Risk pooling advantages of manufacturing network configuration

The decision of a firm to set up a plant network is influenced by a number of factors, including demand fluctuations across its portfolio of products, logistics costs, and service level requirements. Product plant networks offer the benefits of consolidated production and reduced transshipment costs; on the other hand, process plant networks allow intensive dedication to process expertise and economies of scale. In this paper, we show that, aside from these benefits, process plant networks offer significant risk pooling advantages under a wide range of conditions. We analytically demonstrate that, even without accounting for economies of scale advantages, firms may prefer the process plant network configuration due to the risk pooling benefits offered.