Fall 2009 Seminar Series

DATE: November 5th
LOCATION: E51-325
TIME: 4:15pm
Reception immediately following in the ORC ConferenceRoom, E40-106

SPEAKER:
Ananth Iyer

TITLE
Value of Operational Flexibility During Product Upgrade in Closed Loop Supply Chains

ABSTRACT
Motivated by the upgrade of Eurocopters at the US Coast Guard (USCG), we analyze a closed loop supply chain (CLSC) with modular products (e.g., aircraft) whose performance is affected by the type of component (e.g., gearbox or engine) installed. We analyze the performance of the closed loop supply chain during the upgrade process of converting products with regular components to upgraded components in order to improve product performance. As products are used, they fail due to component failure. Failed components are replaced with working components and the failed components are then repaired. The supply chain thus consists of two closed loops – one involving regular and upgraded products and the other involving regular and upgraded components.

Our goal in this paper is to analyze optimal operation of the closed loops under full flexibility (both product upgrades and downgrades permitted), partial flexibility (only product upgrades permitted) and no flexibility (products maintain their configuration). We propose a scaled random variable representation of demand that provides closed form expressions for the optimal broken product and component inventory policy which determines the mix of operating regular and upgraded products.

Our main results are: (a) Under full flexibility, withholding a subset of broken products to wait for upgraded components can improve system performance and thus compensate for limited upgraded compo- nent availability, and (b) Under partial flexibility, it is optimal to withhold more upgraded components than under full flexibility to reserve components for future broken upgraded products, The numerical results also show that a myopic strategy, which was initially proposed at USCG, to use all products using available com- ponents may result in a significant negative impact on performance. Our model provides guidance on when and to what level it is optimal to withhold products or upgraded components. We also provide conditions under which it is optimal not to withhold any products or components and conditions under which it is optimal to withhold all products or components. The results of the model were used by the Coast Guard to estimate the impact of their current aircraft and gearbox components, and justify adding more gearboxes, by providing an estimate of their impact on system performance.