Extended Abstract for ‘Optimal Allocation of Reserved Inventories in a Supply Network with Demand Surge’
(1)Problem definition: What is your research problem?
In this paper, we investigate how the firms strategically allocate reserved inventories among different locations so as to mitigate the impact of demand surges. In particular, we study how uncertainties involved in both the pre-positioning and deployment process (such as the geographical locations of the warehouses, delivery lead times, and partial or complete inventory losses) and the demand surge (such as the geographical distribution, magnitude, demand variability and arrival patterns) affect the firm's reserved inventory pre-positioning decisions.
(2)Academic / Practical Relevance: How is your research problem relevant to the OM research / practice community?
Demand surges -- the significant demand increments in addition to the regular demand in a supply network -- arise from various sources in a supply network. In order to mitigate the disruptive impact of sudden demand surges on firms' inventory flow and production processes, firms usually either build up reactive capacities or keep a certain amount of reserved inventories as a reactive buyer at warehouses in different geographical locations. In the latter case, the reserved inventories are often managed separately from the regular inventories that are used to satisfy the daily demand. When demand surge occurs at some specific location(s), due to the geographical difference between the inventory reserve and demand, the pre-positioned inventories at other non-surge-stricken locations need to be deployed to the surge-occurring location(s). Such deployment process creates a time lag between the demand and the arrival of the reserved inventories, which results in an immediate mismatch between supply and demand and leads to a significant loss of demand. Consequently, firms, governments and non-for-profit organizations often target at minimizing the expected unmet demand, i.e., the immediate mismatch between the supply of the reserved inventories and the demand surge. This is especially relevant for a supply network where reserved inventories are kept at multiple geographically different locations.
Our paper contributes to the emerging studies of inventory planning for random demand surges. Past literature on mitigating random demand surges study pre-positioning emergency inventories with the objective tominimize operational cost and joint inventory stocking and capacity reserving problems for sudden demand surges. Our paper complements previous works by considering uncertain demand locations and delivery lead times. We also consider a different objective that aims to minimize supply-demand mismatch while they consider cost minimization.In order words, we focus on finding the optimal reserved inventory pre-positioning bytaking into account the demand dynamics and uncertainties involved in the deployment process.
(3)Methodology: What is the underlying research method?
We formulate the firm's reserved inventory pre-positioning problem as an allocation problem with uncertainties coming from both the supply and demand sides. Because the arrival sequence of reserved inventories depends on the demand surge location as well as the realized delivery lead times, we define a novel ranking function that characterizes the arrival sequence of reserved inventories and express the aggregated supply-demand mismatch in closed form. We use stochastic comparison to illustrate conditions under which the total expected unmet demand is larger.
(4)Results: What are your key findings?
When the demand surge occurs at a single location, we show that the total expected unmet demand is larger when one of the following is true: the probability distribution of the demandsurge location is more dispersed, the post-surge delivery takes a longer time, more demand arrivesat the early times, or it has a higher volatility.When the probability distribution of the demand surge locations is more dispersed, the surge may occur at a wider range of locations. Thus, theinventory reserves need to be stocked so that the delivery time to each possible demand locationcan be balanced, yet the time it takes to deliver the inventories to each location may be on averagelonger. As a result, the expected total unmet demand becomes larger. On the other hand, whenthe demand surge occurs only at certain locations, the inventory reserves can be placed at or nearthese locations to increase the responsiveness of the supply network and hence reduce the totalunmet demand. When more demand arrives at early times, the amount of inventory reserve thatcan be used to satisfy the demand is less due to the positive delivery lead time and thus, resultsin a larger unmet demand. Moreover, when the arrival demand is more volatile, the probability oflarger arrivals within shorter time periods is larger, which leads to a larger unmet demand
(5)Managerial Implications: How can academics/managers/decision makers benefit from your study?
When demand surge may occur at multiple locations, as the totalamount of reserved inventories increases, it may be optimal to reduce the reserves atcertain locations and pre-position the reserved inventories at fewer locations. It can also be optimal to pre-position more reserved inventoriesat locations with a low probability of demand surge or inventory survival rate. These results imply that the optimal prepositioningof reserved inventories can be complex in a supply network with multiple demand surge locations.