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!

FireEye Acquires Mandiant and Why Cybersecurity Matters

My most recent post on this blog was on networks in mergers and acquisitions and shortly thereafter there was a very interesting acquisition announcement in the cybersecurity space: FireEye acquired Mandiant Corp. This is considered one of the biggest recent security deals as reported by The New York Times, which noted that The combination of the two companies — one that detects attacks in a novel way (FireEye), another that responds to attacks (Mandiant) — comes as corporate America has become wary of relying on the federal government to monitor the Internet and warn of incoming attacks. And according to The Wall Street Journal: Mandiant and FireEye market themselves to businesses, not consumers, and focus on blocking highly skilled hackers who can evade traditional antivirus software. But they have unique specialties. Mandiant has become famous for its investigators that act like a cyber-SWAT team for companies that have been hacked. They focus on figuring out how hackers got in and removing them from corporate systems.

Mandiant is named after its founder, Kevin Mandia, who also served as the company's CEO prior to its acquisition. According to the company's website: Mandia was profiled on the cover of Fortune magazine and recognized by Foreign Policy magazine as one of the 100 leading global thinkers of 2013. The New York Times a few months ago had major coverage of the expertise of Mandiant which was fascinating.

Mr. Mandia went to Lafayette College, in Easton, PA, which is also my husband's undergraduate alma mater. From  an article on Lafayette College's website, I learned that Kevin Mandia was a computer science graduate, and also holds a Master’s in forensic science from George Washington University. He is co-author of Incident Response: Investigating Computer Crime and articles for The International Journal of Cyber Crime.

I became interested in cybersecurity and cyber crime in my research on modeling the Internet and was involved in an Advanced Cyber Security  Center (ACSC) project, Prime the Pump, entitled: Cybersecurity Risk Analysis and Investment Optimization  with colleagues in Operations & Information Management and in Finance at the Isenberg School of Management, and in Electrical and Computer Engineering, at UMass Amherst, along with one of the university's chief information officers.

I presented some of our funded research at the INFORMS Annual Meeting in Minneapolis last October and posted some information prior to the conference. Our session, organized by Professor Alla Kammerdiner,  was entitled: Big Data Analytics for Cybersecurity, and it was videotaped. INFORMS recently posted the video of my presentation: Network Economics of Cyber Crime with Applications to Financial Service Organizations  on INFORMS' great youtube channel and it can be accessed directly below.

We hope to extend this and related work through the auspices of ACSC.

Also,  Alla's presentation was on Network Inference for Monitoring Cyber-physical Systems (CPS) and it can be viewed below.

Alla ran the Boston Marathon last April 15 and is an elite runner. She heard about the bombings after she completed the marathon route and while on the Green line traveling back to her hotel.

Computational Social Science and Supply Chain Networks

I had a great time giving a seminar yesterday on Grand Challenges and Opportunities in Supply Chain Networks: From Analysis to Design in the Computational Social Science Initiative Seminar Series at UMass Amherst.  The presentation took place on the 9th floor of the Campus Center in the middle of the campus and the view was fabulous on a bright, sunny, and actually warm day in February.

Yahoo is giving financial support for the seminar series and it was nice that lunch was provided by UMass catering.

Several of my doctoral students from the Isenberg School of Management came and it was great to see sociologists, computer scientists, and engineers in the audience, as well.

I focused on the importance of capturing the behaviors of the decision-makers in the context of supply chains and also overviewed the Braess paradox (classic (1968) version) and showed photos of Professor Braess visiting the Isenberg School, after our translation of his paper from German to English, along with Tina Wakolbinger, appeared in Transportation Science.  I showed how we used evolutionary variational inequalities to demonstrate how the Braess paradox only occurred on the classic Braess network for a range of demands. This was work that I did while I was  a 2005-2006 Fellow at the Radcliffe Institute for Advanced Study at Harvard University. My co-authors on this paper were Professor David Parkes of Harvard and Professor Patrizia Daniele of the University of Catania. The paper appeared in Computational Management Science. 

In addition, I had to mention our work on the integration of social networks with supply chains and with financial networks, as well as the evolution of the product flows, relationship levels, and prices over time. This was also work done with Tina Wakolbinger.


Coincidentally, Tina Wakolbinger, who is now a Full Professor (I am so proud of my former students)  is flying into Boston today to take part in the Dynamics of Disasters symposium that I organized for the AAAS meeting that is taking place in Boston, February 14-18, 2013. Our symposium will be at the Hynes Center tomorrow afternoon and I can hardly wait -- the panelists and discussants are simply superb -- Professor David McLaughlin, Professor Laura McLay, and Professor Panos M. Pardalos, with Professors Tina Wakolbinger and Jose Holquin-Veras as discussants.

The questions from the audience at my seminar were really good (Thank you!) and ranged from questions on existence and uniqueness of solutions and multiple equilibria as well as stability analysis, ongoing and future research, as well as how the methodologies that we have been instrumental in co-developing (projected dynamical systems, for example) have migrated to different disciplines, including neuroscience. I had highlighted the wide range of supply chains that we had worked on from electric power ones with empirical results for New England to humanitarian and healthcare ones for critical needs products and pharmaceutical products, respectively, and blood supply chains.  I even spoke on network synergies and assessment in the context of mergers and acquisitions. M&As have been big news lately with the American Airlines and USAir merger (still needs approval by regulators), Berkshire Hathaway and Heinz -- breaking related news on this one, and others, including Dell.

I was also asked about our work on supply chains in nature, so I had the opportunity to speak on work that we have done with Professor Christian Mullon of France on the network economics of ecological systems with data from marine ecosystems. I mentioned his forthcoming book, which he graciously forwarded a recent draft of to me. The book, which should be available this July, is called Network Economics of Marine Ecosystems and their Exploitation,  He acknowledges me in the book for "inspiration." To see network economics, variational inequalities, and projected dynamical systems being utilized in this novel application domain is simply thrilling.

I concluded my lecture by showing by latest book, Networks Against Time: Supply Chain Analytics for Perishable Products, hardcopies of which had arrived on Valentine's Day, to the audience.

Special thanks to Professors Ryan Acton and James Kitts for the great hosting!

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!

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.

Supernetwork Center Associates at INFORMS in Austin, Texas

Nine of the Supernetwork Center Associates will be presenting papers at the INFORMS Annual Meeting in Austin, Texas, November 7-10, 2010 so we will be having a very special reunion.

Dr. Tina Wakolbinger of the University of Memphis will be chairing the session: Decision-Making in Nonprofit Organizations in which she will present a co-authored paper, "Collaborative Information Sharing in Humanitarian Supply Chains." In that session, my doctoral student, Min Yu, will present a paper co-authored with Dr. Patrick Qiang of Pennsylvania State University Malvern and me entitled, " Supply Chain Network Design for Critical Needs with Outsourcing." This paper is now in press in Papers in Regional Science.

Dr. Jose Cruz of the University of Connecticut will be chairing the session: Sustainable and Responsible Supply Chain Management in which he will deliver the paper, "Mitigating Global Supply Chain Risks through Corporate Social Responsibility." In the same session, Dr. Zugang Liu of Pennsylvania State University at Hazleton will speak on, "Consumer Environmental Awareness and Competition in Two-Stage Supply Chains," co-authored with Dr. Cruz and Dr. Trisha Woolley (now Anderson).

Dr. Woolley Anderson will present the paper, co-authored with me, "Environmental and Cost Synergy in Supply Chain Network Integration in Mergers and Acquisitions." This paper was published 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.

I will be presenting, "Supply Chain Network Design under Profit Maximization and Oligopolistic Competition," in a session on Risk Management organized by Dr. Jussi Keppo and Dr. Jie Ning of the University of Michigan. This paper was published recently in the journal Transportation Research E.

Dr. Patrick Qiang will present our joint paper, "A Bi-criteria Measure to Assess Supply Chain Network Performance for Critical Needs," in the session on Disruptive Event Management.

And Dr. Dmytro Matsypura will be traveling all the way from Sydney, Australia, where he holds the position of tenured lecturer at the University of Sydney to present the co-authored paper, "Margining Option Portfolios by Offsets with Two, Three, and Four Legs" in a Financial Engineering session.

In addition, Center Associate Dr. Padma Ramanujam of SAS Inc. will also be joining us at INFORMS in Austin, Texas.

I will be posting our presentations, as they become available, on the Visuals Page of the Supernetworks Center website.

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!

Computational Management Science in Glorious Vienna

I am very much looking forward to the International Conference on Computational Management Science that will take place in Vienna, Austria later this month. Vienna is a center of scholarship, culture, architecture, music, and intrigue.

The last time that I was in Vienna was back in March 2009 when I spoke on Synergies and Vulnerabilities of Supply Chain Networks in a Global Economy at the Vienna University of Economics and Business Administration and was hosted by my esteemed and wonderful colleague there, Professor Manfred Fischer.

At the Computational Management Science (CMS) 2010 conference, which will be at the University of Vienna, I will be giving a keynote / plenary talk, entitled, Supply Chain Networks: Challenges and Opportunities from Analysis to Design, and the abstract is below.

Abstract: Supply chain networks provide the backbones for our economies since they involve the production, storage, and distribution of products as varied as vaccines and medicines, food, high tech products, automobiles, and even energy. Many of the supply chains today are global in nature and present challenging aspects for modeling and analysis. In this talk I will discuss different perspectives for supply chain modeling, analysis, and computation based on centralized vs. decentralized decision-making behavior, along with suitable methodological frameworks. I will also highlight applications to mergers and acquisitions and even humanitarian logistics through supply chain network integration. Such timely issues as risk management, demand uncertainty, outsourcing, and disruption management in the context of our recent research on supply chain network design and redesign will also be discussed. Suggestions for new directions and opportunities in healthcare and sustainable supply chain networks will conclude this talk.

I thank the organizers of CMS 2010 for giving me the opportunity to deliver this talk.

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.

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.

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.

Was the Operations Research Crew Scheduling Program Just Too Interesting?

According to CNN.com as well as the New York Times, the reason that the Northwest pilot and first officer were unreachable for about 90 minutes on last week's flight from San Diego to Minneapolis (and overshot their destination by about 150 miles before turning around) was that they were engrossed in the crew scheduling software on their laptops.

Since Delta merged with Northwest, there have been obvious issues regarding the retraining of personnel (I have had long discussions with stewardesses on flights during which I was told how different the philosophies were of these two airlines pre-merger as well as the number of stewardesses that would assist on a flight).

According to news reports, the first officer was assisting the pilot with the crew scheduling software and clearly the subject was of sufficient fascination for both that they did not realize that they were to be piloting an airplane! Those of us who work in operations research are well aware of the underlying mathematical models and, coincidentally, today I was teaching integer programming models in my graduate class at the Isenberg School.

Of course, these two have now lost their pilot licenses. I remember a colleague of mine, Dr. Richard Stone, who is a Lanchester Prize winner and early in his career taught at the Kennedy School at Harvard and then left to join the Operations Research group at Northwest Airlines. You can read about some of his relevant activities here.

It is rather ironic that O.R. (operations research) which focuses on optimization of business processes, including crew scheduling, may have had a role to play in this major human error and only because the software was clearly so interesting that it was an obvious distraction to the flight crew. Why were there no "bells and whistles" in the automatic pilot software when the plane overshot its destination, I wonder?!

As for the merger of Delta and Northwest, locally, we lost our direct flight from Bradley airport (Hartford/Springfield) to Amsterdam, which was a terrific asset while we had it for about a year and a half.

I have done research on mergers and acquisitions in oligopolies, which airlines are, and you can find my latest paper on the subject, which is in press in the journal Computational Management Science here.

To Outsource or to Do It Yourself and Boeing

Sunday's NY Times had a terrific article, A Dream Interrupted at Boeing, that highlighted what went wrong in the design and production of Boeing's 787 Dreamliner airplanes, which are two years behind schedule. Specifically, it analyzed how Boeing's missteps in outsourcing have taken a huge toll. The CEO, W. James McNerney Jr., is even recognizing that Boeing lost control of its production of the Dreamliner by outsourcing more design and production work than previously and not monitoring closely its suppliers. The Dreamliner's novel design lies in its use of plastics reinforced with composites for half of its structure. The composites of carbon fiber are both lighter and stronger than aluminum and, hence, will allow the planes, once operational, to fly further and to significantly reduce fuel costs.

However, there are now new stresses identified where the wings join the fuselage. Also, the outsourcing partners agreed to "share the risk" and to share in the Boeing profits but not when they delivered the parts to Boeing but, rather, when the planes were actually delivered to the airlines (now years behind schedule). Certain suppliers are demanding that Boeing now pay them in advance since they are angry about the delivery delays, understandably.

The article concludes that Boeing still believes in its model of teaming up with partners that share in the risks, but it intends to retain a greater share of the engineering on future projects and to monitor its partners' work more closely. There are, nevertheless, potential positives -- if the technology works, given that the only possible competitor is Airbus, the 850 advance orders for the Dreamliner at $125 million each could bode well for Boeing.

There is much to be learned in terms of supply chain management from Boeing's experiences. Indeed, our group at the Virtual Center for Supernetworks has been conducting studies on mergers and acquisitions and horizontal integration of supply chains. We are now moving to researching tradeoffs regarding the risks associated with outsourcing and the costs versus the benefits, but from a system-wide perspective. Ultimately, our network models will be able to identify when to outsource and when to "do it yourself." In recessionary times and when quality matters the latter may be the best solution of all.

Supply Chain Disruptions and New Book

In the post below, I noted that I have organized an invited session, which will take place this Monday, at the Math Programming Symposium in Chicago. In the session, we have a presentation on supply chain risk management and vulnerability analysis, joint with Professor Patrick Qiang of Penn State University in Malvern, and Professor June Dong of SUNY Oswego. The paper that we are presenting on this topic will appear in a new book, out shortly, entitled Managing Supply Chain Risk and Vulnerability, which is edited by Professors Teresa Wu and Jennifer Blackhurst. If you click here, you will also find the table of contents, which includes our chapter, and the chapter by another Virtual Center for Supernetworks Associate, Professor Jose M. Cruz of UCONN at Storrs, who contributed a chapter on network relationships. We congratulate Professors Wu and Blackhurst on the completion of this volume!

Here is the preprint of our supply chain risk paper, which captures uncertainty associated with production costs, as well as distribution and transportation costs in multitiered supply chain networks, in which the individual behavior of the decision-makers is modeled, along with the prices that the consumers are willing to pay for the product in the case of random demands. In addition, we define robustness in this setting and provide a supply chain network performance measure.

An expansion of this chapter, with additional motivation and case examples, appears in our book, Fragile Networks: Identifying Vulnerabilities and Synergies in an Uncertain World, where we also model network systems and their vulnerability from transportation networks to the Internet, electric power supply chains, and even financial networks! In addition, we demonstrate, how through network integration, one may identify a priori, any possible synergies, which can greatly assist in the evaluation of potential mergers and/or acquisitions.

To Merge or Not to Merge

The big news today is the merger of Pfizer and Wyeth Pharmaceuticals, to the tune of $68 billion. Clearly, some of the potential benefits will involve the integration of these global firms' supply chain networks.

Hot off the press regarding the topic of horizontal mergers and acquisitions through supply chain integration, is the leading paper in the journal Transportation Research E: Logistics and Transportation Review, which I wrote way back in 2007, and which now appears in volume 45 (2009), pp. 1-15.

As I have mentioned before in this blog, one of my primary areas of research is operations research / management science, which involves the science of better decision-making. Our professional society is called INFORMS (The Institute of Operations Research and the Management Sciences) and there are now associated with it a growing number of bloggers. INFORMS has, as its members, academics, researchers, practitioners, as well as students, and the topics tackled by its members are some of the most pressing ones today.