The Optimization of a Virtual Dual Production-Inventory System under Dynamic Supply Disruption Risk

Abstract

Major events such as the COVID-19 pandemic, Olympic Games, and G20 Summit bring about supplier disruption risks and challenges to supply chain management. To help deal with these risks, a virtual dual-sourcing production-inventory system can be deployed. In this paper, we study such a system which consists of a raw material supplier, a manufacturer, and a virtual dual-sourcing contingency supplier. The manufacturer needs to determine the production, procurement, and inventory plan of raw materials. When its supplier is interrupted, the manufacturer may need to adjust the production and inventory plan and work with the contingency supplier. We develop a system dynamics method to simulate the operations in this production-inventory system to identify the approximately optimal order-up-to-level inventory policies. We find that the virtual dual production-inventory strategy can be the optimal contingency policy to deal with supplier dynamic disruption risks. Furthermore, for disruption risk with low frequency and long duration, the manufacturer should increase the safety inventory level before the disruption. Otherwise, it should increase the safety inventory level in every cycle.