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

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Chapter 6Results of the ModelThis chapter presents a view of the results obtained thanks to real options analysis.6.1 Sourcing strategy depends on the intensity of disruptionrisks.The company estimates that there is a probability p that the foreign supplier will be disrupted andwill not be able to deliver for an extended period. To cover this risk the firm considers thepossibility to take a second supplier. Actually the firm can also choose to abandon totally the mainsupplier and rely only on the local supplier. Let us call the three different possible sourcingstrategies, respectively: “main supplier strategy”, “dual sourcing strategy” and “local supplierstrategy”. To decide, the firm needs to weigh the benefits and costs of each solution, as listed in thetable below.Table 6.1: Pros and Cons of different sourcing strategiesStateStrategyMainSupplierDualSourcingLocalSupplierCheap (PriceNormal SituationDisruption SituationwM) Shortage of componentsLoss of market shareCosts to maintain dual sourcing.Components delivered by localsupplier are more expensive(Price w > w )L2L1Expensive (Price100% supplyCosts to maintain dual sourcingExtra components are more expensive(Price wL3> wL2> wL1)DelaywL1≥ wM) 100% supplyCheap (Price wL1< wL2< wL3)Continuous supply – No delayThe model we developed in the previous chapter permits one to get quantitative results, and obtainthe total value (benefits-costs) of each strategy over the product lifetime. Let us consider that thefirm has not launched his project yet and wants to evaluate the different sourcing strategies. We58
also assume that the company sticks to the same sourcing approach until the end and that allparameters stay constant over time. Lastly, we take the immediate investment costs to implementthe different sourcing strategies equal to zero. The detail of the different parameter values thatwere used to obtain the results is given in Appendix B.The optimal sourcing strategy depends on the intensity of the risk. Figure 6.1 shows that dualsourcing is the best solution for a limited range of disruption frequencies α ; ] .[1α2Figure 6.1: Optimal Sourcing Strategy According to Disruption FrequencyThe figure presents the expected profits (or expected net present value) that the firm will make overthe product lifetime according to the sourcing strategy it chooses and the disruption frequency. Aswe can easily understand, if the firm decides to rely only the local supplier, the profits he will makedo not depend on the disruption frequency of the main supplier. On the contrary, if the company59
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Managing Risks of Supply-Chain Disr
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AcknowledgementsI would like to exp
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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
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Page 19 and 20: 2.3 Secure the Supply-ChainThere ar
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Page 25 and 26: 2.6 Conclusions- Increase the secur
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Page 29 and 30: suppliers’. The main objective of
Page 31 and 32: Some people continue to think that
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
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Page 56 and 57: 5.4 Programming on MatlabTo solve t
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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
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Page 78 and 79: (13) Lee, H.L., Wolfe, M. (2003),
Page 80 and 81: and Supply Management Course.(38) Z
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Page 84 and 85: APPENDIX B: PARAMETER VALUES USED T
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Page 92 and 93: % Probability of going from (m,k,j)
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Page 98 and 99: elsevalue.DecOneNormal=3;end-------
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