Optimal flexibility configurations in newsvendor networks: Going beyond chaining and pairing

Achal Bassamboo*, Ramandeep S. Randhawa, Jan A. Van Mieghem

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

53 Scopus citations

Abstract

We study the classical problem of capacity and flexible technology selection with a newsvendor network model of resource portfolio investment. The resources differ by their level of flexibility, where "level-K flexibility" refers to the ability to process K different product types. We present an exact set-theoretic methodology to analyze newsvendor networks with multiple products and parallel resources. This simple approach is sufficiently powerful to prove that (i) flexibility exhibits decreasing returns and (ii) the optimal portfolio will invest in at most two, adjacent levels of flexibility in symmetric systems, and to characterize (iii) the optimal flexibility configuration for asymmetric systems as well. The optimal flexibility configuration can serve as a theoretical performance benchmark for other configurations suggested in the literature. For example, although chaining is not optimal in our setting, the gap is small and the inclusion of scale economies quickly favors chaining over pairing. We also demonstrate how this methodology can be applied to other settings such as product substitution and queuing systems with parameter uncertainty.

Original languageEnglish (US)
Pages (from-to)1285-1303
Number of pages19
JournalManagement Science
Volume56
Issue number8
DOIs
StatePublished - Aug 1 2010

Keywords

  • Applications
  • Flexibility
  • Inventory production
  • Linear
  • Networks
  • Newsvendor networks
  • Programming
  • Queues
  • Stochastic models

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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