Optimal stock and capital reserve policies for emergency medical supplies against epidemic outbreaks

Killing tens of thousand of people and bringing tremendous loss, epidemics have been one of the most huge and urgent threats for all human kind. Given the abruptness of epidemic outbreaks, quick access to sufficient medical supplies is essential. Most existing research focuses on reserving physical stocks only, while some authors also consider reserving production capacity. This study is the first to consider capital reserves besides physical stocks, a practice that is for instance used in China. We characterize in closed form and graphically under what conditions a certain reserve policy (no reserves, safety stock only, capital reserve only, mixed reserves) is optimal. A key insight is that increased demand uncertainty sometimes leads to lower safety stock levels, although the combined reserves do increase. In such situations, to limit the risk of obsolescence, it is optimal to rely less on safety stocks and more on capital reserves.