On the trade-offs between risk pooling and logistics costs in a multi-plant network with commonality

Abstract

This paper examines the benefits and costs of two alternative manufacturing network configurations in the presence of component commonality. We evaluate the trade-off between the decreased logistics costs and loss of risk-pooling benefits in plant networks which spread component manufacturing over each plant (product network) as compared to those that consolidate component manufacturing in a single plant (process network). We examine for conditions that mean that a product network would be chosen instead of a process network and vice-versa. We find that the risk-pooling benefit obtained by consolidating common subassembly production is reduced when the cost of acquiring common component capacity is sufficiently high or low. A post-optimality sensitivity analysis for the process network provides insights into subtle substitution effects, which are a direct outcome of cost mix differentials and network structure and complementarity effects, which are induced by the considered sequential assembly system. Our results suggest that the impact of operational cost parameters on strategic decisions can often be non-intuitive. Overall, our analysis provides a link between strategic and operational decision-making in supply chain management, in the context of multi-plant configuration.

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