Product and process modularity: improving flexibility and reducing supplier failure risk

Abstract

As the dependence on suppliers intensifies, companies can adopt product and process modularity to reduce the potential negative effects of supply disruptions. Indeed, enabling manufacturing postponement can provide firms with a prompt response; by reducing the complexity of the system and allowing for easier configuration of the production process, the negative impact of a supply disruption, such as supplier failure, can be absorbed. This study provides a framework that relates the adoption of postponement enablers (i.e. product modularity and process modularity) to the reduction of the negative impact of a supply disruption. We attempt to determine whether the direct effect can be explained by the impact of these practices on companies’ flexibility. Based on data collected from 54 Italian manufacturing companies, we show that the adoption of manufacturing postponement enablers directly reduces the negative impact of the occurrence of supplier failure. Furthermore, we show that this relationship can only be partially explained by an indirect path through companies’ flexibility.