Research by Xuan Wang of HKUST reveals how large manufacturers can benefit from flexible production systems. In collaboration with US-based scholars, Wang shows that the right kind of flexibility design allows firms with multiple plants and products to adapt to demand uncertainties. By using the methods presented in the paper, such firms can dodge the traps that result from inflexible processes, allowing them to maximize not only sales but profits.
The study’s motivation is vividly demonstrated by a real example of the pitfalls of inflexibility. In 2000, Chrysler lost an estimated $2 billion in potential revenue when its factories were unable to match the unexpected demand for a new vehicle. This loss would have been avoided if the plants producing Chrysler’s older lines had been able to switch over to the new model. As the authors state, “even just a little flexibility, if configured in the right way, can be extremely effective in mitigating supply–demand mismatch.”
Wang and colleagues therefore rigorously modeled how a company manufacturing different products at different sites can introduce process flexibility at a reasonable cost. In fact, their study went beyond the scope of situations like the Chrysler case, in which the loss was compounded by a simultaneous fall in demand for an older model. The authors realized that when a firm’s products are positioned at different price points, flexibility is beneficial even if the demands for each product are perfectly correlated.
Among various flexibility designs, Wang and colleagues focused on the alternate long chain. Each of a firm’s factories can produce a subset of the total range of products—this is more flexible than a “one-plant-one-product” design, but sparser and thus cheaper than a fully interchangeable system. The paper proves that if plants can produce two product lines, it is optimal for each plant to make one high-profit and one low-profit product. Then, under capacity constraints, “high-profit products never have to directly compete for shared resources,” and all of them can be prioritized simultaneously.
To prove this point, the authors used a custom-made performance metric dubbed the dual margin group index (DMGI). The paper proves rigorously that the DMGI can measure the performance of any flexibility design, making it a versatile tool for practitioners. Furthermore, the authors develop a heuristic algorithm based on DMGI for generating effective flexibility designs in the presence of product margin differentials and show that using the DMGI based heuristic “can achieve a better performance than other approaches in an unbalanced and asymmetric system, especially when there exists demand distribution misspecification.”, which helps firms generate effective flexibility designs in noisy and unpredictable real markets.
The rigor and generality of the paper’s results ensure that the DMGI has wide potential applicability in real-world industries. Moreover, alternate long chain flexibility designs now clearly emerge as a winning solution among many.