Disruption Mitigation and Pricing Flexibility

We study a firm that is exposed to random supply chain disruptions while producing a single product. During a disruption, the firm may use reserve inventory and/or reserve capacity to serve customer demand. As supply in the form of reserve inventory and reserve capacity is often lower than demand during a disruption, the firm may choose to increase the price of the product during the disruption. An increase in price reduces demand during the disruption, which may help better match supply and demand during the disruption. We find that pricing flexibility (i.e., the ability to increase the price during a disruption) may complement or substitute the operational mitigation levers of holding reserve inventory or reserve capacity. Specifically, when a firm has pricing flexibility, it may be economical to increase the use of reserve inventory or reserve capacity relative to a setting without pricing flexibility.

Dr. Florian Lücker is a Senior Lecturer in Supply Chain Management at Bayes Business School. Before joining Bayes Business School, Florian was a Visiting Scholar at the Kellogg School of Management and a research assistant at the Swiss Federal Institute of Technology EPFL, where he completed his PhD. His research focuses on gaining a better understanding of supply chain management. He is particularly interested in supply chain risk management and supply chain finance. His research has been supported by various grants and has been published in leading operations journals. Florian regularly presents his research at international conferences and research seminars.