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7.2.4 Exploit at maximum real option calculationsOnce the method of valuation found and calculations made, it is important to exploit at maximumthis work. Conducting sensitivity analysis for example will permit the determination of theparameters that have the most impact. This will be most useful in time of negotiations, as the firmwill be able to concentrate only on the most important parameters, and for monitoring, as hereagain the firm can reserve its efforts for the significant drivers.7.3 Recommendations for Future ResearchThis paragraph provides with a few recommendations on possible further research.7.3.1 Analyze the supplier sideThe results rely on the strong assumption that the local supplier accepts to make a contract with themanufacturer. But, is it really interesting for the supplier to make a contract with the company inorder to get x% of its commands in normal situation, and ensure that he will ramp up its productionto supply all the components in case of emergency?With the contract, the manufacturer protects itself against risks and is able to continue producingeven in case of disruption. This contract is in reality an insurance for the firm. The cost of thisinsurance is the premium paid for using the local supplier who gets x% of the components innormal situation. The firm just needs to ensure that the benefits are worth the costs.Under the contract, the local supplier is the one who carries out the disruption uncertainty: innormal situations, he only deals with x% of the manufacturer’s commands, and in case ofdisruption he has to be able to supply 100% of the components. Being able to increase fast theproduction has a cost, and one may wonder why the supplier would agree to offer such a contract.Practically, the local supplier will have the manufacturer pay for this extra cost (though higherprices in our case), but this is possible only if the cost stays reasonable. One solution is to maintainadditional capacity and this is all the more possible as disruptions are likely. Or the supplier canshift production from other customers with less demanding time constraints, and bear penalties thathe will pass through to the manufacturer. This might be considered only if disruptions are rare. Thesupplier can also make contracts with other suppliers in emergency, or maintain lots of raw74
material, etc… The solution that is taken by the supplier depends a lot on the specifics of the case.In the same way we did for the manufacturer it is necessary to weigh the costs and benefits of thedifferent approaches that are available for the supplier. Two questions are important: at which pricethe local supplier should supply the components in the normal situation, and which risks can heaccept? The whole problem is to find a contract that works for both parties.7.3.2 Test the methodology on real dataThe demonstration that was made in this paper relies on Sheffi’s model. It would be veryinteresting to implement the methodology on a true situation using real data. This would permit tocapture better the preoccupations of the firm and answer several important questions: what is theamount of work necessary to implement such a method? What resources are to be put on theproject? What are the principal difficulties that can be encountered? What is the impact of suchquantification? How such a project would be accepted within the organization? Etc… With suchinformation, we could define a more precise implementation plan and help firms to understandbetter the use and impact of such a method.The implementation does not need to be done on dual sourcing but can be applied to other flexiblestrategies. For example, it could be interesting to investigate the problem of safety stock. With leanmanufacturing, levels of stocks have been reduced dramatically, but this can be very risky. Aresafety stocks a good strategy to hedge disruption risks? If so, what is the optimal level? How dofirms need to manage their stocks over time?7.3.3 Investigate other methods to assess risk management benefits.Real options constitute a possible method to quantify the benefits of risk management, but there areothers; it may be interesting to compare the different approaches and define which is the mostadapted according to the use and situation. For example more simple approaches may be moreappropriate for a first analysis. In that respect, it could be worth studying further the solutionproposed by Zsidin (2001) or finding other simple quantification methods.Courtney (2001) suggests a list of techniques to study strategies under uncertainties: decision trees,scenario-planning exercises, game theory, real options, system dynamics models, or managementflight simulators. Wilson (2002) gives a good illustration of the use of system dynamics. She75
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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 .................
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List of FiguresFigure 1.1: Strategy
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Chapter 1Introduction.Modern supply
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- Levels 2 and 3--between these two
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5. In terms of implementation, Forr
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Some articles focus precisely on di
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2.3 Secure the Supply-ChainThere ar
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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 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
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 76 and 77: developed “ a general simulation
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
Page 86 and 87: normal or in disruption.The program
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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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