An Evaluation of Capacity and Inventory Buffers as Mitigation for Catastrophic Supply Chain Disruptions

Abstract

By some accounts supply chains are increasingly being affected by catastrophic events that disrupt goods flow for prolonged periods. This may be because the occurrence of catastrophic events has, indeed, increased or because we are simply more attuned to such events because global supply chains are exposed to a greater number of catastrophic risks. Regardless of which is true, arguments have been made in the popular press that the impacts of catastrophic events are more severe than in past years because supply chains have less inventory which reduces the amount of time before deliveries to customers are affected. These same accounts argue for managers to return to past practices where more inventory was held, which motivated the analysis in this article of whether such inventory buffers are financially feasible. To broaden the discussion, we also analyzed whether the alternative type of buffer, manufacturing capacity, is feasible. We characterize the feasibility of these two buffer tactics by measuring their effect on manufacturing companies’ net incomes and credit worthiness. We also discuss nonfinancial factors that determine whether capacity and inventory buffers are effective as well as provide some ideas for restructuring supply chains so that less capacity is needed to mitigate the effect of catastrophic disruptions.