Building Supply Chain Resilience through Virtual Stockpile Pooling
Tong, Jordan D.
Date of Issue2016
College of Business (Nanyang Business School)
Stockpiling inventory is an essential strategy for building supply chain resilience. It enables firms to continue operating while finding a solution to an unexpected event that causes a supply disruption or demand surge. While extremely valuable when actually deployed, stockpiles incur large holding costs and usually provide no benefits until such a time. To help to reduce this cost, this study presents a new approach for managing stockpiles. We show that if leveraged intelligently, stockpiles can also help an organization better meet its own regular demand by enabling a type of virtual pooling we call virtual stockpile pooling (VSP). The idea of VSP is to first integrate the stockpile into several locations’ regular inventory buffers and then dynamically reallocate the stockpile among these locations in reaction to the demand realizations to achieve a kind of virtual transshipment. To study how to execute VSP and determine when it can provide the most value, we formulate a stylized multi-location stochastic inventory model and solve for the optimal stockpile allocation and inventory order policies. We show that VSP can provide significant cost savings: in some cases nearly the full holding cost of the stockpile (i.e., VSP effectively maintains the stockpile for free), in other cases nearly the savings of traditional physical inventory pooling. Last, our results prescribe implementing VSP with many locations for large stockpiles, but only a few locations for small stockpiles.
Supply chain disruption risk management
Production and Operations Management
© 2016 Springer Science+Business Media Dordrecht. This is the author created version of a work that has been peer reviewed and accepted for publication by Production and Operations Management, Springer Science+Business Media Dordrecht. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1111/poms.12573].