Management Science,                                     IEM DepartmentVol. 52, No. 5, May 2006                            ...
Brian Tomlin:Associate Prof. of Operations,Technology & InnovationManagement at UNC, andBenjamin Cone Scholar         Pr...
1      2        3                                         Reliable Supplier (R)                                         Re...
1          2          3                                    Why does firm think about supplier’s                           ...
1     2      3Key TermsDisruption Risks: may arise from natural disasters, strikes,economic disruptions, or terroristsMiti...
1        2       3Disruption-Management Strategy (DMS)Strategy                 Description                         Source ...
1            2             3Conditions of Strategy                            Risk Aversion               Zero riskFirm’s ...
1       2      3Optimal DMS    1a- R has no volume flexibility and U has infinite        capacity, a risk neutral firm use...
1       2      3Optimal DMS    2- When R has volume flexibility firm can reroute      a- Contingent rerouting is often th...
1        2       3    Conclusion    • Percentage up time and the nature of the disruption are the key      determinants of...
Thanks for Your Time       Value!       Q & A!                       11                       11
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Seminar dms -final.ppt

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  • 4/16/2008
  • Seminar dms -final.ppt

    1. 1. Management Science, IEM DepartmentVol. 52, No. 5, May 2006 Seminar I On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks Brian Tomlin Kenan-Flagler Business School, University of North Carolina at Chapel Hill. Instructor: Professor Muh-Cheng Wu Presented by: Mao, Seikveng 1
    2. 2. Brian Tomlin:Associate Prof. of Operations,Technology & InnovationManagement at UNC, andBenjamin Cone Scholar Presentation Outline a. Abstract b. Introduction c. Optimal Strategy and Conclusion 2
    3. 3. 1 2 3 Reliable Supplier (R) Reliable Supplier (R) (Expensive) (Expensive) Unreliable Supplier Unreliable Supplier (U) (U) (Cheap) (Cheap) Firm Firm Suppliers Suppliers Single-Product Setting Single-Product Setting Dual-Sourcing Dual-Sourcing Disruption-Management Disruption-Management Strategy (DMS) Strategy (DMS) Optimal Optimal Disruption-Management Disruption-Management Strategy Strategy Conditions Conditions 3
    4. 4. 1 2 3 Why does firm think about supplier’s Disruption Risk?In 2000, fire at Philips Hurricane Mitch at Central Earthquake in Taiwan inSemiconductor Plant America in1998 affected the 1999 affected PC’s banana field components plantNokia Ericsson Chiquita Dole Dell Apple• Lost all of • $400 million • Lost • Lost 70% • Respond to • Lesssupply from potential loss significant of regional disruption risk ability toPhilips • 14% of supply supplier more cope with• But Suffered shares is • Increases • Decline effectively, by disruptionlittle financial tumble revenue 4% revenues 4% changing the risk,impact in the 4th • Over $100 demand • More quarter. million loss supply constrainAlternative No backup Alternative No alternativesuppliers suppliers banana field 4
    5. 5. 1 2 3Key TermsDisruption Risks: may arise from natural disasters, strikes,economic disruptions, or terroristsMitigation Vs. Contingency: act in advance Vs. act only inthe event of disruptionVolume Flexibility: the amount of extra capacity and thespeed which it becomes availableUptime Vs. Downtime: time in which a machine is actuallyoperational. Vs. the machine is no longer operational,because of repairs or maintenance.Disruption Length: period of disruption 5
    6. 6. 1 2 3Disruption-Management Strategy (DMS)Strategy Description Source exclusively from the U and carries no inventory. ThePassive Acceptance firm passively accepts the disruption risk.Financial Mitigation Purchase business interruption insurance The firm sources exclusively form the U but carries someInventory Mitigation inventories to mitigate disruptionSourcing Mitigation The firm source exclusively from R Sources exclusively from U when that supplier is up. TheContingency Rerouting firm carries no inventory, but it reroutes to the R during disruption.Inventory Mitigation & Sources exclusively from the U when that supplier is up. TheContingency Rerouting firm carries some inventory to mitigate disruption, but during a disruption it may also reroute production to the R. 6
    7. 7. 1 2 3Conditions of Strategy Risk Aversion Zero riskFirm’s Attitude toWard Risk Risk Neutral Constant risk(Level of Risk Tolerance) Risk Seeking High risk Percentage Uptime (reliability of supplier) Impacts on frequency and level at mitigation and contingency costs. Disruption Length Plays an important role through its effect onSupplier’s Supplier’s Capacity supplier’s recovery time in the aftermath of aCharacteristics disruption. Enables contingent rerouting to an element Volume Flexibility of firm’s strategy, and can significantly (extra capacity) reduce the cost. 7
    8. 8. 1 2 3Optimal DMS 1a- R has no volume flexibility and U has infinite capacity, a risk neutral firm uses single DMS: 1- passive acceptance (U) 2- mitigation by carrying inventory (U), 3- mitigation by single source from the R, optimal only when disruption long, otherwise 2 is optimal 1b- Mixed mitigation (2+3) optimal if the firm is risk averse or if U has finite capacity (cannot recover during disruption period) 8
    9. 9. 1 2 3Optimal DMS 2- When R has volume flexibility firm can reroute a- Contingent rerouting is often the component of optimal DMS, and significant cost reducing b- In the idea, rare disruptions would favor for contingency tactic, as the costs are incurred only in the event of disruption. c- However, the finding suggests that sourcing mitigation (1a3) often become optimal as disruption become less frequent. 9
    10. 10. 1 2 3 Conclusion • Percentage up time and the nature of the disruption are the key determinants of the optimal strategy • Firms that passively accept the risk of disruption leave themselves open to the danger of severe financial and market- share loss • Advance information provides the right tactics to solve disruption risk and encourages for future research • The model of volume flexibility provide a foundation for further research into the benefits of volume flexibility in context other than disruption risk 10
    11. 11. Thanks for Your Time Value! Q & A! 11 11

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