Network Approach to Mergers & Acquisitions

Today's New York Times has an article, "U.S. Merger Activity in '13 Back at the Trillion-Dollar Level," by David Gelles, which immediately caught my attention.

My supernetwork research group has been working on modeling potential synergies associated with Mergers & Acquisitions (M&As) using networks in order to ascertain whether a pending deal may be worthwhile or costly.

The Times article also included a great graphic which I have reposted below:

First, you may notice that many of the industries that were especially active with respect to M&As in 2013 are actually network industries (wireless, transportation and infrastructure, power, telecommunications, and I would argue even banks as financial networks). Hence, it makes (alot of) sense that any quantification of possible synergies associated with mergers and acquisitions should be network-based.

Interestingly, a few weeks ago, I was interviewed for a piece by Mark Huffman on cardhub.com in its Ask the Experts series on the topic: Should American Airline, US Airways Merger Be Blocked? The merger did go through.

The comments on the Times article by readers were also quite good and several alluded to criteria associated with M&As (and not just having the lawyers earn $$$ from the deals).

In our work on M&As, we have pursued not only criteria of (possible) cost reduction but also risk reduction as well as environmental impacts. Some of our papers are noted below with associated links: A System-Optimization Perspective for Supply Chain Network Integration: The Horizontal Merger Case, Anna Nagurney, Transportation Research E 45: (2009) pp 1-15.

Environmental and Cost Synergy in Supply Chain Network Integration in Mergers and Acquisitions, Anna Nagurney and Trisha Woolley, in Sustainable Energy and Transportation Systems, Proceedings of the 19th International Conference on Multiple Criteria Decision Making, Lecture Notes in Economics and Mathematical Systems, M. Ehrgott, B. Naujoks, T. Stewart, and J. Wallenius, Editors, Springer, Berlin, Germany (2010) pp 51-78.

Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integration, Zugang Liu and Anna Nagurney, Journal of Financial Decision Making 7(2): (2011) pp 1-18.

I also wrote on the merger paradox in the paper below:
Formulation and Analysis of Horizontal Mergers Among Oligopolistic Firms with Insights into the Merger Paradox: A Supply Chain Network Perspective, Computational Management Science 7: (2010) pp 377-401.

High Tech Mergers Are HOT Again

USAToday.com is reporting that high tech mergers, both in number and in value, are on the increase. Especially attractive, as acquisitions, are firms associated with mobile computing, cloud computing, and search engines. In the past year, SAP, IBM, Apple, and Google have acquired firms and Oracle's success may be due, in part, to its earlier wise acquisitions.

Interestingly, the article also notes that the Chinese are eager to acquire firms. One of the major drivers in mergers and acquisitions (M&A) this time around is the desire to obtain access to new global markets, coupled with bigger firms acquiring smaller, agile firms with technological know-how and cutting-edge technological expertise and products. Moreover, many of the leading high tech companies are sitting on a lot of cash and interest rates are lower than a year ago signaling an improved economic climate for such transactions.

Our research on the integration of multiproduct firms, and the quantification of associated synergy, entitled,"Multiproduct Supply Chain Horizontal Network Integration: Models, Theory, and Computational Results," was just published in the International Journal of Operational Research, volume 17 (2010), pp 333-349. The results therein can be applied to assess the synergy of mergers and acquisitions of firms with similar or distinct portfolios of products and with access to different markets.

Another recent M&A study of ours, which is in press, also in a peer-reviewed journal, Computational Management Science, entitled, "Formulation and Analysis of Horizontal Mergers Among Oligopolistic Firms with Insights into the Merger Paradox: A Supply Chain Network Perspective," shows the impacts on profits of different acquisitions in industries in which the firms compete directly and feed the same markets.

Mergers and Acquisitions, Energy and the Environment

The New York Times is reporting that the number of mergers and acquisitions of energy companies is growing and that energy companies are increasingly seeking to acquire new sources for energy exploration. Companies are focusing on buying small, growing companies or on acquiring companies that expand their reserves in a period in which it is hard for them to find new places to drill. Targeted companies include companies in Africa as well as those that control drilling fields in deep waters in the Gulf of Mexico.

A recent study of ours, Environmental and Cost Synergy on Supply Chain Network Integration in Mergers and Acquisitions, that I co-authored with Dr. Trisha Woolley, appears in the recent volume, Sustainable Energy and Transportation Systems, Proceedings of the 19th International Conference on Multiple Criteria Decision Making, Lecture Notes in Economics and Mathematical Systems, M. Ehrgott, B. Naujoks, T. Stewart, and J. Wallenius, Editors, Springer, Berlin, Germany (2010) pp 51-78. In this paper, we developed a multicriteria supply chain network model to assess the possible cost and environmental synergies associated with supply chain network integration as in mergers and acquisitions. This work has direct relevance to energy companies who are considering whether to acquire or merge with an existing energy company (or not).

We have also (with Woolley and Dr. Patrick Qiang) developed metrics to assess the synergy associated with the supply chain network integration of multiproduct firms in the case of mergers and acquisitions. That paper, entitled, Multiproduct Supply Chain Horizontal Network Integration: Models, Theory, and Computational Results, will appear in the journal International Transactions in Operational Research.

Multi-product Supply Chains, Network Integration, and Mergers and Acquisitions

Now that the economy appears to be recovering, more and more companies are looking at mergers and acquisitions as a means of further reducing costs, expanding markets, and creating possible synergy.

In a study, Multi-product Horizontal Supply Chain Network Integration: Models, Theory, and Computational Results, published in the International Journal of Operational Research, (2010), vol. 17, pp. 333-349, we developed a framework for the identification of potential synergy associated with network integration in the case of multi-product firms. The perspective was that of system-optimization and total cost reduction associated with the sharing of resources, such as facilities (from manufacturing plants to distribution centers) within a general supply chain network framework.

The study was conducted with two of my former doctoral students, who are now professors at Business Schools: Dr. Trisha Woolley, who is a Professor at Texas Wesleyan University, and Dr. Patrick Qiang, who is a Professor at the Penn State Great Valley Campus.

The network approach that we developed can be applied to assess the potential synergy a priori of different potential mergers and acquisitions, from airlines to consumer product companies and even financial services and oil companies. Since the perspective is that of system-optimization, the tools can also be applied to the assessment of teams as in the partnering of organizations in humanitarian logistics operations.

The paper is also available at the Virtual Center for Supernetworks website.

Risk Reduction and Cost Synergy via Supply Chain Network Integration

Nothing like waking up and having a message from a publisher that the galleys of your paper are ready for proofing.

Plus, when there are no changes needed, and the paper looks great, it makes it all even sweeter.

This morning, my co-author, Dr. Zugang "Leo" Liu, and I were delighted to experience the above and our paper, Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integration, is the lead paper in the December 2011 issue of the Journal of Financial Decision Making and appears in volume 7(2), (2011), pp 1-18.

I had blogged about our research on which this paper is based in a post: Supply Chain Risk, Mergers and Acquisitions, and Synergy.

In this paper, we developed a network model that captures the costs and the risks associated not only with the production, transportation, and storage activities in supply chains, but also with the merger / acquisition (M&A) itself. The framework allows one to estimate the expected total cost and the total risk of the supply chains before and after the merger. In addition, we provided three synergy measures that can assist decision-makers in the evaluation of potential gains of M&As from different perspectives. The measures are: the expected total cost synergy, the absolute risk synergy, and the relative risk synergy.

The first measure quantifies the expected total cost savings obtained by the merger; the second measure represents the reduction of the absolute risk achieved through the merger, and the third measure reflects the reduction of the relative risk through the merger.

Our results provide interesting managerial insights for executives who are faced with M&A decisions. The first set of examples showed that, if the expected total costs and the risks of the merger are negligible, both the total cost and the total risk would be reduced through the merger. In addition, the risk reduction achieved through the merger was more prominent when the uncertainty of link costs was higher. Our second set of examples showed that the cost and the risk of merger could have a significant impact on the total cost and the total risk of the post-merger firm, and should be carefully evaluated. Our examples also demonstrated that whether a merger makes sense economically may depend on the priority concerns of the decision-makers, and on the measures used to evaluate the gains. For instance, a merger that could not lower the expected total cost might still be able to reduce the total risk, and, hence, may be considered beneficial to the firms' stakeholders.

With all the articles appearing recently in The Wall Street Journal on Mergers & Acquisitions (horizontal as well as vertical) it is exciting to be doing research that is both interesting and timely and that includes networks applied in new ways!

Fragile Networks Tutorial at NIH -- Good Timing!

Next Monday, Dr. Patrick Qiang and I will be giving a tutorial on Fragile Networks: Identifying Vulnerabilities and Synergies in an Uncertain World at the National Institutes of Health (NIH) in Bethesda, MD. This tutorial will take place immediately preceding the 2010 International Conference on Social Computing, Behavioral Modeling, and Prediction at NIH. Our tutorial is one of 4 invited ones.

Dr. Qiang and I have been hard at work preparing our tutorial which is organized into three different modules:

Module I - Network Fundamentals, Efficiency Measurement, and Vulnerability Analysis explores the theoretical and practical foundations for a new network efficiency measure in order to assess the importance of network components in various network systems. Methodologies for distinct decision-making behaviors are outlined, along with the tools for qualitative analysis, the algorithms for the computation of solutions, and a thorough discussion of the unified network efficient measure and network robustness with the unified measure.

Module II - Applications and Extensions examines the efficiency changes and the associated cost increments after network components are eliminated or partially damaged. A discussion of the recently established connections between transportation networks and different critical networks is provided, which demonstrates how the new network measures and robustness indices can be applied to different supply chain, financial, and dynamic networks, including the Internet and electric power networks.

Module III - Mergers and Acquisitions, Network Integration, and Synergies reveals the connections between transportation networks and different network systems and quantifies the synergies associated with the network systems, from total cost reduction to environmental impact assessment. In the case of mergers and acquisitions, the focus is on supply chain networks. A system-optimization perspective for supply chain networks will be presented. Also, we will formalize coalition formation using game theory with insights into the merger paradox. Applications to humanitarian logistics operations will also be presented.

The tutorial is based on our book by the same name.

This tutorial is well-timed given the growing interest in network vulnerability and robustness as reported in this article in The New York Times, which highlights the ramifications of a recent scientific article published in the journal Safety Science.

US Approves Merger of Continental and United Airlines

The New York Times is reporting that the proposed merger of Continental and United Airlines has been approved. It is expected that the deal will now move forward quickly and result in the world's largest airline.

According to The Times: In a statement posted on its Web site, the Justice Department said it had “closed its investigation” into the proposed merger after United and Continental agreed to give take-and landing slots to Southwest Airlines at Newark Liberty International Airport.

“United and Continental entered into the arrangement with Southwest in response to the department’s principal concerns regarding the competitive effects of the proposed United/Continental merger,” the Justice Department said in its statement.

This news I find especially exciting since we have been conducting a lot of research on mergers and acquisitions from a network perspective in both competitive, such as oligopolistic, settings, which is the industrial structure of many airlines, and in cooperative environments, such as in humanitarian logistics and operations where there may be teaming for disaster relief.

My paper, "Formulation and Analysis of Horizontal Mergers Among Oligopolistic Firms with Insights Into the Merger Paradox: A Supply Chain Network Perspective," has now been published online in the journal Computational Management Science and according to a message that I received yesterday from the publisher of this journal, Springer, it should be appearing in the hardcopy issue soon.

Another more personal connection is that my college room-mate from Brown University, Teresa Davila, is a United Airlines stewardess and language specialist. I hope that the corporate cultures of these two airlines mesh well so that the employees are comfortable when it ultimately takes place. I am a former Premier flier on United and my recent long distance flights on this airline were to/from spectacular Honolulu and to/from Buenos Aires, Argentina!

Supply Chain Network Design and Redesign, Game Theory, and Nash Equilibria

There is a wonderful interview (but too short) by Ron Howard, the Director of the Academy Award winning movie, "A Beautiful Mind," with John F. Nash Jr., the 1994 Nobel laureate in Economic Sciences, in a trailer that accompanies the DVD of this movie. I had the pleasure of recently seeing both.

As John Nash walks away at the end of the interview, bundled up in a warm overcoat and knit cap, he ruefully comments that he has lost so many years and he needs to get back to research since that is what matters.

John Nash's contributions to game theory earned him the Nobel Prize. His work has influenced numerous disciplines, in addition to economics, notably, operations research and management science, political science, applied mathematics, and computer science.

I cite Nash's classical (1950) and (1951) papers in many of my papers that deal with competition.

For example, in a paper, "Supply Chain Network Design Under Profit Maximization and Oligopolistic Competition," which was published recently in the journal, Transportation Research E (2010), I devised a model in which firms seek to determine their optimal supply chain network designs in terms of manufacturing, storage, and shipment capacities, as well as product flows so as to maximize profits. The governing concept is that of a Nash - Cournot equilibrium. This model extends my earlier model in which a firm seeks to design (or redesign) its supply chain network so as to minimize its total costs associated with capacity enhancements (even from scratch) as well as the operational costs. In the latter, no competition was assumed. That study, "Optimal Supply Chain Network Design and Redesign at Minimal Total Cost with Demand Satisfaction," is in press in the International Journal of Production Economics.

High tech companies, including Samsung, Hewlett Packard, and IBM, as well as apparel companies from Benetton to Zara well understand the competitive advantages of careful cost control in supply chains. In addition, more and more companies, including Frito-Lay, Tesco, P&G, and Colgate are being recognized for their supply chain performance.

The analytical challenges of identifying not only the optimal capacities associated with various supply chain network activities, coupled with the optimal production quantities, storage volumes, as well as shipments are tremendous, since the possibilities of where to site manufacturing plants and distribution centers, for example, and at which capacities, may be great. Furthermore, the determination of the optimal supply chain network design (or redesign if a supply chain network already exists with some capacities) needs to be done in a rigorous manner that captures the system-wide nature of the problem.

I've also recently made use of the Nash equilibrium concept in devising a model to capture the gains of possible mergers and acquisitions of firms which are competitors. That paper, "Formulation and Analysis of Horizontal Mergers Among Oligopolistic Firms with Insights into the Merger Paradox: A Supply Chain Network Perspective," is in press in the journal Computational Management Science.

The algorithms that can be applied to determine the optimal designs of supply chain networks, operating either in a centralized manner or in a competitive, decentralized manner, are also reported in the above papers.

I agree with Nash that it is imperative to carve out the necessary time to do research.

The Global Outsourcing of Electronic Recycling -- Profits at What Costs?

Yesterday's New York Times ran an article, which I shared with some of my collaborators and students, and one already responded with the following message: It breaks my heart whenever I hear this kind of news. A big powerful country should not take advantage of its position.

The article, "Lead from Old U.S. Batteries Sent to Mexico Raises Risk," focuses on the immense health costs and environmental damage from outsourcing of electronic waste recycling to Mexico, a practice that has grown over the past several years.

The article is filled with ironies.

According to the article: The rising flow of batteries is a result of strict new Environmental Protection Agency standards on lead pollution, which make domestic recycling more difficult and expensive, but do not prohibit companies from exporting the work and the danger to countries where standards are low and enforcement is lax.

Also, according to the article, "lead is gold" and the American car battery industry likes to boast that it has the highest recycling rate for any commodity — 97 percent of the lead is recycled — and most states have laws mandating that stores take back old batteries. Whether deposited at the store where they were purchased or with a local mechanic, used batteries are redirected to recycling plants, where the real goal is not environmental stewardship but extracting the precious lead that is the gold of a protean trading system where traceability is impossible.

By outsourcing electronic recycling to Mexico not only are domestic recyclers in the US being hurt economically, but Mexicans who reside near recycling plants that do not adhere to proper lead recovery standards are faced with extraordinary health risks and negative impacts. There are schools located close to such facilities and more and more children are being identified with high lead amounts in their blood. Lead leads to neurological disorders, delayed/stunted learning, and behavioral problems.

I have conducted research on environmental sustainability for about 15 years now and have written both papers and books on the subject with my doctoral students who continue to produce scholarship on this topic. One of my most heavily cited papers is a paper with my former doctoral student, Fuminori Toyasaki, who is now a Professor at York University in Canada.

The paper is: Reverse Supply Chain Management and Electronic Waste Recycling: A Multitiered Network Equilibrium Framework for E-Cycling, Transportation Research E 41: (2005) pp 1-28.

Several of my former doctoral students, who are now all professors at business schools, just had a co-authored paper accepted on closed loop supply chains that is also relevant to electronic recycling. The paper, The Closed-loop Supply Chain Network with Competition, Distribution Channel Investment, and Uncertainties, by Qiang Qiang, Ke Ke, Trisha Anderson, and June Dong, will appear in OMEGA -The International Journal of Management Science.

Another relevant article of ours, Environmental and Cost Synergy in Supply Chain Network Integration in Mergers and Acquisitions, co-authored with Trisha Woolley (nee Anderson) quantified synergies, including environmental ones, associated with mergers and acquisitions, a topic of clear relevance to this application domain.

Along with Dr. Toyasaki, Professor Tina Wakolbinger of the Vienna University of Economics and Business and I are now completing a study on outsourcing, regulation, and electronic recycling.

I lived in Mexico the summer between my graduation from high school and my freshman year at Brown University. That experience remains one of my most wondrous ones of living in another country.

Businesses must look at the entire product supply chain life cycle to ensure that it is socially responsible and environmentally sound. Outsourcing to countries with low environmental awareness and poor environmental standards monitoring is contrary to civilized business practices.

Besides, what is more important than a company's reputation!

For an informative and accessible presentation on e-cycling, delivered by my husband, who also provided the above collage of images, see: Our Campus - Our Planet at the University of Hartford Freshman Orientation (pdf)

Challenges in the Blood Industry - Opportunities for Supply Chain Redesign and Operations Research

The article by Matt Wald (who was a  classmate of mine at Brown University), "Blood Industry Hurt by Surplus" in today's The New York Times  was extremely well-researched and timely. It highlighted the new challenges faced by this critical healthcare industry and ended with the quote by Dr. Ferraris of the University of Kentucky: Every surgeon who's ever lived has seen somebody whose life was saved by a blood transfusion.

Changes in medical procedures with innovations have greatly reduced the need for transfusions in the past several years, with last year's demand being about 11 million units, with 15 million being needed five years ago. As a consequence, blood bank revenue is falling, down from a high of $5 billion in 2008 to only about $1.5 billion expected this year. The Red Cross supplies about 40% of the blood to hospitals and other healthcare facilities, such as surgical units. The cost of a unit of blood to hospitals ranges from $225-$240.

Nevertheless, even at reduced demand, the blood banks still require tens of thousands of donors a day. And, of course, and this cannot be emphasized enough, blood is a perishable product and it must undergo rigorous testing and quality control before utilized in patients.

We have written several articles on blood supply chains and also included the topic in our most recent book: "Network Against Time: Supply Chain Analytics for Perishable Products."

The most relevant paper of ours related to the issues brought forth by Matt Wald is: Supply Chain Network Design of a Sustainable Blood Banking System, Anna Nagurney and Amir H. Masoumi, in Sustainable Supply Chains: Models, Methods and Public Policy Implications, T. Boone, V. Jayaraman, and R. Ganeshan, Editors, Springer, London, England (2012) pp 49-72. Here we dealt with demand uncertainty and with penalties associates with shortages or surpluses (as is the real-world industry scenario now) with appropriate weights imposed. We also handled perishability of this life-saving product using a generalized network approach and also included costs associated with wastage.

Given that this industry has not been immune to mergers and acquisitions, The New York Times article  reports that America's Blood Centers, an association of blood banks,  has seen a drop in members from 87 five years ago to 68 today.  Also, at a recent meeting of blood industry experts, it was predicted that most of the blood collections agencies, because they have good relationships with donors would survive,  but that there would be mergers associated with such blood supply chain network activities as testing, stockpiling, and distribution. In the paper, A System-Optimization Perspective for Supply Chain Network Integration: The Horizontal Merger Case, that I wrote and that was published in Transportation Research E 45: (2009) pp 1-15, I proposed synergy measures associated with supply chain network integration under cost minimization, exactly what is needed in this industry. 

We had had a wonderful exchange with Dr. Walter Dzik of Harvard Medical School and Mass General Hospital, who is an expert on hematology and transfusion medicine since he was aware of our blood supply chain research. He told us that, although now Red Blood Cells (RBCs) are considered to have a shelf-life of 42 days, the goal is to have the blood  stored for not longer than 7 days. Interestingly, it has been found that older blood is also of lower quality. This would put additional pressures on the blood supply chains in terms of time-sensitivity.

Thanks to Matt Wald for such a great article from which many additional research ideas are germinating!

The Fragile Networks book is published

We are delighted to announce that the new book, Fragile Networks: Identifying Vulnerabilities and Synergies in an Uncertain World, has arrived. In the above photo we are holding the first of two copies that we, as authors, received. It's always a very exciting moment to see the book that has been worked on for a long, intensive period of time. The feeling is almost like holding a newborn child in one's arms. The official release date, according to the publisher, John Wiley & Sons, was June 2009, and the book is now out, right on schedule!

The book is a culmination of several years of research and provides a unified treatment of the vulnerabilities that exist in real-world network systems, along with tools to identify synergies for mergers and acquisitions. The book consists of three parts: Part I focuses on the network fundamentals, efficiency measurement, and vulnerability analysis. Part II discusses applications ranging from transportation networks and supply chains to electric power generation and distribution networks, the Internet, and even financial networks. It also examines the efficiency changes and the associated cost increments after network components are eliminated or partially damaged. Part III provides models and analyses for assessing mergers and acquisitions, network integration, and associated synergies.

According to the publisher, Fragile Networks, with its numerous network examples and real-world applications, is an excellent book for courses in network science, transportation science, operations management, and financial networks. It is also a valuable reference for researchers and practitioners in the areas of applied mathematics, computer science, operations research, management science, finance and economics, as well as industrial, systems, and civil engineering. Additional information about the book is available here.

My co-author, Dr. Patrick Qiang, just happened to be wearing his Isenberg School of Management t-shirt when our copies arrived on June 17, 2009. Colleagues have commented from as far away as Italy that the cover of the Fragile Networks book looks "stunning."

We thank the editors and the publication assistants at Wiley for all of their help during the writing and production of this book! Needless to say, given the deterioration in our critical infrastructure and the opportunities that now are being made possible because of President Obama's stimulus package, the book can assist in wise and appropriate investment decision-making for the nation's (and the world's) network systems.

A Letter from Al Gore and Trains for Warren Buffett

Teaching my transportation & logistics class is always an incredible experience! Today, I shared with my students the New York Times OpEd piece by Bob Herbert, What the Future May Hold, in which he writes: We're trundling along in the infrastructure equivalent of a jalopy, with bridges rotting and falling down, while other nations, our competitors in the global economy, are building efficient, high-speed, high-performance infrastructure platforms to power their 21st-century economies. Herbert then proceeds to imagine an America with rebuilt and healthy metropolitan areas, efficient rail and electric power networks, coupled with world-class public schools. He cites both a Brookings study and Rohatyn's recent book, Bold Endeavors, with the opening sentence: The nation is falling apart -- literally.

The themes of our Fragile Networks book focus not only on identifying the vulnerabilities of our infrastructure through the prism of transportation and logistical networks but also how to identify potential synergies through cooperation, through teaming and wise sharing of resources, and even through mergers and acquisitions. Patrick Qiang and I show in our book how to also compute a priori potential environmental synergies by capturing the underlying network structure of firms involved in mergers and/or acquisitions.

Today's New York Times also has an article on the environmental costs associated with air travel (which I also shared with my students) in which is stated that the average British commuter while commuting by rail, bus, or car in a full year would emit LESS than a single air traveler flying from London to Los Angeles! Research is now being conducted (and some terrific work is being done right here at UMass Amherst) to develop alternative fuels even using algae, that would drastically reduce the carbon imprint of air travel. The article emphasizes that the effect of carbon offsets at the present prices on emission-reduction is esssentially null (but travelers' guilt might be reduced and that is about it).

Mr. Dickenson, of the nonprofit Carbon Disclosure Project, says that he is now taking trains, flying less, and trying to conduct more meetings via phone or teleconference. The article ends with a comment about Warren Buffett's recent investment in the Burlington Northern Santa Fe Corporation. Indeed, what does it say when the world's most successful investor, Warren Buffett, is now purchasing more railroad companies?!

As Buffett has joked, This is all happening because my father didn't buy me a train as a kid. Buffett gets the importance of trains for the movement of goods in the United States of America and how environmental impacts can be reduced through mode switching from trucks to trains. By the way, as I told my students today, CSX has a very cool carbon emission calculator for determining the environmental costs associated with moving freight from different origins to destinations via rail.

In honor of Warren Buffett's vision, I have featured a photo above of some trains (toy, obviously) from my husband's collection.

I have also included a photo of the letter that I received from then Vice-President Al Gore commenting on my book, Sustainable Transportation Networks, and thanking me for it, when it was published. The letter is hanging in my Isenberg School of Management office for my students to see.

Supply Chain Risk, Mergers and Acquisitions, and Synergy

Risk in the context of supply chains may be associated with the production/procurement processes, the transportation/shipment of the goods, and/or the demand markets. Such supply chain risks are directly reflected in firms' financial performances, and priced in the financial market. For example, it has been estimated that the average stock price reaction to supply-demand mismatch announcements was approximately -6.8%. In addition, supply chain disruptions can cause firms' equity risks to increase by 13.50% on average after the disruption announcements.

So how should we measure risk with uncertainties today associated with exchange rates, production disruption frequencies, and/or material and energy prices?

We take a mean-variance (MV) approach to the measurement of risk, which dates to the work of the Nobel laureate Markowtiz (1952, 1959) and which even today, according to my finance colleagues, Schneeweis, Crowder, and Kazemi (2010), remains a fundamental approach to minimizing volatility. The MV approach has been increasingly used in the supply chain management literature to study decision-making under risk and uncertainty.

In a recent study of ours, "Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integration," Dr. Zugang Liu and I developed supply chain network models that allow decision-makers to minimize both total expected costs and risks associated with their supply chain network activities both prior to and post a merger or acquisition. In addition, we developed three synergy metrics to assess a potential merger or acquisition (M&A) a priori. These measures capture, respectively, the expected total cost synergy, the absolute risk synergy, and the relative risk synergy.

We focused on supply chain network models since it has been estimated that 80% of a firm's expenses is due to operations.

Since we can expect additional M&As in emerging countries as well as in the developed ones, especially in the healthcare, high tech, and energy sectors, such metrics can be valuable.

Our study has been accepted in the Journal of Financial Decision Making and we will be presenting it next Friday at the First Northeast Regional INFORMS Conference at UMass Amherst in an invited session on Risk Management: Interfaces Between Finance and Operations.

The numerical simulations in our study reveal interesting managerial insights for executives who are faced with M&A decisions. Our first set of examples showed that if the expected total costs and the risks of the merger are negligible, both the total cost and the total risk would be reduced through the merger. In addition, the risk reduction achieved through the merger was more prominent when the uncertainty of link costs was higher.

Our second set of examples showed that the cost and the risk of merger could have a significant impact on the total cost and the total risk of the post-merger firm, and should be carefully evaluated. Our examples also demonstrated that whether a merger makes sense economically may depend on the priority concerns of the decision-makers, and on the measures used to evaluate the gains. For instance, a merger that could not lower the expected total cost might still be able to reduce the total risk, and, hence, be considered beneficial to the firms' stakeholders.

Sustainable Supply Chains to Save Our Planet Through Operations Research

This has not been a good day with President Trump announcing, as had been expected (but we were hoping otherwise), that the US is quitting the Paris Climate Pact. This puts US at odds with over 190 nations that had signed this pact. 

Frankly, I feel physically repulsed and ill by his decision, which is contrary to that of not only many world leaders but also top executives and even some of his very own advisors. I guess for some, breathing clean air and having their children breathe clean air, too; having clean water, and a diversity of species, and not dealing with more  turbulent weather, uncertainty, and possible food insecurity due to climate change, does not matter. This is so ironic, since the green economy can actually be a very successful economy and can generate jobs and is doing so (as the Chinese have even started to figure out). The costs of not slowing down climate change will be immense and are already upon us.

I do have some hope, however, in leaders from certain industries in the US as well as on the state levels (including California, New York, and Massachusetts) that progress will, nevertheless, be made to reduce pollution and emissions and to combat climate change.

In addition, I have hope because of students and this generation as well as a community of academics and practitioners that has a passion for sustainability and saving our planet.

Our most recent work on supply chains and sustainability, we will be presenting at the MSOM meeting this month. There we will present the paper,  A Competitive Multiperiod Supply Chain Network Model with Freight Carriers and Green Technology Investment Option, which was co-authored by Professors Sara Saberi and Joe Sarkis of WPI, Professor Jose M. Cruz of UConn, and me. In this work, we construct a model with multiple manufacturers, retailers, and freight carriers who maximize the net present value (NPV) of their investments in ecologically friendly technology. Future production, inventory, transaction, and transportation costs savings are used to help fund investments. The environmental impact of production, inventory, transportation, and consumption of products in the supply chain network are all integrated. The tradeoff between the initial technology investment and its ecological footprint effect are considered for the supply chain planning period. This is a large-scale multiperiod game theory problem for  a supply chain of multiple echelons, which we provide theoretical results for an extensive numerical results with policy implications.

We have also published on design of sustainable supply chains:  Design of Sustainable Supply Chains for Sustainable Cities, Anna Nagurney,   Environment & Planning B 42(1): (2015) pp 40-57 and Sustainable Supply Chain Network Design: A Multicriteria Perspective, Anna Nagurney and Ladimer S. Nagurney, International Journal of Sustainable Engineering 3: (2010) pp 189-197.

Also, topics related to transportation have been a theme in our sustainability research:   Environmental Impact Assessment of Transportation Networks with Degradable Links in an Era of Climate Change, Anna Nagurney, Qiang Qiang, and Ladimer Nagurney, International Journal of Sustainable Transportation 4: (2010) pp 154-171 and  Environmental and Cost Synergy in Supply Chain Network Integration in Mergers and Acquisitions, Anna Nagurney and Trisha Woolley, in Sustainable Energy and Transportation Systems, Proceedings of the 19th International Conference on Multiple Criteria Decision Making, Lecture Notes in Economics and Mathematical Systems, M. Ehrgott, B. Naujoks, T. Stewart, and J. Wallenius, Editors, Springer, Berlin, Germany (2010) pp 51-78.

Electronic recycling has also been a theme of several papers of ours, including:   When and for Whom would E-waste be a Treasure Trove? Insights from a Network Equilibrium Model of W-waste Flows, Tina Wakolbinger, Fuminori Toyasaki, Thomas Nowak, and Anna Nagurney, International Journal of Production Economics 154: (2014) pp 263–273.

Food, given the costs associated with waste, has obsessed us in our research, with an example being:  Competitive Food Supply Chain Networks with Application to Fresh Produce, Min Yu and Anna Nagurney, European Journal of Operational Research 224(2): (2013) pp 273-282.

Other sustainable supply chain research of ours has included work on fashion supply chains: Fashion Supply Chain Network Competition with Ecolabelling, Anna Nagurney, Min Yu, and Jonas Floden, in Sustainable Fashion Supply Chain Management: From Sourcing to Retailing, T.-M. Choi and T.C.E. Cheng, Editors, Springer (2015) pp 61-84 and Sustainable Fashion Supply Chain Management Under Oligopolistic Competition and Brand Differentiation, Anna Nagurney and Min Yu, International Journal of Production Economics, Special Section on Green Manufacturing and Distribution in the Fashion and Apparel Industries 135: (2012) pp 532-540.

Finally, in addition to several books that I have written on sustainability, with examples highlighted here,  we have also written on sustainability issues in healthcare in the papers: 
Securing the Sustainability of Global Medical Nuclear Supply Chains Through Economic Cost Recovery, Risk Management, and Optimization, Anna Nagurney, Ladimer S. Nagurney, and Dong Li, International Journal of Sustainable Transportation 9(6): (2015) pp 405-418 and Supply Chain Network Design of a Sustainable Blood Banking System, Anna Nagurney and Amir H. Masoumi, in Sustainable Supply Chains: Models, Methods and Public Policy Implications, T. Boone, V. Jayaraman, and R. Ganeshan, Editors, Springer, London, England (2012) pp 49-72.

We have also published on policies and energy and the environment with an example of that research being:  Spatially Differentiated Trade of Permits for Multipollutant Electric Power Supply Chains, Trisha Woolley, Anna Nagurney, and John Stranlund, in Optimization in the Energy Industry, J. Kallrath, P. Pardalos, S. Rebennack, and M. Scheidt, Editors, Springer, Berlin, Germany (2009) pp 277-296.

Sustainability of our supply chains has never been more essential.

New Book -- Multiple Criteria Decision Making for Sustainable Energy and Transportation Systems

The new edited volume, Multiple Criteria Decision Making for Sustainable Energy and Transportation Systems, is now available. The book, edited by the international group of scholars consisting of Professors Ehrgott, Naujoks, Stewart, and Wallenius, of, respectively, New Zealand, Germany, South Africa, and Finland, is a collection of papers presented at the Multiple Criteria Decision Making (MCDM) for Sustainable Energy and Transportation Systems Conference that took place January 7-12, 2008, at the University of Auckland in New Zealand. 137 delegates from 39 countries on six continents took part in this wonderful conference.

I had the honor of being a plenary speaker, along with Professor Jim Petrie of the University of Sydney and the University of Cape Town. My plenary talk was titled, Multicriteria Decision-Making Analysis for the Environment: Sustainability and Vulnerability of Critical Infrastructure Systems from Transportation Networks to Electric Power Supply Chains.

This edited volume is a very timely collection of MCDM models and methodologies applied to sustainable energy and transportation systems. Trisha Woolley and I contributed the paper, Environmental and Cost Synergy in Supply Chain Network Integration in Mergers and Acquisitions, to it.

We congratulate the editors and the authors as well as all the conference participants for an excellent scientific conference, coupled with glorious memories. I have included several photos that I took while at this conference in Auckland, New Zealand, which took place exactly two years ago!

Meeting Great People in Travels to and from Berkeley

As it is often said, the journey is as important as reaching your destination.

When the email arrived from United the night before I was to fly to San Francisco, after my daughter had me watch the movie, The Terminal, with Tom Hanks, I suspected the worst, but I was just being rerouted through DC rather than flying through Chicago. Given the "computer glitch" of last week which resulted in 36 flight cancellations and some negative press plus inconvenience to many travelers, most likely United was still catching up.

When I asked and received aisle bulk head (and exit row) seats and great seat-mates on both legs of my journey (just lucked out) I was more than pleased. On the flight to Dulles from Bradley (Hartford/Springfield) I sat next to a Principal Scientist from a top pharmaceutical company who had gone to URI, Yale, and who had had a postdoc at Dana Farber. He researches anti-viral drugs, and his company provides drugs for free to Africa. The conversation never stopped and the flight was much too short so we exchanged business cards. We even discussed mergers and acquisitions in this industry and how, in his case, luckily, the acquiring company knew to keep the scientific talent and to reward accordingly.

On the flight to San Francisco, I sat next to a college student who had gone for a year to a boarding school in a very isolated wooded location and he was off to a series of techno rave concerts in Las Vegas. His curiosity, love of languages, and travel experiences were fun and refreshing -- we bonded on discussions of what makes Italy so special!

After about 12 hours since leaving my home in Amherst, I arrived in the San Francisco airport only to be told by a taxi driver that the traffic to Berkeley was so bad that he would not take me there (the only other similar experience I had ever had was in Athens, Greece, when a taxi driver refused to take me because I did not have the exact change, despite my pleas to even pay him more).

At this point, I was rather tired, but I figured, why not try another mode of transportation, and since I had never ridden BART (Bay Area Rapid Transit) but had heard and read a lot about it, I decided to go that route. I received a nice map at the information desk (but it was missing the crucial link of how to actually to get to the BART station). As I was getting my bearings and trying to figure out in which direction I should march with my luggage I noticed a female with tons of luggage so I just asked her whether she might be a grad student at UC Berkeley. Not only was she a grad student there (working on getting her PhD in Math) and had been traveling for over 24 hours, including taking a 12 hour bus ride from her village in Brazil to the Sao Paolo airport, but her Master's degree advisor in Sao Paolo had gotten his PhD in Applied Math from Brown University and his supervisor (Professor Constantine Dafermos) was the husband of my doctoral dissertation advisor (Professor Stella Dafermos)! We had a wonderful conversation during our journey on BART, despite being in an un-air-conditioned car, during the commuting period. She is being fully supported on a Fulbright scholarship.

The purpose of my travel to UC Berkeley was to attend a consortium meeting of the I3P (Institute for Information Protection). I will write more in another blogpost.

As for my journey back from Berkeley, I decided to take a taxi/limo and, would you believe that we stopped in downtown Berkeley where the driver took another passenger (without warning me) and this was so that we could go faster using the car pool lane! Our "passenger," who was riding for free, is an antitrust lawyer who had gone to Smith College and Harvard Law School, and she commutes this way regularly. We dropped her off in downtown San Fran, and then my driver sped off to the airport. She had just finished work on a highly visible antitrust case, and we even talked about digital piracy.

Again, at the San Fran airport, I was called out by United and rewarded with an exit row seat (thank you, United) (perhaps it does not hurt that my college room-mate at Brown is a top-level United stewardess and being a frequent flier has its rewards). My flight from San Fran to Chicago O'Hare was terrific and when I arrived at my gate at O'Hare there was police presence, so we speculated as to whether someone from the FBI's ten most wanted list was being transported through O'Hare. (No luck, but we had our cell-phones and cameras ready and we were probably a day or two too early for this, given the news).

At O'Hare, I met a finance and IT professional who was standing in front of me who began talking about multicriteria optimization -- nothing like a discussion about operations research to make for a fun time. He had gotten his degrees from IIT and UConn. He was puzzled as to why United would not transfer his first class ticket on the 9PM flight to an economy class seat on the 7:20 o'clock flight, given that there was a seat available, and he flies every week! Eventually, he got on my flight with a big smile (the 9PM flight had been delayed for 90 minutes). We arrived at Bradley on time.

Very Exciting Talks in Our UMass Amherst INFORMS Speaker Series this Spring from Knowledge Networks to Machine Learning, and Smart Cities and Analytics

One of the favorite aspects of being the Faculty Advisor to the UMass Amherst INFORMS Student Chapter (and since I have had this role since 2004, I must really enjoy it) is helping the students organize the Speaker Series each semester.  There is a lot of planning that goes into this, as well as some serendipity. It is always wonderful to have speakers even reach out to us because they want to speak in our Series. Hosting speakers requires excellent logistics, attention to details, and warm hospitality because one wants to create a pleasant experience for all.

This semester has been extra exciting since we are now holding the talks in our new $62million Business Innovation Hub of the Isenberg School, which was opened "for business" in late January 2019.

Thus far, this semester, we have had the pleasure of hosting two speakers, Professor Aurora Liu of the Isenberg School, who spoke on February 1, and Professor Peter Haas of the UMass Amherst's College of Information and Computer Sciences, who spoke this past Friday.

The posters for their fabulous talks are below.

 

Next month we will be hosting two speakers, which we are also very excited about: Dr. Jurij Paraszczak and Dr. Thiago Serra. The posters announcing their talks are below.

Interestingly, all of our speakers this semester have had industrial experience - Dr. Liu was a management consultant focusing on mergers and acquisitions in pharma earlier in her career; Dr. Haas spent over 30 years at IBM and is both an INFORMS Fellow and an ACM Fellow (we believe he is the only individual to have earned this two major accolades). Dr. Jurij Paraszczak, is also a long-time IBMer, and Dr. Thiago Serra is now at the Mitsubishi Electric Research Labs in Cambridge, MA, before he joins the faculty of Bucknell University in the Fall 2019!

Both speakers, to-date, have emphasized networks and graphs (near and dear to my heart) and the solution of very large-scale problems on Big Data, including dynamic Twitter data.  They have attracted audiences from the Isenberg School of Engineering, the UMass Amherst College of Engineering, as well as the College of Computer and Information Sciences. The talks have demonstrated the need for the integration of a variety of methodological tools (helpful, if your team and co-authors have such skill sets) from probability and statistics, to graph analytics, optimization, network analysis and centrality measures, algorithm development, including for machine learning, and even stochastic dynamical systems (loved that part, too)!

Many thanks to the Chapter President, Katerina Deliali, for expertly constructing the above posters and introducing the speakers. Also, thanks to our amazing Chapter Webmaster, Haris Sipetas, who so promptly posts writeups and photos after the speakers' visits.

Plus, please visit the Chapter's Youtube channel, where interviews with our great speakers are posted - more coming soon!

And I can't resist also sharing with you a few photos from our first two talks!

Below are photos from Professor Aurora's talk and lunch afterwards.

 And below are a few photos from Professor Haas's presentation and lunch afterwards.

Of course, as is our tradition, we always share desserts!

My Article on Blood Supply Chain Challenges for The Conversation

In mid December I set out to write an article for The Conversation, which is one of my favorite sites. I was lucky to work with a fabulous Editor, Lynne Anderson.

The article, Uncertainty in blood supply chains creating challenges for industry, is a distillation of some of the research that we have done on blood supply chains at the Virtual Center for Supernetworks at the Isenberg School, coupled with updates on the latest economic issues facing the industry. I argue in the article, for example, that supply chain analytics can help in quantifying any synergies associated with mergers and acquisitions in this industry and help in better matching supply with demand.

My article was the top story on Monday in The Conversation and was featured on its homepage. It has been picked up by several news outlets, including the San Francisco Chronicle. The article is characterized under Health and Medicine.

I never, ever thought that something I wrote would end up on The Conversation's homepage next to and on the same page as a photo of President-elect Trump but it did so on Monday.

This article has attracted good, high quality attention and I have had the pleasure of getting messages from professionals from various countries highlighting even how blood supply chains are managed there and what kinds of incentives are given to attract donors. Given that during the holiday season and the winter there may be fewer donations, this is quite relevant, although the industry, overall, now has a much lower demand for blood in the US than only a decade ago and one of the reasons is that fewer pints are transfused in many surgeries and new surgical techniques result in less loss of blood in patients.

 I very much enjoyed working with the Editor and in getting the article polished and published and plan on writing other articles for The Conversation in the future.

It was also cool to see the article make the UMass Amherst homepage (and, appropriately, right next to an announcement of an event for a new Master's in Business and Analytics at the Isenberg School!

As operations and analytics supply chain researchers it is important to get the news on the research out to the public. This is one reason that I also blog!

Many thanks to Lynne Anderson of The Conversation for helping us to get the news on our research out!

Internet of Things, Network Economics, and Operations Research

Next week, while I will be speaking on cybersecurity at the Heinz College at Carnegie Mellon University, my collaborator on our NSF ChoiceNet project, and now NSF EAGER project, Associate Dean in the UMass Amherst College of Engineering Professor Tilman Wolf, will be flying to Berlin, Germany, to present our invited paper at the 1st IEEE International Conference on the Internet of Things Design and Implementation.

The title of our paper is below and it will be published in the Proceedings of the First IEEE International Conference on Internet-of-Things Design and Implementation (IoTDI), Berlin, Germany, April 2016.

The abstract is as follows: Many solutions to important societal problems relating to the environment, health care, transportation, etc. seek to utilize the promises of the Internet of Things (IoT), where sensing, computation, and actuation merge the physical world with the computational world. To date, many such solutions have focused on a single problem domain and require dedicated sensor and actuator infrastructure. This vertical integration makes the development of innovative, novel solutions costly and difficult to deploy. An architectural approach to addressing this challenge is to enable horizontal integration, where sensors and actuators from different applications can interconnect with any computational IoT application. In order to isolate complexities and to support heterogeneous systems and software, it is necessary to provide clear abstractions. We present such abstractions in the form of a layered protocol architecture that describes the necessary interfaces. Beyond technical challenges for horizontal integration, this paper also addresses network economic considerations since the various entities owning and operating sensors and actuators need suitable economic motivation to participate in such an approach. We believe that this work provides a conceptual foundation for future, scalable IoT solutions.

In quantifying the synergy associated with horizontal integration, we have assumed that system optimization, in the form of total cost minimization, is the desired criterion. This reflects centralized decision-making. Earlier applications of synergy measures that I have done research on were in the context  of supply chain networks and included a means of evaluating mergers and acquisitions.

Since the costs on the links prior to horizontal integration in the Internet of Things (IoT) and post correspond to generalized costs, this gives us the flexibility to include risk measures, emission measures (if there are environmental concerns), and other relevant criteria, and, with appropriate extensions, even time.

Below are the networks corresponding to two applications prior to integration in our IoT framework that includes ideas from network economics and operations research.

 Also, we may have different degrees of horizontal integration:

The synergy measure is calculated as follows:

Interestingly, in supply chain network applications, thus far, the network topologies (see the references in a prior blogpost) have been less expansive than in the IoT context revealed here. Also, the added links in the horizontal integration cases corresponded to transportation activities and not data transfer activities as in the above network figures.

Wishing everyone at the IEEE conference in Berlin, Germany a very rewarding time!

Supply Chain Network Theory and Operations Management

When I received an invitation to contribute to a PhD course being offered this term at the School of Business, Economics and Law at the University of Gothenburg in Sweden, I was intrigued.

The title of the course is: Theoretical Perspectives in Contemporary Business Administration Research.

Of course, I accepted, and look forward to being back soon as a Visiting Professor of Operations Management at the University of Gothenburg in the gorgeous city that has become my second home.

For the past three weeks or so, I have been reading a lot of material on theory in operations management and in supply chain management and selected the title: "Operations Management and Supply Chain Network Theory," for my contribution to the course.

I was also asked to prepare a reading list for the doctoral students, which I have done and which includes both a recent invited handbook chapter that I wrote on "Supply Chains and Transportation Networks" and a tutorial that I co-authored with Dr.  Qiang "Patrick" Qiang  that was published in the International Transactions in Operational Research, which has been been available for download for free.

In addition, in order to emphasize how the theory can be applied in practice, I will be using the article, A. Nagurney and M. Yu (2012),  ``Sustainable Fashion Supply Chain Management Under Oligopolistic Competition and Brand Differentiation," International Journal of Production Economics 135, Special Issue on  Green Manufacturing and Distribution in the Fashion and Apparel Industries, pp 532-540.

The syllabus for the course is now available.

What a wonderful way in which to begin my sabbatical -- by teaching on a topic that I care deeply about in a country that I love -- Sweden.

In my intensive lectures I will be giving the students an introduction to operations management, since they come with different backgrounds and represent different specialties.  I will overview networks of relevance to supply chains and will discuss supply chain network theory and applications, with our case study on sustainability and fashion, which is quite appropriate since I will be teaching in the land of H&M! I also plan on covering  other issues that have been explored using supply chain network theory from mergers and acquisitions to supply chain network performance and vulnerability analysis and even the role of supply chains in disaster relief.