Balancing stocks, flexible recipe costs and high service level requirements in a batch process industry: A study of a small scale model

Process industries often obtain their raw materials from mining or agricultural industries. These raw materials usually have variations in quality which often lead to variations in the recipes used for manufacturing a product. Another reason for varying the recipe is to minimize production costs by using the cheapest materials that still lead to a satisfactory quality in the product. A third reason for using recipe flexibility is that it may occur that not all materials for the standard recipe are available. If variations in supply and demand are large, keeping sufficient safety stock to cope with these variations may incur prohibitive high costs. This means that the costs of keeping safety stock should be balanced with the costs of sometimes using more expensive recipes. The question now is for what situations and to what extent the use of recipe flexibility is justified. In this paper we study this question by means of a small scale model. For this simple situation we derive a decision procedure to balance safety stock costs and flexibility costs. This procedure is applied to a range of different situations, that are characterized by a set of parameter values, in order to determine for which situations recipe flexibility should be used.