Managing Risks of Supply-Chain Disruptions: Dual ... - CiteSeerX

Managing Supply-Chain Risk Disruptions:Dual Sourcing as a Real OptionBySophie PochardSubmitted to the Engineering Systems Division on August 9, 2003In Partial Fulfillment of the Requirements for the Degree ofMaster of Science in Technology and PolicyAt the Massachusetts Institute of TechnologyAbstractThis thesis examines how firms should prepare against disruption in their supply-chain andfocuses on how they can use real options to value dual sourcing strategies.As an introduction, it defines a general framework to help managers to think about supply chaindisruptions and determine adapted strategies. The logic of the paper is based on this framework.First it establishes a general review of the possible solutions to manage risk disruptions. Aliterature research points out that firms can use two complementary types of actions to respond touncertainty: securing the supply-chain and developing resilience. Both can be performed in manydifferent ways and it seems that there is no single best solution. The problem for managers is tochoose a good strategy, and quantifying the benefits of the various solutions can be very helpful.The thesis focuses on the particular approach of dual sourcing and shows that the real optionsconcept is an adapted tool to evaluate such a strategy. It develops an analytic model to analyzeand value the benefits of relying on dual sourcing. This model takes into account variousparameters such as the frequency of disruption and the loss of market share. Using MATLAB, itdefines the particular circumstances that justify a second supplier. Sensitivity analyses permit todetermine the impact of each parameter. The model also demonstrates the value of the option ofdelaying decision and shows that a time-varying dynamic strategy works the best.The thesis finishes with a few recommendations to help managers build a more resilient supplychainand use real options to quantify their choices.Thesis Supervisor: Professor Richard de NeufvilleTitle: Professor of Engineering System and of Civil and Environmental Engineering3