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Supply Chain Management Under Simultaneous Supply and Demand Risks

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Supply Chain Disruptions

Abstract

In this chapter, we characterize how supply risks arising from yield uncertainties impact on supply chain management. We first consider the implications for the procurement strategies of a firm which has access to a set of potential suppliers which differentiate themselves in terms of their prices and yield distributions. The fundamental questions that arise here are (i) how many suppliers to maintain and diversify one’s purchase orders amongst; (ii) how to select the desired number of suppliers from the set of potential suppliers; (iii) how to adjust one’s inventory strategy to account for the supply risk, in particular how total purchase quantities should be set in the simultaneous presence of supply and demand risks; (iv) the final question is how aggregate orders are to be split among the selected suppliers and whether the tradeoffs between reliability and cost differentials among the suppliers can be captured in terms of simple allocation rules.

We first characterize the answers to the above questions assuming given cost and reliability profiles of the potential suppliers. In the last part of this chapter, we proceed to analyze how these competing suppliers may wish to invest in process and technology improvements so as to “optimally” affect their reliability characteristics and resulting market shares.

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Notes

  1. 1.

    “In recent years there have been many significant disruptions of vaccine supplies. Between November 2000 and May 2003, there were shortages of 8 of the 11 vaccines for childhood diseases in the United States including those for tetanus, diphtheria, whooping cough, measles, mumps and chicken pox. There have been flu vaccine shortages or miscues for four consecutive years.” See [30].

  2. 2.

    This assumes \(\mu - z_{\alpha}\sigma \,{>}\, 0,\) i.e. the probability of the Normal demand distribution adopting a negative value is itself less than \(\alpha.\)

  3. 3.

    Demand may represent net demand, net of pre-committed and guaranteed deliveries, as under the flexible quantity contracts. In our base model, we assume that the demand distributions have the positive half line as their support. All of our results are easily extended when the support is given by a different interval, for example the full real line, as in the case of Normal distributions.

  4. 4.

    See [14] for a reduction to a \(L+1\) dimensional state space when all distributions are Normal or when end-of-the-period inventory levels are approximated as Normals.

  5. 5.

    Even before the 2008 financial crisis, [2] describes the severity of this type of risk: “Credit rating firms report that in 2002 over 240 firms defaulted on 160 billion dollars of debt, the largest amount ever over any one year period. \(\ldots\) The combined volume of defaults in 2001 and 2002 exceeded the total volume of defaults in the US over the previous twenty years. What is especially striking about the current trends is the surge in the defaults of large, well-established companies. Even in the relative stable years 2000–2005, almost 50 firms with assets or liabilities exceeding one billion dollars have filed for bankruptcy.” In the automobile industry, for example, many suppliers routinely incur losses, with Delphi, the largest supplier of automotive parts in the United States, residing in Chap. 11, until recently. Choi and Hartley [5] document that in this industry, purchasing managers consider the financial solvability of the suppliers a major selection criterion, along with criteria like consistency and reliability.

  6. 6.

    For example, the Center for Disease Control and Prevention (CDC) purchases more than 50% of all routinely administered vaccines in the United States through the Vaccine Assistance Act (Section 317 of the Public Health Service Act, 1963) and the VFC (Vaccines For Children Act) program, which was established in 1994. To enforce minimum reliability standards, the CDC together with the US Food and Drug Administration (FDA) established current Good Manufacturing Practices (cGMPs) which required many of the vaccine manufacturers to renovate their facilities, see [24]. Many manufacturers institute qualification processes for which any potential supplier must compete to become part of the supplier base, see [19] for an example of such a qualification process prepared by Semiconductor companies such as Motorola, Infineon Technologies, Phillips and Texas Instruments. [34] describes the qualification processes in the data storage industry, and [31] those employed by Hitachi. Also, many firms require suppliers to comply with qualification processes such as ISO 9000.

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Author information

Authors and Affiliations

  1. Graduate School of Business, Columbia University, New York, NY, 10027, USA

    Awi Federgruen

  2. Olin Business School, Washington University in St. Louis, St. Louis, MO, 63130, USA

    Nan Yang

Authors
  1. Awi Federgruen
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  2. Nan Yang
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Correspondence to Nan Yang .

Editor information

Editors and Affiliations

  1. , Department of Management, University of Miami, Coral Gables, 33124, Florida, USA

    Haresh Gurnani

  2. University of Miami, Coral Gables, 33124, Florida, USA

    Anuj Mehrotra

  3. , Desaulets Faculty of Management, McGill University, Sherbrooke St (W) 1001, Montreal, H3A 1G5, Canada

    Saibal Ray

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Federgruen, A., Yang, N. (2012). Supply Chain Management Under Simultaneous Supply and Demand Risks. In: Gurnani, H., Mehrotra, A., Ray, S. (eds) Supply Chain Disruptions. Springer, London. https://doi.org/10.1007/978-0-85729-778-5_4

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  • DOI: https://doi.org/10.1007/978-0-85729-778-5_4

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