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Supplies from developing countries: Optimal order quantities under loss risks

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  • Sounderpandian, Jayavel
  • Prasad, Sameer
  • Madan, Manu

Abstract

When raw material suppliers of a global supply chain are situated in developing countries, not only will there be long lead times but there could also be a possibility of material losses in transit. The magnitude of the losses will be uncertain and can be significant. We consider the optimization of order quantity decisions in such situations. The long lead times imply that we need to take into account the uncertainty in finished goods demands for which the raw materials are to be ordered. The order quantities have to be optimized carefully as they determine the "real options" that become available later in production plans. Using data from the plywood industry and using stochastic programming we demonstrate a method for solving such problems. The method combines simulation and optimization. An interesting observation we make is that the optimal order quantity of a material need not be monotonic in expected loss of that material. In addition, we offer explanations as to why the expected loss need not be monotonic.

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  • Sounderpandian, Jayavel & Prasad, Sameer & Madan, Manu, 2008. "Supplies from developing countries: Optimal order quantities under loss risks," Omega, Elsevier, vol. 36(1), pages 122-130, February.
    • Handle: RePEc:eee:jomega:v:36:y:2008:i:1:p:122-130
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    Cited by:

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    2. Driouchi, Tarik & Leseure, Michel & Bennett, David, 2009. "A robustness framework for monitoring real options under uncertainty," Omega, Elsevier, vol. 37(3), pages 698-710, June.
    3. Shu Feng & Chun-Yu Ho, 2016. "The real option approach to adoption or discontinuation of a management accounting innovation: the case of activity-based costing," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 835-856, October.
    4. Wu, Desheng & Olson, David L., 2008. "Supply chain risk, simulation, and vendor selection," International Journal of Production Economics, Elsevier, vol. 114(2), pages 646-655, August.
    5. Lin, Tyrone T. & Huang, Shio-Ling, 2011. "Application of the modified Tobin's q to an uncertain energy-saving project with the real options concept," Energy Policy, Elsevier, vol. 39(1), pages 408-420, January.
    6. Tang, Ou & Nurmaya Musa, S., 2011. "Identifying risk issues and research advancements in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 133(1), pages 25-34, September.
    7. Shanshan Guo & Lei Zhao & Xiaowei Xu, 2016. "Impact of supply risks on procurement decisions," Annals of Operations Research, Springer, vol. 241(1), pages 411-430, June.
    8. Lin, Tyrone T. & Huang, Shio-Ling, 2010. "An entry and exit model on the energy-saving investment strategy with real options," Energy Policy, Elsevier, vol. 38(2), pages 794-802, February.
    9. Fagerholt, Kjetil & Christiansen, Marielle & Magnus Hvattum, Lars & Johnsen, Trond A.V. & Vabø, Thor J., 2010. "A decision support methodology for strategic planning in maritime transportation," Omega, Elsevier, vol. 38(6), pages 465-474, December.
    10. Yu, Haisheng & Zeng, Amy Z. & Zhao, Lindu, 2009. "Single or dual sourcing: decision-making in the presence of supply chain disruption risks," Omega, Elsevier, vol. 37(4), pages 788-800, August.
    11. Gunasekaran, Angappa & Lai, Kee-hung & Edwin Cheng, T.C., 2008. "Responsive supply chain: A competitive strategy in a networked economy," Omega, Elsevier, vol. 36(4), pages 549-564, August.
    12. Sawik, Tadeusz, 2011. "Selection of supply portfolio under disruption risks," Omega, Elsevier, vol. 39(2), pages 194-208, April.

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