For example, if you want to reduce cost by lowering. The volatility of various economies, coupled with cultural issues, demands companies with wideranging supply. Risk hedging in a supply chain xin zhai, zhongyi liu guanghua school of management peking university beijing china abstractwe study two risk hedging strategies, i. Risk management strategy risk management governance risk operating model. Pdf there is a growing body of literature addressing supply chain risks and risk management as a source of competitive advantage. This process of developing a risk profile thus requires an examination of both the immediate risks from competition and product market changes as well as the more indirect effects of macro economic forces. We offer a decomposition framework to capture the costreduction and flexibility effect of hedging. Procurement and supply chain leaders can play a pivotal role in combatting the impact of covid19 on their enterprises. Agile supply chains combine riskhedging and responsive strategies, aiming to cope with both high supply uncertainty and high demand uncertainty. Global supply chain risk management is thus critical to many companies, considering that supply chain risk management hereafter, scrm has been developed in recognition of increasing supply chain risks and of the needs for responses to manage them ritchie and brindley, 2007. Leading companies use supply chain event management technology to send alerts to key personnel when action needs to be taken by someone, somewhere in the global supply chain.
First, the optimal decisions under the two contracts from the perspectives of both the manufacturer and the retailer are determined. Factors affecting the nature and payoff from smr include the integrity of the supply chain, criticality of the commodity in terms of the consequences of disruption of normal supplies, regional vs. Next, we provide some definitions for supply chain management. Maximizing profits in an ethanol supply chain with hedging. The dissertation investigates the impact of supply chain risks on a buyers sourcing strategies with a combination of operational hedging, quantity flexible contracts, and a multisourcing strategy. Other measures to be taken in advance include the formation of a detailed strategy for ensuring the continuity of suppliers and materials in times of crisis. Hedging is a deliberate strategy adopted to limit the potential for future losses. The thirdranked strategy used to manage supply chain risk involves the use of visibility tools to closely track global shipments and take action when necessary. As a result, supply chain risk management scrm is emerging as a critical supply chain management discipline.
Likewise, a responsive sc strategy should be aligned with an accommodative ce strategy, and an agile sc strategy with a proactive ce. A riskhedging supply chain from the chemical process industry is modelled, several different procurement strategies. You own an assortment of assets that dont rise and fall together. Their numerical study shows that operational hedging reduces the. A contract that allows the holder to buy or sell an underlying commodity or product at a given price.
A quantitative study supply chain managing risk in the. An analysis of supply chain risk and mitigation strategies. Supply chain risk management scrm is a fresh emerging area of. Pdf risk management in global supply chains hedging. Companies should not necessarily adopt the same hedging strategy when dealing with different supply chain partners if market power is concentrated at the supply chain downstream, our model predicts hedging for hedging to be effective, costly breakdown is. This idea will call for a company in a supply chain to exercise specific strategies. Fisher 3 categorized products as either functional or innovative, depending on. Operational strategies managing supply chain disruption risk.
Companies that focus on a specific supply chain strategy are more likely to build shareholder value than those do not. Supply chain strategies are used to show the companies competitiveness and the position in the market against their competitors. Ill try to answer this question as concise as i can. A survey of classifications in supply chain strategies. To understand the key trends and drivers of supply chain risk, amr research conducted an indepth. With business growth and the emergence of new markets presenting new opportunities for companies, the scope of the supply chain has grown along with the exposure to possible risks. Profiling and hedging to manage risk, you first have to understand the risks that you are exposed to. Defining a commodity risk management strategy requires an integrated approach for a number of reasons. Pdf the strategies of supply chain risk management a synthesis.
A resilient supply chains that are able to hedge against supply, demand, and price risks by applying a variety of financial and contractual tools. Risk management strategy should be included in the sourcing strategy, reflecting the overall needs of the organisation. For example, most people own bonds to offset the risk of stock ownership. Aligning supply chain strategies with product uncertainties mba. Risk management is required throughout the full lifecycle of a contract. We have examined the optimal decisions under each contract from the perspective of the manufacturer and the retailer respectively. There are a number of effective hedging strategies to reduce market risk, depending on the asset or portfolio of assets being hedged. Aligning supply chain strategy with corporate environmental strategy. Cohen 1996 values global manufacturing strategy options for a single.
Innovative products with unpredictable demand and an evolving supply process face a major challenge. That only applies to highgrade corporate bonds or u. Risk hedging supply chainsthese are supply chains that utilize strate. It uses strategy of being responsive and flexible to the changing diverse needs. Hedging commodity material purchases in a bilateral supply chain danko turcic1, panos kouvelis1,andehsanbolandifar2 1olin business school, washington university in st. In this paper we develop hedging strategies in maximizing profits for an ethanol producer who buys raw materials corn and cellulosic and produces end products ethanol, corn oil and distillers dried grains soluble. Managing commodity risk has emerged as a key issue in todays economy. Demand and supply uncertainty is a good framework for understanding supply chain strategy.
Globalization is a reality, but the effectiveness of current supply chain practices is constantly being challenged. Gep can help you with an assessment and action plan to manage supply risk, secure cash flow and drive profitability. It uses strategies of pooling and sharing resources so that risk in supply disruption can be shared. For example, airlines may hedge their exposure to rises in aviation fuel by the use of options. Commodity price risk management a manual of hedging commodity price risk for corporates. Characteristics of the supply chain for the commodity. Supply chain risk management deals with the identification and control of potential risks along the supply chain. Ja17 presented by michael irgang executive vice president global risk management corp. Tactical approaches for mitigating supply chain risks. Our primary purpose is to introduce supply chain practitioners and scholars to the operational strategies that firms can implement to manage supply chain disruption risk. Supply chain management definitions a supply chain consists of all the parties involved directly or indirectly in fulfilling a. A company is part of a supply chain, with pricing agreements and price developments on both supplier and customer side.
Guidelines for managers hedging depends on distribution of market power. It is the second lesson that is the focus of this chapter. It allows us to understand how a firms hedging choice depends on its supply chain partners decision, and how such interaction is affected by supply chain characteristics such as. But most of the supply chain managers fail to understand how the financial risks affect them.
Sure, supply managers are on the front lines of ensuring continuity of supply and managing a global supply base. We first develop an optimization model considering maximization of. With 27,000 stores operating in more than 64 countries, starbucks coffee has become a global leader in the delivery of the coffee experience to consumers worldwide. The operational hedge in their study is the use of excess capacity and production switching options. Efficient supply chain strategies aimed at creating the highest cost efficiency riskhedging supply chains strategies aimed at pooling and sharing resources in a supply chain so that the risks in supply disruptions can be shared responsive supply chains strategies aimed at being flexible to the changing needs of customers agile supply. Lets assume that an indian company is purchasing from a us supplier. Consider airlines, which have seen fuel costs rise sevenfold over the last few years, says bob tevelson, a. In this research, two risk hedging strategies, the option contract and the advance purchase discount contract, are investigated within a manufacturerretailer twoechelon supply chain context. Risk hedging supply chain it uses strategies of pooling. What are the most effective hedging strategies to reduce. A supply chain strategy should be selected based on the characteristics of the product and. Three popular ones are portfolio construction, options, and.
Pdf risk management in global supply chains hedging for the. A survey of classifications in supply chain strategies core. Agile information systems for mastering supply chain. What are the characteristics of efficient, responsive. Voss a a institute of information syst ems iwi, university of hamburg. There is an inherent risk of loss associated with trading.
The airline might purchase a call option that gives the company the right but not the obligation to buy a quantity of fuel from the seller at an agreed price some. Because pf shorter and shorter product life cycles, the pressure for dynamically adjusting and adopting a company supply chain strategy is great. Four levels of maturity in supply chain operations and risk management. Unifying theory of commodity hedging and arbitrage. Commodity trading is not suitable for all investors. But as these natural disasters show us, risk includes the ramifications of business interruption, changing consumer behavior, product changes, fluctuations in market share, and. Say using alternative supplier, increasing safety stock etc. We discuss the issue of supply and demand uncertainty and how to align the supply chain strategy with the product demand and supply characteristics. Efficient cost effective responsiveagile react quickly risk hedging risk reduction basically you cant win them all. Global supply chain risk management strategies citeseerx. After establishing axioms and rules of inference, we investigate the agribusiness supply chain to help illustrate.
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