1. Management Science, IEM Department
Vol. 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
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2. Brian Tomlin:
Associate Prof. of Operations,
Technology & Innovation
Management at UNC, and
Benjamin Cone Scholar
Presentation Outline
a. Abstract
b. Introduction
c. Optimal Strategy and Conclusion
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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
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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 in
Semiconductor Plant America in1998 affected the 1999 affected PC’s
banana field components plant
Nokia Ericsson Chiquita Dole Dell Apple
• Lost all of • $400 million • Lost • Lost 70% • Respond to • Less
supply from potential loss significant of regional disruption risk ability to
Philips • 14% of supply supplier more cope with
• But Suffered shares is • Increases • Decline effectively, by disruption
little financial tumble revenue 4% revenues 4% changing the risk,
impact in the 4th • Over $100 demand • More
quarter. million loss supply
constrain
Alternative No backup Alternative No alternative
suppliers suppliers banana field
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5. 1 2 3
Key Terms
Disruption Risks: may arise from natural disasters, strikes,
economic disruptions, or terrorists
Mitigation Vs. Contingency: act in advance Vs. act only in
the event of disruption
Volume Flexibility: the amount of extra capacity and the
speed which it becomes available
Uptime Vs. Downtime: time in which a machine is actually
operational. Vs. the machine is no longer operational,
because of repairs or maintenance.
Disruption Length: period of disruption
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6. 1 2 3
Disruption-Management Strategy (DMS)
Strategy Description
Source exclusively from the U and carries no inventory. The
Passive Acceptance firm passively accepts the disruption risk.
Financial Mitigation Purchase business interruption insurance
The firm sources exclusively form the U but carries some
Inventory Mitigation inventories to mitigate disruption
Sourcing Mitigation The firm source exclusively from R
Sources exclusively from U when that supplier is up. The
Contingency 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. The
Contingency Rerouting firm carries some inventory to mitigate disruption, but
during a disruption it may also reroute production to the R.
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7. 1 2 3
Conditions of Strategy
Risk Aversion Zero risk
Firm’s Attitude to
Ward 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 on
Supplier’s Supplier’s Capacity supplier’s recovery time in the aftermath of a
Characteristics disruption.
Enables contingent rerouting to an element
Volume Flexibility
of firm’s strategy, and can significantly
(extra capacity)
reduce the cost.
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8. 1 2 3
Optimal 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)
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9. 1 2 3
Optimal 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.
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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
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11. Thanks for Your Time
Value!
Q & A!
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