Deploying Simulation to Compare among Different Risk Reduction - PowerPoint PPT Presentation

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 2

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. 3

Risk management strategies But this chart just shows benefits! What about costs of strategies? 4

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 7

Illustrative example Severe supply chain disruption: multiple suppliers cannot produce and multiple firms are impacted 12 Supplier 1 Firm 1 8 55 Supplier 2 Final Firm 2 consumers 21 26 Supplier 3 8 Firm 3 13 Supplier 4 8

Simulation Response strategies Preparedness strategies Choose response strategy Simulate Discretize that Select severe Choose each strategy performs response supply preparedness so that each Select one the best strategy chain strategy that strategy costs preparedness according disruption performs the the same strategy to an best “small” objective amount Repeat but assume that response strategy is being implemented Repeat but assume that preparedness strategy is being implemented 9

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 – Alternate supplier 2 – Alternate supplier 3 – All alternate suppliers 10

Firm 2’s response strategies 1. Purchase from alternate suppliers at higher cost – Alternate supplier 1 – Alternate supplier 2 – Alternate supplier 3 – All alternate suppliers 2. Help supplier 3 recover more quickly 11

Objective: maximize profit • If no preparedness strategy • Then best response strategy 1. Help supplier 3 recover more quickly 2. Purchase from alternate supplier 3 3. Purchase from alternate supplier 3 4. Purchase from alternate supplier 3 5. Purchase from alternate supplier 3 12

Objective: maximize profit Preparedness strategies Response strategies 1. Arrange purchase from all 1. Purchase from alternate 1. Purchase from alternate alternate suppliers supplier 3 supplier 1 2. Arrange purchase from 2. Help supplier 3 recover more 2. Purchase from alternate alternate supplier 3 quickly supplier 2 3. Arrange purchase from 3. Help supplier 3 recover more 3. Help supplier 3 recover more alternate supplier 1 quickly quickly 4. Arrange purchase from 4. Purchase from alternate 4. Purchase from alternate alternate supplier 3 supplier 2 supplier 1 5. Arrange purchase from 5. Help supplier 3 recover more 5. Help supplier 3 recover more alternate supplier 3 quickly quickly 6. Arrange purchase from all alternate suppliers 7. Arrange purchase from all alternate suppliers 8. Arrange purchase from alternate supplier 3 13

Objective: maximize demand Preparedness strategies Response strategies 1. Arrange purchase from all 1. Help supplier 3 recover more alternate suppliers quickly 2. Raw material inventory for 2. Help supplier 3 recover more supply 2 quickly 3. Raw material inventory for 3. Help supplier 3 recover more supply 2 quickly 4. Raw material inventory for 4. Help supplier 3 recover more supply 3 quickly 5. Raw material inventory for 5. Help supplier 3 recover more supply 3 quickly 6. Raw material inventory for supply 2 7. Raw material inventory for supply 2 8. Raw material inventory for supply 3 14

Greedy algorithm for preparedness Raw material inventory Raw material inventory Finished goods inventory Arrange Finished goods purchase inventory from Arrange alternate Arrange purchase from supplier 3 purchase from alternate alternate supplier 1 supplier 1 Arrange Arrange purchase from purchase from all alternate all alternate suppliers suppliers 15

But algorithm could be too greedy Raw material Raw material inventory inventory Arrange purchase from alternate supplier 1 Finished goods Arrange purchase inventory Arrange from all alternate purchase suppliers from Arrange alternate purchase from Raw material supplier 3 alternate inventory supplier 1 Arrange purchase from alternate Arrange supplier 1 purchase from all alternate Arrange purchase suppliers from all alternate suppliers 16

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: camacken@nps.edu 17

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 18

Results from maximizing profit Total expected profit lost Preparedness strategy due to disruption Arrange purchase from all alternate suppliers 392 Arrange purchase from alternate supplier 3 334 Arrange purchase from alternate supplier 1 397 Arrange purchase from alternate supplier 3 335 Arrange purchase from alternate supplier 3 328 Arrange purchase from all alternate suppliers 429 Arrange purchase from all alternate suppliers 331 Arrange purchase from alternate supplier 3 309 19

Results from maximizing profit Response strategy given best set of Total expected profit lost preparedness strategies due to disruption Purchase from alternate supplier 1 350 Purchase from alternate supplier 2 312 Help supplier 3 recover more quickly 309 Purchase from alternate supplier 1 312 Help supplier 3 recover more quickly 326 20

Results from maximizing profit Response strategy given no preparedness Total expected profit lost strategies due to disruption Help supplier 3 recover more quickly 471 Purchase from alternate supplier 3 466 Purchase from alternate supplier 3 462 Purchase from alternate supplier 3 458 Purchase from alternate supplier 3 454 Purchase from alternate supplier 3 450 Purchase from alternate supplier 3 446 Purchase from alternate supplier 3 442 Purchase from alternate supplier 3 440 Purchase from alternate supplier 3 437 21

Results from maximizing demand Total expected demand Strategy lost due to disruption Purchase from all alternate suppliers 674 Raw material inventory for supply 2 437 Raw material inventory for supply 2 562 Raw material inventory for supply 3 489 Raw material inventory for supply 3 659 Raw material inventory for supply 2 693 Raw material inventory for supply 2 575 Raw material inventory for supply 3 597 22

Results from maximizing profit Response strategy given best set of Total expected demand lost preparedness strategies due to disruption Help supplier 3 recover more quickly 795 Help supplier 3 recover more quickly 749 Help supplier 3 recover more quickly 640 Help supplier 3 recover more quickly 606 Help supplier 3 recover more quickly 597 23

Outline 1. Motivation 2. Research contribution 3. Model and simulation 4. Application 24