An integrated response system for demand surges of emergency products: backup capacity investment and capacity sharing based on product flexibility

The practices of addressing the COVID-19 pandemic have yielded significant insights for emergency supply chain management. One is that horizontal collaboration between firms, such as capacity sharing, is an effective way to handle emergencies. Additionally, production switching through product flexibility effectively covers the shortage of the existing emergency response system. This paper studies an integrated response system comprising an emergency product manufacturer(EM) and a regular product manufacturer with product flexibility (RMPF). The EM can address potential demand surges through backup capacity investment and capacity sharing with the RMPF. We develop a game theoretical model to examine such an integrated response system and analyze the government's subsidy strategies for both approaches when the profit-driven response system fails to satisfy the surging demand. Our main results are: (1) The integrated response system generally outperforms both single-approach response systems, except when capacity sharing is unprofitable or backup capacity investment is highly economical. (2) Capacity sharing is more useful during significant demand surges or shortages of valuable emergency items. (3) When the profit-driven response system fails, the government should adopt a single subsidy strategy if the corresponding emergency response approach is sufficiently cost-effective. In cases of rare and severe demand surges, a hybrid subsidy strategy should be adopted.