Modeling the flexibility of order quantities and lead-times in supply chains

The underlying assumption of a good supply chain is that buyers and suppliers are willing to accommodate the uncertainties and variations in each other's businesses. We define supply chain flexibility as the robustness of the buyer-supplier relationship under changing supply conditions. This flexibility provides an effective parameter for characterizing the behavior of asynchronous supply chains. A highly flexible relationship is one in which there is little deterioration in the procurement price under different supply conditions. In this paper we introduce a measure for estimating supply chain flexibility as a function of varying order quantities and varying supply lead-times. Our survey indicates that order quantities and supply lead-times are the two most common changes which occur in supply chains, and are most often the cause of buyer supplier grievance. Since buyers are not always able to predict downstream conditions, they will often issue procurement orders that are for a smaller quantity than normal, and/or shorter supply lead-time than normal. In an inflexible relationship a supplier will only accept these orders at a much higher unit price. Using the proposed model a buyer is able to estimate the flexibility of potential supply chain partners, and hence make a quantifiable choice. The measure itself can be specified in the supply chain contract. Further, in conjunction with a parametric representation of the buyer's procurement behavior, the model is able to estimate the annual procurement cost of a given relationship. (C) 2003 Elsevier Science B.V. All rights reserved.