Supply Capacity, Supply Reliability and Precautionary Stockpiling

Abstract

This paper examines how supply capacity and supply reliability affect precautionary stockpiling by healthcare institutions facing future supply risk. We develop a simple model in which  identical healthcare institutions choose how much medical supply to purchase in advance, while supply capacity determines current and future market prices and future supplies remain available with a given probability. The analysis yields two main results. First, an expansion of supply capacity can increase precautionary stockpiling. Although greater capacity lowers future procurement costs and thereby discourages stockpiling, it also lowers the current purchase price and makes advance purchases more attractive. When the expected loss from future supply disruption is sufficiently large relative to inventory holding costs, the latter effect dominates, so that greater supply capacity increases equilibrium stockpiling. Second, an improvement in supply reliability reduces precautionary stockpiling when the shortage loss exceeds the normal future procurement price. These results demonstrate that supply expansion and supply-risk reduction are not equivalent policies. Increasing physical supply without reducing uncertainty about future availability can unintentionally stimulate precautionary purchasing, whereas improving supply reliability directly weakens the incentive to stockpile. The analysis therefore highlights the importance of combining supply-expansion policies with measures that enhance the reliability of future procurement.