Fall 2006 Seminar Series

DATE: Thursday, November 2, 2006
LOCATION: E40-298
TIME: 4:15pm
Reception immediately following in the Philip M. Morse Reading Room, E40-106

SPEAKER:
Feryal Erhun

TITLE
Risk Management in Supply Chains: An Operations Management Perspective

ABSTRACT
This talk will describe several models on risk management in supply chains, with an emphasis on managing demand uncertainty with dual supply contracts. We model a buyer's procurement and contracting decisions with two suppliers with different leadtimes. At the beginning of a finite planning horizon, the suppliers offer contracts in the form of unit reservation and execution prices, per period maximum capacity limits, and minimum order commitments. The buyer first chooses a pair of contracts (one from each supplier) and reserves per period upper and lower order bounds. During the planning horizon, she then meets random demand by procuring from the suppliers according to the terms of the contracts chosen. We analytically characterize the optimal policy, which is computationally intractable due to high dimensions of state and decision variables.

 

As an alternative, we propose a plausible and managerially insightful policy, and compare its performance with the optimal solution as well as an analytical lower bound on the optimal cost. Because we combine important tactical (i.e., capacity and pricing) and operational (i.e., inventory) decisions in a dual supply model, our methodology can be used to explain diverse sourcing strategies practiced by many companies in various industries.

 

Joint work with Ozgur Yazlali