is a critical design consideration in multiproduct supply chains facing uncertain demand. The challenge is to determine a cost-effective flexibility configuration that is able to meet the demand with high likelihood. In this paper, we present a framework for analyzing the benefits from flexibility in multistage supply chains. We find two phenomena, stage-spanning bottlenecks and floating bottlenecks, neither of which are present in single-stage supply chains, which reduce the effectiveness of a flexibility configuration. We develop a flexibility measure g and show that increasing this measure results in greater protection from these supply-chain inefficiencies. We also identify flexibility guidelines that perform very well for multistage supply chains. These guidelines employ and adapt the single-stage chaining strategy of Jordan and Graves (1995) to multistage supply chains.
(Supply Chain; Flexibility; Capacity; Product Allocation)
1. Introduction
Manufacturing firms invest in plant capacity in anticipation of future product demand. At the time of capacity commitment, a firm has only a forecast of the unknown product demand. One approach to addressing forecast uncertainty is to build dedicated plants with sufficient capacity to cover the maximum possible demand. This strategy is expensive, and the expected capacity utilization is low. Flexibility provides an alternative means of coping with demand uncertainty. By enabling plants to process multiple products, a firm can allocate products to plants so as to meet realized demand most effectively.
A number of authors (e.g., Fine and Freund 1990; Gupta et al. 1992; Li and Tirupati 1994, 1995, 1997; Van Mieghem 1998) have examined investments in dedicated plants versus totally flexible plants, where a totally flexible plant can process all products. Partial flexibility, whereby a plant can produce a subset of products, has received less attention (Jordan and Graves 1995).
Jordan and Graves (J-G) investigate process flexibility in a single-stage manufacturing system with multiple products and plants. Flexibility is represented by a bi-partite graph, as shown for three configurations in Figure 1. Flexibility investments are then investments in these product-plant links.
J-G introduce the concept of chaining: "A chain is a group of products and plants which are all connected, directly or indirectly, by product assignment decisions. In terms of graph theory, a chain is a connected graph. Within...