Wednesday, September 28, 2011

Sustainability of Supply Chain Networks

Supply chain networks have emerged as the backbones of economic activities in the modern world. In their most fundamental realization, supply chains consist of suppliers and manufacturers, distributors, retailers, and consumers at the demand markets. Today, supply chains may span thousands of miles, involve numerous interacting decision-makers, and be underpinned by multimodal transportation and telecommunication networks. Their importance to the timely and efficient delivery of products as varied as food, energy, including electric power, pharmaceuticals, clothing, computer hardware, and even toys, etc., has fueled an immense interest in their analysis on the part of both researchers and practitioners. When supply chain disruptions occur, whether due to natural disasters, human error, attacks, or even market failure, the ramifications can propagate and impact the health and well-being of the citizenry.

Today's supply chains may be characterized by decentralized decision-making associated with the different economic agents or by centralized decision-making. In some instances the underlying behavior may be that of competition, whereas, in other cases, cooperation is essential. Supply chains are, in fact, Complex Network Systems, and, hence, any formalism that seeks to model supply chains and to provide quantifiable insights and measures must be a system-wide one and network-based. Indeed, such crucial issues as the stability and resiliency of supply chains, as well as their adaptability and responsiveness to events in a global environment of increasing risk and uncertainty, can only be rigorously examined from the view of supply chains as network systems.

Supply chains share many of the same characteristics as other network systems; including a large-scale nature and complexity of network topology; congestion, which leads to nonlinearities; alternative behavior of users of the networks, which may lead to paradoxical phenomena (recall the well-known Braess paradox in which the addition of a new road may increase the travel time for all); possibly conflicting criteria associated with optimization (the minimization of time for delivery, for example, may result in higher emissions); interactions among the underlying networks themselves, such as the Internet with electric power networks, financial networks, and transportation and logistical networks, and the growing recognition of their fragility and vulnerability. Moreover, policies surrounding supply chain networks today may have major impacts not only economically, but also socially, politically, and security-wise.

On the other hand, increases in demand for a product, entirely new demand markets, decreases in transaction costs, new suppliers, and even new modes of transaction, and new engineering technologies may provide new opportunities for profit maximization for manufacturers, distributors, as well as retailers, and new linkages that were not previously possible.

The integration of an environmental perspective into a business context can be traced back to the 1990s, and is linked to the book, Our Common Future, also referred to as the Brundtland Report. Indeed, it has been argued that the critical next step from examinations of operations and the environment is the study of sustainability and supply chains with environmental performance being a source of reputational, competitive, and financial advantage. According to a 2007 survey sponsored by DuPont and Mohawk Industries, despite the weak economy, 65% of consumers are willing to pay an additional 8.3% for products made with renewable resources. A firm's success has been tied, in part, to the strength of its ability to coordinate and integrate activities along the entire supply chain, and to effectively implement multicriteria decision-making tools to aid in their strategic decisions.

Our approach to supply chain network sustainability incorporates several facets from the enhanced operations management of supply chains to their design and redesign. In addition, we have modeled the incorporation of policies ranging from carbon taxes to tradable pollution permits in electric power supply chain networks as well as in transportation networks. Our emphasis is on the development of transparent computable frameworks that enable decision makers and policy makers to investigate how changes in policies, which can include the addition or removal of supply chain nodes and links, and the inclusion of lower-emitting production and storage technologies, will impact the product flows, as well as the product prices, and emissions generated.

Moreover, our perspective on sustainability also captures waste management issues from electronic recycling networks to health care supply chains, such as blood supply chains, medical nuclear supply chains, and even pharmaceutical ones. An essential aspect of our research is the incorporation of economics, behavioral, engineering, and management principles and components in order to capture the complexity and realities of today's supply chains.

Below we highlight three application domains in which our supply chain research has attempted to address major challenges.

1. Electric power is essential to the functioning of our modern economy; however, electricity generation is the dominant industrial source of air pollution emissions in the US today. Fossil fuel-based power plants are responsible for 67% of the nations sulfur dioxide emissions, 23% of the nitrogen oxide emissions, and 40% of man-made carbon dioxide emissions. Electricity worldwide is produced mainly by using coal, which is responsible for 40% of the carbon dioxide pollution (and, hence, global warming). Coal is expected to maintain about 36% share of the electricity generation market through 2020.

In Liu and Nagurney (2009), we developed an electric power supply chain network model with fuel supply markets that captures both the economic network transactions in energy supply markets and the physical network transmission constraints in the electric power network. The model was applied to the New England electric power supply chain, which consists of 6 states, 5 fuel types, 82 power generators, with a total of 573 generating units, and 10 demand market regions. The empirical case study revealed that the regional electric power prices simulated by the model matched the actual electricity prices in New England very closely. We also computed the electric power prices and the spark spread, an important measure of the power plant profitability, when the natural gas and oil price were varied. The empirical examples demonstrated that, in the case of New England, the market/grid-level fuel competition has become the principal factor that affects the influence of the oil price on the natural gas price. We also applied the model to investigate how changes in the demand for electricity influence the electric power and the fuel markets from a regional perspective. The theoretical framework can be applied to other regions and multiple electricity markets under deregulation.

2. In Nagurney and Nagurney (2011), we constructed a model for the design medical nuclear supply chains, which addresses the perishability of the radioisotpes. For example, each day, 41,000 nuclear medical procedures are performed in the United States using Technetium-99m, a radioisotope obtained from the decay of Molybdenum-99. The Molybdenum is produced by irradiating primarily Highly Enriched Uranium targets in research reactors. For over two decades, no irradiation and subsequent Molybdenum processing has occurred in the United States. All of the Molybdenum necessary for our nuclear medical diagnostic procedures, which include diagnostics for two of the greatest killers, cancer and cardiac problems, comes from foreign sources. Since Molybdenum-99 has a half-life of only 66.7 hours, continuous production is needed to provide the supply for the medical procedures. Thus, the US is critically vulnerable to Molybdenum supply chain disruptions that could significantly affect our health care security and is totally dependent on foreign suppliers.
3. Another industry that our research has focused on is the pharmaceutical industry (see Masoumi, Yu, and Nagurney (2011)). Ironically, whereas some drugs may be unsold and unused and/or past their expiration dates, the number of drugs that were reported in short supply in the US in the first half of 2011 has risen almost to an all-time record 0f 211 as compared to only 58 in short supply in 2004. According to the Food and Drug Administration (FDA) and American Hospital Association, all US hospitals have reported shortages of drugs used in a wide range of treatments and procedures including those for cancer, surgery, anesthesia, and intravenous feedings. In the US, 82% of the hospitals have reported delayed care for patients as a consequence of such shortages including the postponement of surgeries and treatments and the use of less effective or costlier substitutes. In addition to increasing generic competition, the lower reimbursements by government health programs have worsened the situation.

Apart from the cost management pressures and challenges, the safety of imported / outsourced products is another major issue for pharmaceutical companies. In fact, the emergence of counterfeit products has resulted in major reforms in the relationships among various tiers in pharmaceutical supply chains. Interestingly, more than 80% of the ingredients of drugs sold in the US are made overseas, mostly in remote facilities located in China and India that are rarely – if not ever – visited by government inspectors. Supply chains of generic drugs, which account for 75% of the prescription medicines sold in the US, are, typically, more susceptible to falsification with the supply chains of some of the over-the-counter products, such as vitamins or aspirins, also vulnerable to adulteration. Similarly, the amount of counterfeit drugs in the European pharmaceutical supply chains has considerably increased.

Another pressure faced by pharmaceutical firms is the environmental impact of their medical waste, which includes the expired or excess medicine by a hospital or pharmacy and the inappropriate disposal on the retailer/consumer end. Abundant amounts of unused or expired drugs have been found in American drinking water supplies due to improper disposal of unused or expired pharmaceuticals in domestic trash or in the waste water.

Our computable pharmaceutical supply chain network model includes both brand differentiation and perishability of pharmaceuticals whether through loss of quality over time, or even pilferage. Ongoing research includes the assessment of the quantification of the impact of product shortages and the resolution of such shortages.

With rigorous operations research models we can enhance decision making and policy making to enable the better utilization of our resources for supply chains now and in the future.

Further Readings

Cruz, J. M., 2008. Dynamics of Supply Chain Networks with Corporate Social Responsibility Through Integrated Environmental Decision-making. European Journal of Operational Research 184: pp 1005-1031.

Executive Office of Energy and Environmental Affairs and the Adaptation Advisory Committee, 2011. Massachusetts Climate Change Adaptation Report.

Ganeshan, R., T. Boone, and V. Jayaraman, 2011. Sustainable Supply Chains: Models, Methods and Policy. Springer, New York, in press.

Liu, Z., and A. Nagurney, 2009. An Integrated Electric Power Supply Chain and Fuel Market Network Framework: Theoretical Modeling with Empirical Analysis for New England. Naval Research Logistics 56: pp 600-624.

Masoumi, A. H., M. Yu, and A. Nagurney, 2011. A Supply Chain Generalized Network Oligopoly Model for Pharmaceuticals Under Brand Differentiation and Perishability.

Nagurney, A., 2006. Supply Chain Network Economics: Dynamics of Prices, Flows, and Profits. Edward Elgar Publishing, Cheltenham, England.

Nagurney, A., and K. K. Dhanda, 2000. Marketable Pollution Permits in Oligopolistic Markets with Transaction Costs. Operations Research 43: pp 424-435.

Nagurney, A., Z. Liu, and T. Woolley, 2006. Optimal Endogenous Carbon Taxes for Electric Power Supply Chains with Power Plants. Mathematical and Computer Modelling 44: pp 899-916.

Nagurney, A., A. H. Masoumi, and M. Yu, 2011. Supply Chain Network Operations Management of a Blood Banking System with Cost and Risk Minimization. Computational Management Science, in press.

Nagurney, A., and L. S. Nagurney, 2010. Sustainable Supply Chain Network Design: A Multicriteria Perspective. International Journal of Sustainable Engineering 3: pp 189-197.

Nagurney, A., and L. S. Nagurney, 2011. Medical Nuclear Supply Chain Design: A Tractable Network Model and Computational Approach.

Nagurney, A., and Q. Qiang, 2009. Fragile Networks: Identifying Vulnerabilities and Synergies in an Uncertain World. John Wiley & Sons, Hoboken, New Jersey.

Nagurney, A., and M. Yu (2011), Sustainable Fashion Supply Chain Management Under Oligopolistic Competition and Brand Differentiation, International Journal of Production Economics, Special Issue on Green Manufacturing and Distribution in the Fashion and Apparel Industries, in press.

Nagurney, A., M. Yu, and Q. Qiang, Supply Chain Network Design for Critical Needs with Outsourcing. Papers in Regional Science 90: (2011) pp 123-142.

Qiang, Q., A. Nagurney, and J. Dong, 2009. Modeling of Supply Chain Risk Under Disruptions with Performance Measurement and Robustness Analysis. In Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers, T. Wu and J. Blackhurst, Editors, Springer, Berlin, Germany, pp 91-111.