Order quantity and timing flexibility in supply chains: The role of demand characteristics

Abstract

We study how differences in product demand characteristics affect the strategic value of different types of supply chain flexibility for accurate response. We propose a single-period inventory modelling framework with two ordering opportunities. The second order reflects updated demand information and potentially capitalizes on supply chain flexibility. We consider two complementary forms of flexibility: quantity flexibility in production and timing flexibility in scheduling. In this framework, we analyze the total inventory cost of a firm for alternate demand types. We model functional products through the standard assumption of independent demand over the period, fashion-driven innovative products through a Bayesian model, and innovative products with evolving demand through a Martingale process. The three demand processes exhibit very different behavior with respect to the value of the alternate forms of flexibility. We observe that quantity flexibility is of moderate value for functional goods and of high value for fashion-driven products for all lead times. Quantity flexibility is of low value for goods with evolving demand with long lead times but of high value for short lead times. Alternately, we observe timing flexibility is of highest value for functional goods, especially for cases of high holding cost, and is of lesser value for fashion-driven goods. It is of least value for goods with evolving demand. Both quantity and timing flexibility capabilities are required to significantly reduce the relevant supply chain costs for evolving-demand innovative goods when the lead times are long. © 2005 INFORMS.