The effect of inter-factory linkage flexibility on inventories and backlogs in integrated process industries

Clusters of factories are sometimes located in close proximity and run together as an integrated unit. These integrated production systems, found in chemical, aluminium, paper, and other process industries, offer many advantages but have to cope with an additional constraint. Factories in these systems must supply sufficient by-products to other factories or use their by-products. If there is insufficient flexibility in these inter-factory linkages, the system builds excess inventories and backlogs. But this flexibility comes at a cost, and that raises the question: how much of it is sufficient? The literature does not provide an answer. We report here a first step in investigating the nature of the relationship between flexibility in these inter-factory linkages and the level of inventories and backlogs in the system. Using Monte-Carlo simulations, we show that this relationship is highly non-linear: tightly integrated systems build excessive inventories and backlogs, but a small amount of flexibility in the inter-factory linkages can reduce them substantially. Furthermore, tightly integrated systems display hysteresis. Small perturbations can trigger the build up of too much inventory of some products and not enough of others over long periods. Unpredictably, the situation might reverse itself—build up too much inventory of those products that were in backlog and not enough of the other products. This feast or famine condition aggravates the expensive ‘bullwhip’ effect in the supply chain. Managers in process industries would be wise in erring on the side of designing more inter-factory flexibility in their integrated production systems, even though it may seem costly.