Optimal reserve policies for emergency medical supplies: Joint consideration of reserving safety stocks, production capacity, and capital

The tragic consequences of the COVID-19 epidemic highlight to governments the importance of keeping sufficient medical supplies. Given that the physical stocks are subject to considerable obsolescence risk, existing studies have considered combining holding safety stocks with keeping production capacity or capital reserve. Pioneering the exploration of keeping all three resources of safety stocks, production capacity, and capital in reserve, we derive closed-form optimal reserve policies under different scenarios. One crucial insight is that the optimal reserve policies should be determined by considering both the cost and utilization efficiency, e.g., solely adopting safety stocks is optimal when the utilization efficiency of safety stocks exceeds that of production capacity and capital reserves, and when the expected benefit of utilizing safety stocks outweighs the cost. Additionally, we find that the optimal safety stocks level is impacted by the combination of demand uncertainty and epidemic outbreak probability, i.e., the optimal safety stocks level decreases (resp., increases) with demand uncertainty in case with a sufficiently low (resp., high) epidemic outbreak probability, whereas the optimal levels of production capacity and capital always increase with demand uncertainty. We show that coordinating the three resources brings extra benefits compared with keeping fewer resources. By exploring the practical scenario where the government faces multiple potential epidemics, we find that below a threshold, a lower outbreak probability of a large-scale epidemic leads to more capital and production capacity reserves.