Supply Chain Vulnerabilities and the Need for Diversification - Thanks to The Democracy Forum for the Invitation to Serve as a Panelist!

The invitation arrived a few weeks ago from Lord Charles Bruce, the President of The Democracy Forum. The panel webinar on "Supply Chain Vulnerabilities and the Need for Diversification," was to take place on July 29, 2025. I had mentioned that I would be traveling then. In fact, I would be on a short vacation in Ogunquit, Maine, but I could take part and join from my hotel. 

I am pleased that, yesterday, the panel took place and the Internet held up. It was a fascinating event and I wish that we had had more time than the scheduled hour. Lord Bruce did an excellent introduction to some of the pressing issues facing supply chains in this era and Humphrey Hawksley was an outstanding moderator. The full video of our panel is now posted on YouTube: https://www.youtube.com/watch?v=oyqPiPTGqjg

Thanks also to the audience for the engagement and their questions! I have already received some direct feedback.

I have been working on supply chains for over 20 years and have published multiple books on the topic as well as journal articles, many of which, more recently, focus on tariffs and other policy interventions, as well as geopolitical issues, including wars and strife, and their impacts on supply chains.

In my panel presentation, I emphasized supply chains as "networks" of suppliers, manufacturers, freight service providers, warehouse operators and, of course, consumers interacting as the resources are transformed into finished products and flow from origin points to the destinations, with consumers responding to prices, quality, etc. Such networks can be local or global in nature and are underpinned by such physical networks as transportation networks (roads, rails, rivers, oceans, air, etc.) as well as telecommunication networks and, of course, energy networks that provide the power. Workers (labour) are essential to each link in a supply chain network,  as became vividly apparent at the height of the pandemic with labor availability as well as productivity suffering.  Products in all sectors, including such critical ones as: agriculture and food processing, high tech, healthcare, automobiles, and construction rely on supply chains.

Mapping out supply chains allows for the visualization of the different tiers, their structure and complexity, and redundancies (or absence thereof), and  enables the identification of possible vulnerabilities. Challenges facing the management of supply chain networks now are numerous and include the negative effects of climate change (fires, floods, droughts, landslides)  and geopolitical risk due to violence and strife and wars.  Further stressing  supply chains and their management are tariffs and on-going trade wars, pushing decision-makers to act under great uncertainty.

Diversification is common in finance as in portfolio optimization as a means of reducing risk. Diversification in terms of supply chains  can involve having multiple suppliers, multiple manufacturing plants in different regions, and even using different routes for the shipments of goods. Diversification can reduce risk, increase resilience, and enhance flexibility and agility so that customers' needs are satisfied, while other stakeholders in supply chains optimize as closely as possible their objectives, which can include profit-maximization, and even the reduction of environmental impacts. It is important to consider "just-in-case" scenarios and to plan and mitigate accordingly. Supply chains are essential to our societies and economies and ensuring that they continue to function efficiently and cost-effectively supports the well-being of our communities.

I wish that we had had more time because the presentations were very informative and, I believe, that they will actually germinate new research.  My fellow panelists were: Manmohan Sodhi of Bayes Business School; Ruth Dearnley OBE of STOP THE TRAFFIK, and Mark Goh of National University of Singapore.

Thanks, again, to Lord Bruce and to Humphrey Hawksley for organizing this very timely panel and for posting the video recording for others to learn from and to enjoy.

I am certain that supply chains will continue to generate much interest because of their importance to all of us!

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.

Were the Reviewers of Our Paper in the Audience?

As a rather "seasoned" academic I continue to be amazed and surprised when it comes to the serendipity of research.

I heard the good news that our paper, 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, was accepted for publication in the International Journal of Sustainable Transportation, while I was working in my office back in Gothenburg, Sweden.

I knew that my doctoral student, Dong "Michelle" Li, was also scheduled to present this paper at the 2012 INFORMS Phoenix conference. However, given the time difference and that I was very busy in Sweden, I was not certain exactly which day.

I was thinking that perhaps she could update the presentation with this good news.

I was wrong, Michelle had already given  the presentation on Sunday in the Managing Disruptions in Supply Chains session.

So, were the reviewers in the session, since the next day I heard that the paper had been accepted?!

This was Michelle's first INFORMS conference and she had a fabulous time and came back really inspired and energized. Some of the highlights for her (apples don't fall far from the tree) were the WORMS Award luncheon and the Student Chapter Awards ceremony. Michelle was the President of our UMass Amherst INFORMS Student Chapter last year.

Plus, this is her first paper acceptance as a doctoral student, which is great!

Medical Waste, Sustainability, and Operations Resarch

For many months now, we have been researching health care supply chains, with a focus on perishable products ranging from blood supply chains to medical nuclear supply chains.

In our research, we have, specifically, emphasized the impact of improper disposal of medical wastes on the environment. Our mathematical models are generalized network models in which the arc multipliers capture features of the perishable, but, life-saving, products that we are studying.

Today, CBS News is reporting on an investigation by a human rights official of the United Nations that noted that: nations pay "too little attention" to their tons of waste each year — waste that contains pathogens, blood, low levels of radioactivity, discarded needles, syringes, scalpels, expired drugs and vaccines. In many poorer nations, discarded chemicals and pharmaceutical wastes go straight to city dumps, down hospital toilets into water systems, or are burned in cement kilns that just add to dioxide emissions.

Our research on blood supply chains, from the operations management aspects, to the design, is written up in our papers:

Supply Chain Network Operations Management of a Blood Banking System with Cost and Risk Minimization
Anna Nagurney, Amir H. Masoumi, and Min Yu, to appear in Computational Management Science.

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, 2011, in press.

Our research, to-date, on medical nuclear supply chains, which I presented recently at the INTRIM Conference at McGill University, is reported in the paper:

Medical Nuclear Supply Chain Design: A Tractable Network Model and Computational Approach
Anna Nagurney and Ladimer S. Nagurney.

According to the report, the UN investigator, Cailin Georgescu, recommended that all nations adopt better laws for managing medical waste and replace incinerators with "more environmentally friendly and safe methods of disposal" such as autoclaving, which uses pressurized steam and superheated water to disinfect waste and medical equipment.

Next week I will be speaking on Sustainability: Methodologies with Some Applications at the SAMSI Workshop, which is part of the 2011-2012 Program on Uncertainty Quantification.

One thing that I am certain about is that we need to take better care of our environment not only for us and our children but for future generations as well.

Clearly, we, in the Operations Research community, understand this, and are doing something about it. Just read Dr. Ian Frommer's wonderful blog post on the course that he has taught on Sustainability.

On my list of new courses that I am developing are courses entitled:

Humanitarian Logistics and Healthcare and

Sustainable Systems.

Would Proper Risk Assessment and Management Have Minimized the Damage to Japan?

The New York Times in a provocative article is raising the question of whether attention to risk assessment for nuclear power plants in Japan might have reduced the scale of the damage from the triple earthquake-tsunami-nuclear disaster. The article even highlights that Japanese engineers focused on deterministic as opposed to probabilistic approaches in determining the safety of the associated engineering structures. According to the article, over the decades, preparedness against tsunamis never became a priority for Japan’s power companies or nuclear regulators. They were perhaps lulled, experts said, by the fact that no tsunami (itself a Japanese word) had struck a nuclear plant until two weeks ago. Even though tsunami simulations offered new ways to assess the risks of tsunamis, plant operators made few changes at their aging facilities, and nuclear regulators did not press them.

Also, engineers took a similar approach with earthquakes. According to Masaru Kobayashi, an expert on quake resistance at the Nuclear and Industrial Safety Agency, Japan’s nuclear regulator, "When it came to designing the Fukushima plant, official records dating from 1600 showed that the strongest earthquakes off the coast of present-day Fukushima Prefecture had registered between magnitude 7.0 and 8.0." We all know that the earthquake that struck Japan on March 11, 2011, has now been upgraded from an 8.9 earthquake to a 9.0 one.

The Times article stated: For whatever reasons — whether cultural, historical or simply financial — Japanese engineers working on nuclear plants continued to predict what they believed were maximum earthquakes based on records. Those methods, however, did not take into account serious uncertainties such as faults that had not been discovered or earthquakes that were gigantic but rare, said Greg Hardy, a US-based structural engineer.

Indeed, in the West, risk management and assessment has become a focus not only of engineering studies and analyses but also a critical component of business decision-making. Drawn from techniques in finance, probability, and, I would add, optimization and decision-making under uncertainty, risk management has been integrated with design and analysis with a notable body of literature now in existence especially in the area of global supply chains (clearly also impacted by the Japanese set of disasters).

As a faculty member in the Department of Finance and Operations Management at the Isenberg School at UMass Amherst, I have been researching, along with my students and associated colleagues, risk management in different network systems from transportation and logistic ones to economic and financial ones. Our research on the integration of risk management and decision-making under uncertainty with complex networks began over half a decade ago and has yielded publications such as:

Supply Chain Networks, Electronic Commerce, and Supply Side and Demand Side Risk
Anna Nagurney, Jose Cruz, June Dong, and Ding Zhang, European Journal of Operational Research 26: (2005) pp 120-142.

Multitiered Supply Chain Networks: Multicriteria Decision–Making under Uncertainty
June Dong, Ding Zhang, Hong Yan, and Anna Nagurney, Annals of Operations Research 135: (2005) pp 155-178.

Global Supply Chain Network Dynamics with Multicriteria Decision-Making Under Risk and Uncertainty
Anna Nagurney and Dmytro Matsypura, Transportation Research E 41: (2005) pp 585-612.

Financial Networks with Intermediation: Risk Management with Variable Weights
Anna Nagurney and Ke Ke, European Journal of Operational Research 172: (2006) pp 40-63.

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

Supply Chain Outsourcing Under Exchange Rate Risk and Competition
Zugang Liu and Anna Nagurney, Omega 39: (2011) pp 539-549.

Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integration
Zugang Liu and Anna Nagurney, to appear in the Journal of Financial Decision Making.

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

Only with the right methodological and analytical tools can we assess risk and prepare appropriately for emergencies and disasters!

The Robustness of Global Supply Chains and the Disasters in Japan

The New York Times has some very timely coverage of the immediate and more speculative impact on global supply chains post the earthquake-tsunami-nuclear set of disasters in Japan. The article, "Stress Test for the Global Supply Chain," begins with a very vivid account of an H.P. VP of Operations, Tony Prophet, being awaken at 3:30AM and then proceeding to triage, as in an emergency room, the potential impacts of this triple disaster on H.P.'s global supply chain. Mr. Prophet oversees all hardware purchasing for H.P.’s $65-billion-a-year global supply chain, which feeds its huge manufacturing engine. Its factories produce two personal computers a second, two printers a second and one data-center computer every 15 seconds.

Japan, as the world's third largest economy, is a key supplier of automobile components (as well as automobiles), high tech products, including integrated chips, and even raw materials such as resins that are used in integrated circuit packaging. Factories that were affected by the triple disaster are shut down in Japan creating cascading failures across the globe with GM even closing one of its manufacturing plants in Louisiana. Not only has manufacturing been disrupted but with so many of the roads impassable, not to mention ports being damaged, the transportation of goods has come to a standstill in parts of Japan. Areas where there is radiation danger with radii of 20 miles to as far as 50 miles have taken on a moon landscape of inactivity since those who have not evacuated have been told to stay indoors.

In 2009, we contributed the chapter, Modeling of Supply Chain Risk Under Disruptions with Performance Measurement and Robustness Analysis, co-authored with Professors Qiang Qiang and June Dong, to the book, Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers, T. Wu and J. Blackhurst, Editors, Springer, Berlin, Germany (2009) pp 91-111. This study shows how to assess, a priori, a supply chain's vulnerability from a system and robustness perspective.The model formulation captures supply-side risk as well as demand-side risk, along with uncertainty in transportation and other costs. The model also incorporates the individual attitudes towards disruption risks among the manufacturers and the retailers, with the demands for the product associated with the retailers being random. We also proposed a weighted supply chain performance and robustness measure based on our recently derived network performance / efficiency measure and provide supply chain examples along with the robustness analyses. This work extends previous supply chain research by capturing supply-side disruption risks, transportation and other cost risks, and demand-side uncertainty within an integrated modeling and robustness analysis framework.

Of course, it is not only complex corporate supply chains that are now being impacted but humanitarian ones have also been deeply affected since the radiation from the Fukushima nuclear power plant has limited the arrival of necessary supplies to those in need who have not been able to evacuate. Japan has a large elderly population and their suffering is horrific. Humanitarian supply chains are different from corporate ones, since the underlying objectives in managing each of them are clearly distinct. One cannot engage in profit-maximization in the case of humanitarian operations and time is often of the essence. Hence, to assess the performance of humanitarian supply chains, Professor Qiang and I have constructed, A Bi-Criteria Measure to Assess Supply Chain Network Performance for Critical Needs Under Capacity and Demand Disruptions.

As researchers and scholars, we hope that we can assist, in a small but concrete way, through our work.

Outsourcing in Supply Chains Under Exchange Rate Risk and Competition

Offshore outsourcing refers to the practice of procuring goods or services from outside foreign suppliers rather than producing them in-house. Since outsourcing manufacturing to lower-wage countries generally reduces production costs it has been growing rapidly in the past decade. From 2000 to 2007, 70 percent of U.S. non-oil import growth was driven by imports from developing countries with imports from China alone accounting for 39 percent of the growth.

However, although offshore outsourcing can provide significant cost reduction opportunities, it also exposes supply chain firms to various risks including: foreign exchange risk, production disruption risk, quality risk, supplier default risk, etc.

Among these risks, foreign exchange risk is consistently considered to be on the list of top concerns of supply chain executives! A study by The Economist, which surveyed 500 global company executives with responsibility for risk management, showed that, in 2009, exchange rate uncertainty was ranked as the second most important risk factor next to demand uncertainty due to the economic recession. In addition, the executives ranked foreign exchange risk as their number one concern for the subsequent twelve months. In 2010, the high volatility of the euro and possible appreciation of the Chinese yuan have posed significant risks to many companies involved in offshore outsourcing and global trades.

In a recent study, completed with Professor Zugang Liu, we quantified the impact of foreign exchange rate uncertainty and competition intensity on supply chain firms who are involved in
offshore outsourcing activities. In particular, the computer-based, analytical model that we developed considers firms' decision-making regarding pricing, material procurement, offshore-outsourcing, transportation, and in-house production under competition and foreign exchange rate uncertainty. Our model allows firms to have different attitudes toward risk. Through a series of simulation examples, we were able to answer imortant questions regarding supply chain firms' pricing and outsourcing decisions, and the associated profits and risks.

The simulation results indicate that, in general, the risk-averse firm has lower profitability and lower risk than the risk-neutral firm. When the competition intensity increases, the exchange rate risks of both risk-neutral and risk-averse firms will increase, which is consistent with recent empirical findings; the profit of the risk-averse firm will always decrease; and the profits of the risk-neutral firm will decrease if exchange rate uncertainty is relatively low and will increase if exchange rate uncertainty is high.

On the other hand, when exchange rate volatility increases, the average profit of the risk-neutral firm will first increase and then become stable while the profits of risk-averse firms will always decrease. As exchange rate variability increases, the risk of the risk-neutral firm will always increase, and the risk of the risk-averse firm will increase when the firm increase prices to compensate the risks, and will decrease if the firm switches from outsourcing to in-house production.

Moreover, as the exchange rate variability becomes higher the risk-averse firm will reduce its outsourcing activities while the risk-neutral firm may increase its outsourcing activities. These results explain the phenomenon regarding how exchange rate uncertainty affects imports of developed countries.

The results in our study provide timely managerial insights for supply chain decision-makers involved in offshore outsourcing and in this highly competitive economic climate:

1. Supply chain managers should first evaluate the risk tolerance level of the firm. If the firm is more concerned about risk, it should try to differentiate its products from that of its competitors since intense competition will both reduce profitability and increase the risk.

2. They should also maintain certain in-house production capacity for operational hedging purposes when the exchange rate uncertainty is high.

3. For the firms that are not sensitive to risk, high exchange rate uncertainty may provide an opportunity for them to get an edge on the competition with more risk-averse firms. For example, when the exchange rate variability is relatively high they should expand their outsourcing operations in order to gain more market share from more risk-sensitive competitors which may help them increase average profits. However, the firms that exploit these opportunities should understand that such strategies can also cause significant risk and loss.

More background, information, and data, along with the model and computational procedure, which was utilized for the simulation examples, can be found in our paper, "Supply Chain Outsourcing Under Exchange Rate Risk and Competition," by Zugang Liu and Anna Nagurney.

Forensic Engineering and Learning from Disasters

I have just about finished reading Henry Petroski's book, "The Essential Engineer," which was published in 2010. It is filled with excellent ideas about why engineering is different from science and how science and engineering and their practitioners and innovators must work together to address the grand challenges today from renewable energy to reducing vulnerability and even to securing cyberspace.

Henry Petroski is a professor of civil engineering and history at Duke University.

Coincidentally, in today's New York Times, there is an article by William Broad, "Taking Lessons from What Went Wrong," which begins with the eye-catching sentence: Disasters teach more than successes, with the overall thesis that disasters can spur innovation. The article includes an interview with Petroski and a graphic photo of the BP oil rig disaster.

Technological feats that define the modern world are sometimes the result of events that some might wish to forget, from the collapse of the Tacoma-Narrows bridge in 1940 due to winds (with no lives lost), to the collapse of the Minneapolis bridge in 2007 (with 13 lives lost), to the sinking of the Titanic on its maiden voyage (with over 1,500 deaths, some due to hypothermia), and even the World Trade Center disaster (with approximately 3,000 deaths). Now we are all reeling from the BP oil rig disaster with ups and downs on almost a daily basis as to progress or lack thereof regarding the spill containment and the propagation of the massive effects on the environment and affected economic sectors and regions.

According to Petroski, disasters are “ a great source of knowledge — and humbling, too — sometimes that’s necessary.” He is also the author of “Success Through Failure,” a 2006 book. “Nobody wants failures. But you also don’t want to let a good crisis go to waste.”

I had written earlier on this blog about forensic accounting and we had even hosted Dr. Brian Levine who spoke on his research on the forensic investigation of the Internet and mobile devices.

Our modern era demands a new area of expertise -- that of forensic engineering, which should clearly have risk management and policy analysis as essential constructs to assist in lessons learned (so mistakes do not get repeated in the future).

Interestingly, Petroski uses as vivid examples in both of his two books noted above the challenges of engineering design in the context of bridge design. He considers bridge designers as very creative individuals who develop mental constructs of a bridge, combined with aesthetics, and then design mathematically the functional structure, which, I might add, should last for many years and support the weight of numerous vehicles.

My uncle, Stanley Jarosz, is an award-winning bridge designer, who, although he is almost 92 years old, still works several days a week at an engineering firm. He is one of my greatest inspirations and an exceptional role model and gentleman (who, I might add, is also a big opera aficionado).

I had the pleasure recently of seeing my uncle and my terrific cousin, Andrew (who, I might add, is a fellow Brown University grad), in NYC. I discussed Petroski's "The Essential Engineer" with my uncle and noted Petroski's almost mystic adulation of bridge designers.

Solving the grand challenges faced by our civilization will require the cooperation and the working together of our best, creative minds, as well as capturing, in a quantifiable and rigorous manner, the risk associated with the resulting innovations.

Portfolio optimization, risk management, and operations

As we see every day -- whether in business or in our personal and professional lives -- decision-making and its consequences, are fraught with risk. The risks may take on many forms from political risk to exchange rate risk and price volatility risk to environmental risk and disruption-based risk, as in disasters due to natural causes, accidents, or planned attacks, to name just a few. The world now is reeling from the BP Deep Horizon oil rig blowout, the most graphic, high impact recent environmental and economic disaster.

Risk management, hence, has evolved as a topic in its own right and is necessarily interdisciplinary because of its vital components, be they social, engineering-based, financial, natural, operational, etc.

In terms of business operations, firms may need to decide whether to outsource various economic activities associated with their supply chains or to continue business as usual. They may need to assess whether to merge or to acquire another firm, which may lie thousands of miles away. They may have to identify new partnerships or to shed older ones; to promote and hire new executives, or let others go. Should one build a new manufacturing plant and where? Should one bring to production a new product? Should one expand into new global markets? All such decisions must have embedded within them some measure of risk since we live in uncertain and very dynamic times.

The areas of finance and operations management (propitiously also the name of my department at the Isenberg School of Management at UMass Amherst) can bring much to both research in and the practice of risk management.

Last year I had the honor and pleasure of instructing a course on portfolio optimization in the Executive Education program at Harvard University's Graduate School of Design. The course covered the fundamentals of portfolio optimization and risk management and also discussed the importance of a network and systems perspective to financial management.

My course lecture notes can be accessed here.

Today we are conducting research on global outsourcing and risk management as well as on supply chain network design and risk. Our recent studies on various supply chain network as well as financial network topics can be accessed here.

Without appropriate risk management and risk mitigation strategies our already fragile and vulnerable networks may not be sustainable.

BP Oil Rig Environmental and Economic Disaster and Supply Chain Design

I returned recently from speaking at a workshop in Honolulu, Hawaii, where I heard from many locals of their outright physical pain and disgust at the growing oil spill from the Deepwater Horizon rig blowout in the Gulf of Mexico. I have refrained from writing about this disaster, with the explosion dating to April 20, 2010, until now, since, as many, I was hoping that, perhaps, the "top kill" approach might work to block the massive flow of oil spilling from this deepwater rig. It has not worked, which is another very serious setback.

Elisabeth Rosenthal writes in The New York Times, that already half a decade ago, David Eyton, who was then BP's Vice President for deepwater development in the Gulf, noted that: IF we’ve learned anything so far about the deepwater Gulf of Mexico, it is that it contains surprises. And that means an operator needs depth — depth in terms of resources and expertise — to create the capability to respond to the unexpected.

As a professor at the Isenberg School of Management, who is in the Department of Finance and Operations Management, it is clear to me that there was insufficient risk assessment conducted prior to this drilling endeavor. The potential benefits (think profits) were weighted more highly than any potential costs, including risks; not to even mention the potential adverse environmental impacts.

Companies must recognize the importance of corporate social responsibility and the negative externalities of their actions on citizens, on nature and the environment, and on a sustainable way of life. Ways of life of those who have labored hard and long, including the fishermen, in areas so adversely affected are being transformed for the foreseeable future. The anger and frustration are felt by us all.

The design of our supply chain networks so that environmental and risk issues are explicitly incorporated is essential. We, as faculty and students in business schools, need to collaborate across boundaries (disciplinary and professional ones) to provide tools that can assess the potential impacts of corporate actions.

In a week, the ALIO-INFORMS conference begins in Buenos Aires, Argentina. One of the talks that I will be presenting there is entitled: "Sustainable Supply Chain Network Design: A Multicriteria Perspective." The presentation has now been posted and is available for download (in pdf format).

This talk is based on the paper, with the same title, which is now in press in the journal, The International Journal of Sustainable Engineering. The paper captures, in a quantifiable way, multicriteria decision-making in supply chain design, which includes, for example, environmental impacts associated with different technologies.

As for other ways, in addition to solid research, that business school students and faculty can help with regards to this environmental and economic disaster, although we may be physically thousands of miles away, read this blog post.

It is clear that worse-case analysis was not addressed in the planning and construction of this deepwater oil rig in the Gulf of Mexico.

The Last Spring 2010 Lecture in Operations Research / Management Sciences

Today we were treated to a wonderful lecture by Professor Mehmet Gumus of the Desautels Faculty of Management at McGill University in Montreal, Canada. Professor Gumus concluded our Spring 2010 Speaker Series in Operations Research / Management Sciences
with a lecture on supply chains, information asymmetry, and agreements between a buyer and a reliable and a not reliable suppliers. He brought in such issues as visibility and insurance and considered uncertainty associated with the capacities of the suppliers. His results were very interesting and well-presented.

The lecture was a fitting conclusion to a wonderful Spring Speaker Series and to a wonderful set of talks that we hosted all year.

As the Faculty Advisor to the award-winning UMass Amherst INFORMS Student Chapter, I thank all of our terrific guest speakers, and commend the chapter officers and members.

Next Tuesday, we will be recognizing our chapter officers as well as staff members who have been so helpful to our chapter's activities all year at a party at the Isenberg School at UMass Amherst.

Above are some photos taken during Professor Gumus' visit on a simply spectacular April day.

Lecture on: Supply Side Story: Risks, Guarantees, Competition and Information Asymmetry

Next Friday, April 30, 2010, the last Speaker Seminar in Operations Research / Management Sciences of the Spring semester will take place. We are delighted to be hosting Professor Mehmet Gumus, of the Desautels Faculty of Management, McGill University, in Montreal, Quebec, Canada, at the Isenberg School at UMass Amherst.

Biography: Dr. Mehmet Gumus is an Assistant Professor of Operations Management at the Desautels Faculty of Management at McGill University. He joined McGill University in 2007. He received his PhD from the University of California at Berkeley in Industrial Engineering and Operations Research. In his research, Dr. Mehmet Gumus develops and analyzes mathematical models related to supply chain management, dynamic pricing and revenue management, supply disruption, and risk management. He is also interested in modeling the strategic customer behavior and how it affects the firm's profit. He has worked with a number of companies including Pratt & Whitney, and Navis LLC.

PRESENTATION TITLE: "Supply Side Story: Risks, Guarantees, Competition and Information Asymmetry."

Abstract: The risk of supply disruption has increased as firms have started procuring more from cheaper, but unreliable, suppliers. In this paper, we model a supply chain comprising a single buyer and two suppliers who compete for the buyer's order. One of the suppliers is more expensive but reliable, while the other (unreliable) one is cheaper but faces risk of supply disruption. The risk level of the unreliable supplier might be private information for her and this lack of visibility further contributes to the buyer's purchasing risk. In such settings, the unreliable supplier often offers a price and quantity (availability) guarantee to the buyer as part of her contract terms. Our objective is to understand the underlying motivation for such a guarantee offer and the effects such an offer have on the performance of the chain partners. We characterize the equilibrium contracts for the two suppliers, and the buyer's procurement strategy for both symmetric and asymmetric information cases. Our analysis indicates that supply guarantee plays two important roles. First, it allows the unreliable supplier to better compete against the reliable one by providing supply assurance to the buyer. More importantly, when information asymmetry risk is high, a guarantee offer enables the unreliable supplier to credibly signal her true supply risk to the buyer improving the visibility in the chain. This additional role causes guarantees to be a more usable strategy in an asymmetric information setting (compared to a symmetric one) from the viewpoint of the unreliable supplier. However, from the buyer's perspective, guarantee provision in an asymmetric setting might reduce the competition between the suppliers resulting in higher contract prices, and, consequently, higher costs for him (and higher profits for the reliable supplier)

Date: Friday, April 30, 2010
Time: 11:00AM - Noon
Place: Room ISOM 112

The announcement for this talk can be found at:
http://supernet.som.umass.edu/informs/speakernew.html

This talk will conclude twelve semesters of this Speaker Series, which the UMass Amherst INFORMS Student Chapter has helped me to organize.

INFORMS Student Chapter website:
http://student.som.umass.edu/informs/

Finance -- Everything Worth Knowing and a Great Speaker

Yesterday, my teenage daughter asked me to write about Everything Worth Knowing in Finance. Coincidentally, and, propitiously yesterday, one of my former students, Dr. Dmytro Matsypura of the University of Sydney, gave a talk in our Speaker Series on Combinatorial Analysis of Option Spreads. He spoke on margining accounts, i.e., the calculation of minimum regulatory margin requirements for margin accounts, which is a critical intra-day and end-of-day risk management operation in the list of mandatory activities of any prime brokerage firm. Margining an account without positions in options or other derivatives is simply the calculation of the total margin requirement for all positions in the account. Options, however, he noted, bring a nontrivial combinatorial component to the calculation because margin regulations for positions in options permit the use of different hedging strategies for margin reductions. Hedging strategies usually imitate trading strategies designed for margin trading. Hedging strategies involving only options are called option spreads.

In December 2005, the U.S. Securities and Exchange Commission approved margin rules for complex option spreads with 5, 6, 7, 8, 9, 10 and 12 legs (positions in options). Only basic option spreads with 2, 3 or 4 legs were recognized before. Taking advantage of option spreads with a large number of legs substantially reduces margin requirements and, at the same time, adequately estimates risk for margin accounts with positions in options. Dr. Matsypura presented combinatorial models for option spreads with any number of legs and proposed their full characterization in terms of matchings, alternating cycles and chains in colored graphs. With co-authors, he showed that the combinatorial analysis of option spreads reveals powerful hedging mechanisms in the structure of margin accounts. He also provided recommendations on how to create more efficient margin rules for options.

My favorite part of his presentation came at the very end, when he showed that what was considered to originally be an NP hard problem could be transformed into a maximum flow network problem! This was a really exciting result! Having co-authored with Dr. Stavros Siokos, the book, Financial Networks: Statics and Dynamics, I love to see additional network structures identified in financial problems!

The photos above were taken at Dr. Matsypura's talk and the lunch that followed.

Plus, yesterday, I received a new book in the mail, co- authored by two of my colleagues in my department, Professors Thomas Schneeweis and Hossein Kazemi, and Garry B. Crowder, a lawyer and financier. Their book, published by Wiley, is called, The New Science of Asset Allocation: Risk Management in a Multi-Asset World. This will be good reading during my air travels.

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.

Supply chain risk management and the swine flu

Given the escalating news about the swine flu, I thought that, as a researcher in supply chains and risk management, it would be wise to step back and to think about the major issues. Already in our town of Amherst, Massachusetts, stores have sold out of face masks and hand sanitizers and the demand for these products is, obviously, great. We are reading about travelers from Mexico being isolated as they arrive in China and a hotel in Hong Kong essentially quarantined along with its guests. Clearly, corporations as well as governments will be faced with how best to deliver needed supplies, in the case of an escalating health crisis, while, at the same time, trying to minimize risk. Here we can think of risk in a broad sense and even include the risk of contagion and spreading the disease.

In 2005, we published a paper in the European Journal of Operational Research, which developed a framework that captured the interactions of decision-makers in multitiered supply chains under risk and uncertainty and also allowed for electronic commerce. I suspect, given the reality of the swine flu and its spread, that we will be seeing more electronic transactions and communications, since "social distancing" is one way of stemming the dissemination of contagious illnesses. The spread of the swine flu is now global in nature and the impact on supply chains, hence, can also be expected to be global. Here you can read about our global supply chain network research and risk management where we also discussed SARS. Clearly, the issues are dynamic in nature, and it will be very interesting to see how this latest global health crisis affects the production of goods and supply chains, including humanitarian ones. In a study on the dynamics of global supply chains and risk management we track the evolution over time of decision-makers' optimal decisions under risk and uncertainty.