Saturday, September 24, 2011

Supply Chain Networks, Global Outsourcing, and Quick Response Production -- Integrating Methodologies for Theory and Practice

During the SAMSI Workshop on Engineering and Renewable Energy, which was one of the events organized under this year's theme of Uncertainty Quantification, I was asked, after my presentation on Sustainability, as to the uncertainty underlying supply chains.

In response, I noted both cost and demand uncertainty, issues that we have been researching in applications from the design of supply chain networks for critical needs products to assessing the performance of supply chains under cost and demand disruptions. Of course, in global supply chains, exchange rate risk is also a major issue that we have investigated.

I had also mentioned, in a discussion with a workshop participant, that another one of our papers on supply chain uncertainty was under review for a journal and, yesterday, we received the official acceptance.

Our paper, Supply Chain Networks with Global Outsourcing and Quick-Response Production Under Demand and Cost Uncertainty, by Zugang Liu and Anna Nagurney, has been accepted for publication in the Annals of Operations Research. It will appear in a special issue dedicated to the memory of Professor Cyrus Derman, who passed away last April at age 85. According to Columbia University, Professor Emeritus Cyrus Derman, was considered the driving force behind the success of Columbia Engineering's Department of Industrial Engineering and Operations Research (IEOR). He had also served as the doctoral dissertation advisor of well-known colleagues in Operations Research, including Professor Michael Katehakis, one of the co-editors of the special memorial volume, Peter Kolesar, and Art Veinott, Jr.

The theme of the special issue is
Optimization under Uncertainty Costs, Risks and Revenues.

The issue was originally formulated to celebrate Professor Derman's 86th birthday and I had been told that he was very excited about it but then passed away -- hence, the issue is now a memorial one.

I am very, if I may say, "fond" of the Annals of Operations Research, which was edited for many years by Professor Peter Hammer, who died tragically in a car accident in December 2006. I had last seen him at the European Conference on Operational Research in Iceland in 2006 and enjoyed my conversation with him and his wife very much. This journal is now edited by Professor Endre Boros, who actually informed many of us of the passing of Professor Hammer. I had edited a special issue of the Annals back in 1993, entitled, Advances in Equilibrium Modeling, Analysis and Computation, vol. 44, and have also published in the journal since.

In our paper,
Supply Chain Networks with Global Outsourcing and Quick-Response Production Under Demand and Cost Uncertainty, we integrate the methodologies of stochastic programming and variational inequalities in order to construct a modeling and computational framework for supply chain networks with
global outsourcing and quick-response production under demand and cost uncertainty. Our model handles multiple off-shore suppliers, multiple manufacturers, and multiple demand markets.

Using variational inequality theory, we formulated the governing equilibrium conditions of the competing manufacturers, who are faced with two-stage stochastic programming problems but who also have to cooperate with the off-shore suppliers. Our theoretical and analytical results shed light on the value of outsourcing from novel real option perspectives as in finance. In addition, our simulation studies revealed important managerial insights regarding how demand and cost uncertainty affects the profits, the risks, as well as the global outsourcing and quick-production decisions of supply chain firms under competition.

The modeling and computational framework is relevant to many industries in which quick response production and enhanced supply chain flexibility and responsiveness may provide a competitive advantage.

We dedicated the paper to the memory of Professor Cyrus Derman.