Process flexibility and inventory flexibility via product substitution

Seyed M.R. Iravani, Bora Kolfal, Mark P. Van Oyen*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Scopus citations


This paper studies the optimal control of and interaction between two types of flexibility under Markov models of demand and production: process flexibility and inventory flexibility. In our model, process flexibility is generated by a multi-functional production facility that can produce two types of products, and inventory flexibility is manifested in firm-driven one-way product substitution. Both process flexibility and inventory flexibility are important drivers of supply chain performance and are strategic design considerations. To analyze the interaction between these two types of flexibility, we model a dynamically controlled two-product, make-to-stock system with stochastic processing times and stochastic demand. We characterize the complex joint optimal production and post-production policy for a special case and numerically show that a simply structured multi-threshold policy is a near-optimal heuristic policy for the general case. We gain further insight into the impact of system parameters on the value of process flexibility and inventory flexibility via a comprehensive numerical study. We find that for a wide range of capacity and cost parameters, process flexibility and inventory flexibility complement each other, so pursuing both forms of flexibility is effective.

Original languageEnglish (US)
Pages (from-to)320-343
Number of pages24
JournalFlexible Services and Manufacturing Journal
Issue number3
StatePublished - Sep 2014


  • Dynamic programming
  • Markov processes
  • Process flexibility
  • Product substitution
  • Production and inventory systems

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering


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