Friday, June 10, 2011

Supply Chain Networks and Quick-Response Production under Uncertainty

In the paper, Supply Chain Outsourcing Under Exchange Rate Risk and Competition, Zugang Liu and Anna Nagurney, Omega 39: (2011) pp 539-549, we explored supply chain outsourcing decision-making under exchange rate uncertainty and competition. The paper recently made the Top 25 Hottest Articles in Decision Sciences (at number 5).

We then became interested in supply chain flexibility and associated decision-making in quick-response industries, such as fast fashion, toys, consumer electronics and personal consumers, as well as industries associated with merchandise for holidays and special events.

The result is a network modeling and computational framework that integrates stochastic programming and variational inequalities for supply chain decision-making with global outsourcing and quick-response production under demand and cost uncertainty. Our model considers multiple off-shore suppliers, multiple manufacturers, and multiple demand markets. The complete study is reported in our paper,
Supply Chain Networks with Global Outsourcing and Quick-Response Production Under Demand and Cost Uncertainty, Zugang Liu and Anna Nagurney.

Specifically, using variational inequality theory, we formulated the governing equilibrium conditions of the competing decision-makers (the manufacturers) who are faced with two-stage stochastic programming problems but who also have to cooperate with the other decision-makers (the off-shore suppliers). Our theoretical and analytical results shed light on the value of outsourcing from novel real option perspectives.

Our results reveal important managerial insights for supply chain decision-makers who are faced with decisions regarding outsourcing and quick-response production under demand and cost uncertainty:

1). For manufacturers who do not have quick-response production capability, rising demand uncertainty will increase the value of outsourcing. However, for risk-neutral decision-makers who have quick-response production capability, rising cost uncertainty will reduce the value of outsourcing.

2). Manufacturers with quick-response production can expect higher average profit and lower risk than their competitors who do not have such capability. However, these manufacturers may not have a higher chance to beat their competitors in terms of profit when the demand uncertainty is low. Moreover, they may have lower profits if the demand turns out to be at normal levels.

3). The prevalence of quick-response production will reduce the benefit.

4). Manufacturers without quick-response capability should understand that they can still be indirectly and negatively affected by the cost variations of quick-response production through market competition.