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Vertical Flexibility in Supply Chains

Author

Listed:
  • Wallace J. Hopp

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Seyed M. R. Iravani

    (Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208)

  • Wendy Lu Xu

    (Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208)

Abstract

Jordan and Graves (Jordan, W. C., S. C. Graves. 1995. Principles on the benefits of manufacturing process flexibility. Management Sci. 41(4) 577-594) initiated a stream of research on supply chain flexibility, which was furthered by Graves and Tomlin (Graves, S. C., B. T. Tomlin. 2003. Process flexibility in supply chains. Management Sci. 49(7) 907-919), that examined various structures for achieving horizontal flexibility within a single level of a supply chain. In this paper, we extend the theory of supply chain flexibility by considering placement of vertical flexibility across multiple stages in a supply chain. Specifically, we consider two types of flexibility--logistics flexibility and process flexibility--and examine how demand, production, and supply variability at a single stage impacts the best stage in the supply chain for each type of flexibility. Under the assumptions that margins are the same regardless of flexibility location, capacity investment costs are the same within and across stages, and flexibility is limited to a single stage of logistics (process) flexibility accompanied with necessary process (logistics) flexibility, we show that both types of flexibility are most effective when positioned directly at the source of variability. However, although expected profit increases as logistics flexibility is positioned closer to the source of variability (i.e., downstream for demand variability and upstream for supply variability), locating process flexibility anywhere except at the stage with variability leads to the same decrease in expected profit.

Suggested Citation

  • Wallace J. Hopp & Seyed M. R. Iravani & Wendy Lu Xu, 2010. "Vertical Flexibility in Supply Chains," Management Science, INFORMS, vol. 56(3), pages 495-502, March.
    • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:3:p:495-502
    DOI: 10.1287/mnsc.1090.1127
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    References listed on IDEAS

    as
    1. Seyed M. Iravani & Mark P. Van Oyen & Katharine T. Sims, 2005. "Structural Flexibility: A New Perspective on the Design of Manufacturing and Service Operations," Management Science, INFORMS, vol. 51(2), pages 151-166, February.
    2. William C. Jordan & Stephen C. Graves, 1995. "Principles on the Benefits of Manufacturing Process Flexibility," Management Science, INFORMS, vol. 41(4), pages 577-594, April.
    3. Gupta, Diwakar & Gerchak, Yigal & Buzacott, John A., 1992. "The optimal mix of flexible and dedicated manufacturing capacities: Hedging against demand uncertainty," International Journal of Production Economics, Elsevier, vol. 28(3), pages 309-319, December.
    4. Jan A. Van Mieghem, 1998. "Investment Strategies for Flexible Resources," Management Science, INFORMS, vol. 44(8), pages 1071-1078, August.
    5. Stephen C. Graves & Brian T. Tomlin, 2003. "Process Flexibility in Supply Chains," Management Science, INFORMS, vol. 49(7), pages 907-919, July.
    6. Charles H. Fine & Robert M. Freund, 1990. "Optimal Investment in Product-Flexible Manufacturing Capacity," Management Science, INFORMS, vol. 36(4), pages 449-466, April.
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    Cited by:

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    4. Tianhu Deng & Zuo-Jun Max Shen, 2013. "Process Flexibility Design in Unbalanced Networks," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 24-32, April.

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