Deploying Simulation to Compare among Different Risk ... 131210 (SRA).pdfDec 10, 2013 · among...

Deploying Simulation to Compare among Different Risk Reduction

Strategies for Supply Chains

Cameron MacKenzie, Defense Resources

Management Institute, Naval Postgraduate School

Japanese earthquake and tsunami

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https://lh3.googleusercontent.com/-dUoZrXzlAnI/TX3Q8Y8sbgI/AAAAAAAABsA/I4Hl7iM6xGg/s1600/A+factory+facility+burns+following+the+earthquake+and+tsunami+in+Sendai,+northeastern+Japan.JPG

Previous research

• Global macroeconomic impacts MacKenzie, C.A., Santos, J.R., & Barker, K. (2012). Measuring changes in international production from a disruption: Case study of the Japanese earthquake and tsunami. International Journal of Production Economics, 138(2), 293-302.

• Disruption management strategies in the automobile sector MacKenzie, C.A., Barker, K., & Santos, J.R. (2013). Modeling a severe supply chain disruption and post-disaster decision making with application to the Japanese earthquake and tsunami. IIE Transactions, in press.

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Risk management strategies

4

But this chart just shows benefits! What about costs of strategies?

Challenges of determining strategy

• No single objective function

– Maximize profit

– Maximize demand satisfied

– Maximize percentage of demand versus competitors

• Different costs for each strategy

– Spend $1000 on one strategy to save $10,000 in profit

– Spend $500 on another strategy to save $7500 in profit

• Preparedness versus response strategies

– Spend $1000 on inventory to save $10,000 in profit if a disruption occurs

– Spend $1000 to purchase from alternate suppliers once disruption occurs to save $5000 in profit

5

Challenges of determining strategy

• Uncertainty over length of disruption, customer actions, and competitors’ strategies

• No functional relationship between strategies and objective function and/or relationships are highly nonlinear

6

Supply chain disruption in auto sector

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Illustrative example

Supplier 1

Supplier 2

Supplier 3

Supplier 4

Firm 2

Firm 3

Firm 1

Final consumers

55

21

8

12

8

26

13

8

Severe supply chain disruption: multiple suppliers cannot produce and multiple firms are impacted

Simulate severe supply chain

disruption

Select response strategy

Choose response strategy

that performs the best

according to an

objective

Repeat but assume that response strategy is being

implemented

Simulation

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Discretize each strategy so that each

strategy costs the same “small” amount

Preparedness strategies

Select one preparedness

strategy

Response strategies

Choose preparedness strategy that performs the

best

Repeat but assume that preparedness strategy is being implemented

Firm 2’s preparedness strategies

1. Hold raw materials inventory

– Supply 1

– Supply 2

– Supply 3

2. Hold finished goods inventory

3. Arrange to purchase from alternate suppliers in case of disruption

– Alternate supplier 1



– All alternate suppliers

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Firm 2’s response strategies

1. Purchase from alternate suppliers at higher cost




– All alternate suppliers

2. Help supplier 3 recover more quickly

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Objective: maximize profit

• If no preparedness strategy

• Then best response strategy


2. Purchase from alternate supplier 3




12

Objective: maximize profit

13


1. Arrange purchase from all alternate suppliers

2. Arrange purchase from alternate supplier 3







Response strategies











Objective: maximize demand

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2. Raw material inventory for supply 2







Response strategies






Greedy algorithm for preparedness

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Arrange purchase

from alternate supplier 3

Arrange purchase from

alternate supplier 1


all alternate suppliers

Raw material inventory

Finished goods inventory







But algorithm could be too greedy

16

Arrange purchase

from alternate supplier 3







Arrange purchase from alternate

supplier 1

Arrange purchase from all alternate

suppliers


Arrange purchase from alternate

supplier 1

Arrange purchase from all alternate

suppliers


Future research

• Refine simulation further

– Expand current path versus explore new path

– Investigate number of simulation runs to obtain certain degrees of confidence

• Use simulation to generalize insights about optimal risk management strategies

– When is holding inventory optimal?

– When is buying from alternate suppliers optimal?

Email: [email protected]

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Simulation

1. Simulate response strategies given no preparedness strategy

2. Discretize each strategy so that each strategy costs the same “small” amount

1. Keep 10 units of raw material inventory for $100

2. Buy 5 units of supply from alternate supplier for $100

3. Spend $100 to help primary supplier recover more quickly

3. Simulate severe disruption with firm selecting one strategy

4. Choose strategy that performs the best according to an objective (e.g., profit, customer demand) or weighted combination of objectives

5. Repeat step 2 but assume that strategy chosen in step 3 is being pursued

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Results from maximizing profit

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Preparedness strategy Total expected profit lost

due to disruption

Arrange purchase from all alternate suppliers 392

Arrange purchase from alternate supplier 3 334








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Response strategy given best set of preparedness strategies

Total expected profit lost due to disruption

Purchase from alternate supplier 1 350


Help supplier 3 recover more quickly 309




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Response strategy given no preparedness strategies

Total expected profit lost due to disruption











Results from maximizing demand

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Strategy Total expected demand lost due to disruption

Purchase from all alternate suppliers 674

Raw material inventory for supply 2 437








23

Response strategy given best set of preparedness strategies

Total expected demand lost due to disruption






Outline

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1. Motivation

2. Research contribution

3. Model and simulation

4. Application

Supply chain risk management

• Qualitative [1, 2]

• Quantitative

– Production and inventory models [3]

– Game theory [4]

[1] Y. Sheffi, 2005. The resilient enterprise: Overcoming vulnerability for competitive advantage. Cambridge: The MIT Press. [2] C. S. Tang, 2006. Robust strategies for mitigating supply chain disruptions. International Journal of Logistics Research and Applications 9 (1):33-45. [3] B. Tomlin, 2006. On the value of mitigation and contingency strategies for managing supply chain disruption risks. Management Science 52 (5): 639-657. [4] V. Babich, 2006. Vulnerable options in supply chains: Effects of supplier competition. Naval Research Logistics 53 (7):656-676.

Disruption management [1]

• Disruptions cause operation plans to deviate

• Disruption management studies optimal way to react in the midst of disruptions

– What should be done once a disruption occurs?

– How to minimize the impacts and return to normal production?

[1] G. Yu and X. Qi, 2004. Disruption management: Framework, models and applications. River Edge, NJ: World Scientific Publishing.

What is new with this research?

Mitigation Preparedness

Recovery Response

Supply chain risk

management

Decision and actions by suppliers and firms during

and after disruption

Research questions

• How can we model the supply chain where

– Some facilities are inoperable?

– Other firms experience a supply shortage?

• What can firms do to mitigate the impacts of inoperable facilities and supply shortages?

Outline

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1. Motivation



4. Application

Simulation

Supply shortage for

firms

Move production to

alternate facility?

Firms receive required supplies

Buy from alternate supplier?

No

Yes Supplier’s facility is

closed

Finished goods

inventory?

Demand not satisfied or

customers buy from other firms

Supplier’s facility

reopens?

No

No

Yes

Yes

No

Supply inventory?

No

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Produce at alternate facility?

Per-unit cost of producing at alternate facility

Fixed cost of moving production to alternate facility

Expected lost revenue of not producing

Per-unit cost of producing at primary facility

Probability primary facility opens next period

Probability supplier’s customers buy from other suppliers

Cost at alternate facility

Expected cost at primary facility

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Produce at alternate facility?

Per-unit cost of producing at alternate facility

Fixed cost of moving production to alternate facility

Expected lost revenue of not producing

Per-unit cost of producing at primary facility


Probability supplier’s customers buy from other suppliers

Cost at alternate facility

Expected cost at primary facility

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Threshold parameters for supplier

𝑝 =𝑟 − 𝑐+ 𝜃

𝑐+ − 𝑐 1 − 𝜃

If probability that primary facility will open next period is greater than 𝑝 , supplier will not produce at alternate facility

Per-unit cost of producing at

alternate facility

Per-unit cost of producing at primary

facility

Probability supplier’s customers buy from

other suppliers

Per-unit revenue

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𝐶 =𝑝𝑍 + 𝑧 𝑟 − 𝑐+ 𝜃 − 𝑝 𝑐+ − 𝑐 1 − 𝜃

𝑝 1 − 1 − 𝑝 1 − 𝜃

If fixed cost of moving production is greater than 𝐶 , supplier will not produce at alternate facility

𝑝 =𝑟 − 𝑐+ 𝜃

𝑐+ − 𝑐 1 − 𝜃

Cost of alternate

facility

Cost of primary facility

Probability of buying from

other suppliers Revenue


Per-period demand Backorders

34


Probability of primary facility opening

𝑝 =𝑟 − 𝑐+ 𝜃

𝑐+ − 𝑐 1 − 𝜃

𝑝

Never produce at alternate

facility

𝐶

Fixe

d c

ost

of

mo

vin

g to

alt

ern

ate

faci

lity

𝐶 =𝑝𝑍 + 𝑧 𝑟 − 𝑐+ 𝜃 − 𝑝 𝑐+ − 𝑐 1 − 𝜃

𝑝 1 − 1 − 𝑝 1 − 𝜃

Produce at alternate facility but may wait some length of time

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Never produce at alternate

facility

Firm’s influence diagram

How much to produce?

Maximize profit in

current period

Satisfy demand

Value

Time when suppliers’ facilities reopen Customer

loyalty

Inventory on hand

Selling price

Cost of alternate suppliers

36

Modeling insights

• Incorporating business decisions in midst of supply chain disruptions

• Solving for optimal production decisions as function of model parameters

• Measuring impact of preparedness decisions on firm’s ability to respond during disruption

37

Outline

38

1. Motivation



4. Application

Supply chain disruption in auto sector

39

Application inspired by auto sector

• Supplies required for production

• Several model parameters gleaned from news reports

• More precise information needed for cost and revenue parameters

Supplier 1

Supplier 2

Supplier 3

Supplier 4

Firm 2

Firm 3

Firm 1

Final consumers

55

21

8

12

8

26

13

40

Simulation results

Average production when suppliers do not move to alternate facility

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Simulation results

42


Simulation results


Simulation results

Average production when suppliers move to alternate facility

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Sensitivity on parameters for Firm 2

Parameter Low Base High

Tradeoff between objectives

Maximizes profit Equally prefer

both objectives Satisfies demand

Final goods inventory 0 periods 6 periods 12 periods

Cost of alternate supplier Primary supplier

+ 6 Primary supplier

+ 3 Equal to primary

supplier

Selling price Equal to cost Cost + 1 Cost + 2

Primary supplier’s recovery (expected time)

36 periods 26 periods 3 periods

Supply inventory 0 period 2 periods 4 periods

Customer loyalty (probability firm’s customer does not buy from competitor)

0.01 0.61 0.99

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Application insights

• Illustrative example reflects actual situation

– Toyota and Honda’s share of production in North America fell from 10% to 7% each

– Nissan’s share of production in North America remained constant

– Detroit 3 automakers increased their share of production in North America by 4%

• Application provides insights into best strategies for response and recovery

– Buying from an alternate supplier may be a better long-term strategy than inventory

– Costs of different strategies should be incorporated

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This work was supported by

• The National Science Foundation, Division of Civil, Mechanical, and Manufacturing Innovation, under award 0927299

• The Center for International Business Education and Research (CIBER) at The George Washington University

Email: [email protected]

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