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

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3.3 Multiple Sourcing as a way to fight against disruptions insupplySince 9/11managers are more aware than ever of the risks that can represent single sourcing andthis approach may have to be revisited. Many experts in supply-chain management and purchasingadvise firms to consider more flexible sourcing strategies. Lee and Wolfe (2003) suggest a list ofpossibilities:- “Develop multiple supply sources for the same component or input material that will costeffectively enhance flexibility”. Adding suppliers often comes with important costs, andfirms must look for sourcing strategies that “combine flexibility with cost-efficiency”. Thenew procurement strategy of Hewlett-Packard is a good illustration. First, it relies on asupplier for a fixed quantity and thus enhances efficiency. Then, it calls on a secondsupplier for flexible quantities, with a lower and higher volume limits, and consequentlyhigher prices. At last, in case demand comes over the quantities contracted with those 2suppliers, HP buys on the spot market. Martinez-de-Albeniz (2003) studied this approachand proposed a framework to help managers find the optimal portfolio. His work ispresented in the appendix A.- “Create a local supply source”. Firms can use local suppliers to supplement their mainforeign base in case the demand increases faster than expected, or in case of disruption. HPuses this approach for their DeskJet printers. Their main supplier is in Singapore to benefitfrom the lower costs of this country, and at the same time it has a local source of supply inVancouver to respond faster to North American market. This paper studies more in detailthis specific solution.- “Create multiple supply sources with the appropriate manufacturing capacities to build thecomponent when needed. Instead of having multiple suppliers for the same component, acompany would merely reserve manufacturing capacity in several suppliers’ facilities.”And the company would call on one of these vendors in case of problem with the currentsupplier. Obviously, this require an investment but will provide with the requiredflexibility,- “Use a supplier with more than one manufacturing site”.30
Some people continue to think that single sourcing is very valuable as it is cost-efficient and itpermits to reach higher supplier quality and increased internal efficiency. In order to protect againstdisruption, the solution would be to go deeper in the relation with the supplier, monitor its financialand operational health and even work with him to reduce its vulnerabilities.3.4 ConclusionSingle sourcing has allowed to reduce a lot sourcing costs and to improve firms’ relationships withtheir suppliers. Those benefits are important, but this approach is also risky. Firms must thereforeconsider the possibility of relying on several suppliers to cover against disruptions in supply.In order to make a choice between those two approaches, it may be useful to quantify their values.In that respect, real options are very useful. This tool allows to evaluate the decisions that are madein an uncertain environment, and to take into account flexibility.31
Page 1: Managing Risks of Supply-Chain Disr
Page 4 and 5: AcknowledgementsI would like to exp
Page 6 and 7: 4.2.5 Conclusions .................
Page 8 and 9: List of FiguresFigure 1.1: Strategy
Page 11 and 12: Chapter 1Introduction.Modern supply
Page 13 and 14: - Levels 2 and 3--between these two
Page 15 and 16: 5. In terms of implementation, Forr
Page 17 and 18: Some articles focus precisely on di
Page 19 and 20: 2.3 Secure the Supply-ChainThere ar
Page 21 and 22: 1) Firms need to build a resilient
Page 23 and 24: at ports and airports and along the
Page 25 and 26: 2.6 Conclusions- Increase the secur
Page 27 and 28: The most adapted approach (single V
Page 29: suppliers’. The main objective of
Page 33 and 34: For example, there is no market for
Page 35 and 36: 4.1.3 Option ValueJust like a finan
Page 37 and 38: - I0: initial investmentThe problem
Page 39 and 40: Re plicating portfolio in the up st
Page 41 and 42: Let’s consider a portfolio compri
Page 43 and 44: The differential equation is quite
Page 45 and 46: value of the cash flows of the proj
Page 47 and 48: update their option management stra
Page 49 and 50: Chapter 5OptionModeling Dual-Sourci
Page 52 and 53: We will describe the firm’s curre
Page 54 and 55: investment costs are denotedIMainSu
Page 56 and 57: 5.4 Programming on MatlabTo solve t
Page 58 and 59: Chapter 6Results of the ModelThis c
Page 60 and 61: uses the main supplier its profits
Page 62 and 63: drivers - in particular at the time
Page 64 and 65: what will happen. To hedge this dem
Page 66 and 67: 6.5 Conclusions- Real options allow
Page 68 and 69: market share from its competitor.7.
Page 70 and 71: = 0.99 * ($100) + 0.01* (-$200)= $9
Page 72 and 73: Table 7.1: Assumption on Parameter
Page 74 and 75: 7.2.4 Exploit at maximum real optio
Page 76 and 77: developed “ a general simulation
Page 78 and 79: (13) Lee, H.L., Wolfe, M. (2003),
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and Supply Management Course.(38) Z
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to reserve for the future, by maxim
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APPENDIX B: PARAMETER VALUES USED T
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normal or in disruption.The program
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% Probability of going from (m,k,j)
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elsevalue.DecOneNormal=3;end-------
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