Supply chain network redesign with demand and price uncertainty

Hamed Jahani, Babak Abbasi, Farzad Alavifard and Srinivas Talluri

International Journal of Production Economics, 2018, vol. 205, issue C, 287-312

Abstract: When new products are introduced into a supply chain, the existing logistics may no longer optimally meet the objectives of the enterprise. This paper provides an analytical approach to redesigning a supply chain network (SCN), considering its current infrastructure. While aiming to maximise total profit, we take into consideration the demand and price uncertainty and their correlation as two important risk factors, and formulate them using associated Brownian motions employed in a real options pricing approach. Our model captures multiple periods and cash flow aspects through a non-linear structure. In the solution approach, we apply a novel piecewise linear conversion. Our theoretical model is complemented by a realistic case study from the Australian cement industry. We demonstrate significant improvements in the financial position of the company after redesigning its SCN. For instance, SCN redesign increases total profit by 49%, while the profit from the existing product increases by 23%. The results also indicate that ignoring the effect of the correlation leads to profit overestimation.

Keywords: Supply chain management (SCM); Supply chain network (SCN); Real option (RO); Geometric Brownian motion (GBM); Stochastic demand and price (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:205:y:2018:i:c:p:287-312

DOI: 10.1016/j.ijpe.2018.08.022

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