Upstream vs. Downstream Flexibility in a Production-Distribution Supply Chain

The capability to improve market responsiveness to meet future uncertain demand is a critical imperative for many firms today. Flexibility in the supply chain to accommodate such changes in demand is a function of the alternative routes a product may take as it travels from the plant where it is made to the distribution center to the regional warehouse and finally to the retailer. From a supply chain perspective, this output flexibility means the capability of the network to provide a mix of products at the retail level. This paper tries to provide an insight into supply chain flexibility by comparing upstream and downstream flexibility from a two-echelon multi-product scenario. The two echelons modeled here are the plant and the distribution center. Upstream flexibility in the supply chain is defined as the capability of the supply chain to fill distribution centers from plants. Thus if all plants can supply all distribution centers all the items in the product portfolio, the supply chain has complete upstream flexibility. Similarly, downstream flexibility is defined as the capability of the supply chain to ship products from the distribution center to the market (regional warehouses or the retailer). A supply chain has complete downstream flexibility if all distribution centers have capability to ship to all products to all markets. The paper is develops a nonlinear integer program to model the supply chain system. We then evaluate the consequences of upstream and downstream flexibility in the supply chain by simulating alternative demand patterns and solving for the optimal product movement in the supply chain under alternative design conditions. We find that upstream flexibility has better payoffs (much higher service level) when demand of products is negatively correlated. We also find that moving towards full flexibility has marginally decreasing payoffs. Thus if the cost of developing these routes in the supply chain is significant, it may be optimal to design the supply chain for limited or partial flexibility.