Research Proposal: Supply Chain Planning Under Uncertainty a Real Options Approach

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Supply Chain Planning Under Uncertainty: a Real Options Approach

In a manufacturer's quest to manage its supply and demand chains, one simple word aptly portrays a certain, common, contemporary concern that a company can count on having to cope with - uncertainty.

In light of uncertainty and operational needs in the supply chain realm, this qualitative case study presents a survey of the supply chain planning, and real options literatures, while it also explores the intellectual developments in these areas as they relate to supply chain management. The initial segment of this study reviews supply chain planning and uncertainty, along with the challenges these components pose for the supply chain planner, and the planning process. The researcher also reviews a number of the most popular approaches available for supply chain planning, and decision-making, including: Linear programming, integer programming, stochastic programming, dynamic programming, game theory, etc. Most of the methods discussed in this section are limited, in that they do not account for uncertainty and managerial flexibility.

During the second part of this study, the researcher reviews real options, and the two most popular approaches for evaluating them:

The binomial option pricing, and the Black-Scholes option pricing models. Due to the capability real options possess to account for uncertainty and managerial flexibility, the researcher purports, they may certainly be utilized to enhance the supply chain planning and decision-making process.

Introduction

1.1 Supplying Chain and Uncertainty

1.1.1 Defining Uncertainty

1.1.2 Uncertainties in Supply Chain

Supply Chain Planning and Decision Making

2.1 Traditional Approaches of Supply Chain Planning and Decision Making

2.1.1 Mathematical Programming

2.1.2 Other Important Decision Making Techniques

2.2 Conclusion of Literature Search on Supply Chain Planning and Decision Making

Real Options

3.1 Options and Basics Pricing Models

3.1.1 Binomial Option-pricing Model

3.1.2 the Black-Scholes Option-pricing Model

3.2 Real Options in Supply Chain

3.3 Conclusion from Literature Search on Real Options

References

Supply Chain Planning Under Uncertainty:

Real Options Approach

CHAPTER II: LITERATURE REVIEW

Introduction

Effectively managing supply chains proves to be the best way for a business to maintain its competitive edge (Blasgen, as cited in Carroll, Stalk, & Sarm, Power of Patience section ¶ 3). In a manufacturer's quest to manage its supply and demand chains, one simple word aptly portrays a certain, common, contemporary concern that a company can count on having to cope with - uncertainty. ***

During the best, as well as the worst of purportedly predictable, and yet simultaneously, notably unpredictable economic times - uncertainty mandates that decision makers consider a new paradigm of decision-making. In light of operational needs in the supply chain realm, this paper presents a survey of the supply chain planning, and real options literatures, while it also explores the intellectual developments in these areas as they relate to supply chain management.

As one group of decision makers, supply chain planners; attempt to meet customer demands, while keeping production, inventory, and delivery costs at a minimum, uncertainty in the supply chain presents a significant challenge to the process. In confronting current challenges relating to supply chain planning under uncertainty, the application of real options accounts for managerial flexibility, risks and changes in future environments. The supply chain planning literature (***) purports the primary goal for planners includes the designing a network of suppliers, manufacturers, logistics provider and customers in an efficient manner to maximize value to the entire supply chain. Recent contributions in this discipline of supply chain management reveal that uncertainty in the specifications of supply chain network should be a driver in the planning phase. Some sources of literature (***) are based on the suggestion of proactively managing uncertainties during the planning phase of the supply chain. Including mechanisms for dealing with uncertain phenomenon in the plan, tools management with alternate means to conduct business when/if circumstances and/or events disrupt the heart of case normal operations. During this literature review chapter, the researcher explores a myriad of researched literature which ultimately contributes to the determination of the hypothesis for this study: When decision makers face the challenge of continuously making vital business (supply chain) decisions in an uncertain environment, then utilizing the new paradigm of decision-making; application of real options, equips decision makers to make better strategic, as well as tactical, supply chain decisions. The application of real options, a component the researcher considers the heart and soul of supply chain planning also accounts for managerial flexibility, risks and changes in future environments.

In "Electronic Textbook - Let us count the ways: Strategies for doing qualitative research," M. Dereshiwsky (1999) stresses: "The heart and soul of any investigation is the research question" (Master Plan section, ¶ 1).

The following research questions, crafted for this study, help maintain the focus the hypothesis:

1. What challenges do supply chain professionals regularly face?

What constitutes an uncertain environment?

3. How do real options potentially equip decision makers to make better strategic, as well as tactical, supply chain decisions?

Supply Chain

1.1 Supplying Chain and Uncertainty

In "From Raw Materials to Customers: Supply Chain Management in the Service Industry," Jack S. Cook, Ph.D. information systems specialist, Kathy Debree, food market representative, and Amie Feroleto, Human Resources Supervisor define supply chain management (SCM). Supply chain management (SCM) constitutes:

familiar concept in manufacturing, but service industries are just now recognizing the value of successfully implementing it. Although certain concepts should be applied while successfully managing a supply chain, companies coordinate their individual supply chains in many different ways. Thus, in application, supply chain management practices exist along a continuum, from more traditional approaches, where the organization focuses only on the direct affects upon itself, to the more expansive, supply chain, channel-wide perspective. (Cooke, Debree, & Feroleto, 2001, ¶1)

SCM, a long-term evolutionary approach, provides constraints to risks inherent to the uncertainty within the planning processes. The need for driving operational efficiencies, along with the quest to improve collaboration among all participants within the given business spectrum spawned the development of supply chain management as a discipline; created by modern management science, and industrial engineering chain management.

Uncertainty in the supply chain, albeit presents a significant challenge to planners as they attempt to meet customer demands, while keeping production, inventory, and delivery costs at a minimum. Managing uncertainties in supply chain operations do not present new experiences and/or challenges, however recently this venture has taken a new level of significance. This new level of significance, a product of recent developments, has caused parties to address supply chain issues with a higher degree of significance (Brindley and Ritchie, 2004). Increased competition, changing customers' demand, social and political standards, government regulation, along with cost and availability of raw materials are currently leading to a rapid increase in the complexity of the configurations and strategies of the supply chain. These factors introduced new sources of uncertainty; of increasing complexity. Dealing with these components constitutes one of the most significant challenges contemporary organizations face today. During the planning and designing of a supply chain system, the process of identifying and understanding the sources and types of uncertainties proves vital, as ignoring these factors possesses the potential to trigger adverse consequences on the supply chain.

In "Quality Planning for the Manufacturing Supply Chain," Robert G. Batson, a professor of industrial engineering at the University of Alabama (UA), and Karen D. McGough, a research engineer with the Naval Surface Warfare Center in Panama City, Florida (2006) examine companies' interactions from a global aspect. International Organization for Standardization (ISO) 9001 defines "product realization as that 'sequence of processes and subprocesses needed to achieve the required product or service'" (Batson & McGough 2006, ¶ 1).

Batson & McGough (2006) further note:

Clause 7, Product Realization, contains Clause 7.1 "Planning of product realization," which states that the organization shall plan and develop the processes needed for product realization. Clearly, the manufacturing supply chain is a system of such processes. In ISO 9001, a document specifying the processes of the quality management system and the resources to be applied to a specific product, project, or contract, can be referred to as a quality plan. (Batson & McGough 2006, ¶ 1)

Trust in Decision Making

Trust in effective decision making in a collaborative planning environment, according to findings from research efforts by Kenneth J. Petersen, Gary Ragatz, and Robert Monczka (2005), significantly impacted the effectiveness of five of the eight planning processes studied. In "An examination of collaborative planning effectiveness and supply chain performance," Petersen, Ragatz and Monczka also stress that numerous businesses are trying to secure a competitive edge by more methodically integrating their suppliers into key supply chain processes. For this to take place, more strategic and operational cooperation has to occur between buyer and supplier firms, a process which frequently involves a degree of collaborative planning. Contemporary technology enables firms to more readily exchange planning information, Petersen, Ragatz and Monczka (2005) assert. Their study, which surveyed purchasing executives from firms involved in collaborative planning with suppliers, examined a number of factors that support effective planning, along with the impact effective collaborative planning exerts on… [END OF PREVIEW]

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"Supply Chain Planning Under Uncertainty a Real Options Approach."  Essaytown.com.  December 2, 2008.  Accessed December 6, 2019.
https://www.essaytown.com/subjects/paper/supply-chain-planning-uncertainty-real/47452.