Enhancing Supply Chain Resilience Using Strategic Inventories and Partial Vertical Integration

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From the start of the COVID-19 outbreak in December 2019 in Wuhan, China, factory closures and other containment measures in many countries have disrupted the operations and supply chains of Canadian firms and other organizations. For example, coronavirus tests require nylon and foam nasal swabs, as opposed to more commonly available cotton swabs. However, the two major suppliers (Copan Diagnostics located in Italy and Puritan Medical Products in the U.S.) of these required swabs have been severely disrupted by the pandemic. Also, In the automotive industry, many manufacturers stopped production and closed factories in North America, including Canada, partly due to parts shortage. Unfortunately, in today's global and turbulent environments, major supply chain disruptions are not uncommon. More recent major examples include the 9/11 terrorist attacks, the Japan Earthquake & Tsunami of 2011, the outbreak of the Ebola virus in 2013-2016, and the current COVID-19 global pandemic. Therefore, supply chain resilience, which is defined as a supply chain' capacity to prepare and deal with supply and/or demand disruptions, and respond and recover in a timely manner, is crucial. This is especially true for Canada, an open economy depending on import and export supply chains for economic growth. In this research proposal, we will be the first to build and analyze models to study two potential strategies to enhance supply chain resilience: strategic inventory and partial vertical integration. The existence of strategic inventory was first shown in Anand et al. (2008) and then confirmed in several following studies. A firm can hold strategic inventory now to force its suppliers to lower their wholesale prices in the future. In this proposal, first, we will study if and how a firm can use strategic inventory to simultaneously enhance its bargaining power as well as supply chain resilience. Second, we will study if and how partial vertical integration, i.e., a firm owning a part of another firm in its supply chain, can enhance supply chain resilience. Although closer supply chain collaboration has been advocated to enhance supply chain resilience, the use of partial vertical integration has not been investigated. Based on our analytic models and results, we will design decision support tools to improve supply chain resilience for Canadian firms and other organizations. Furthermore, one emphasis of this research is to develop more realistic decision support tools by considering supply competition, production and process flexibility, and multi-period supply chain dynamics. We plan to complement our analytic models with simulation studies using software like anyLogistix and JaamSim.