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Sourcing Decision under Interconnected Risks: An Application of Mean-Variance Preferences Approach

Sourcing Decision under Interconnected Risks: An Application of Mean-Variance Preferences Approach
Sourcing Decision under Interconnected Risks: An Application of Mean-Variance Preferences Approach
Supply chains are customarily associated with multiple interconnected risks originated from supply side, demand side, or from the unanticipated background uncertainties faced by a firm. Also, effective functioning of supply chain hinges on sourcing decisions of inputs (raw materials). Therefore, there is a striking need to analyse the risk preference of the decision maker while going for optimal sourcing decision under varying degree of interconnected SC risks. This study addresses this issue by analysing the comparative static effects under interconnected supply chain risks for a risk averse decision-maker, manufacturing and selling products in a regulated market under perfect competition. The decision-maker faces not only supply-side risk (due to random input material prices) but also interconnected risks arising out of background risk (setup costs risk) and demand-side risk (output prices risk). With preferences defined over the mean and standard deviation of the uncertain final profit, we illustrate the effects of the changes in the pairwise correlations between the three above mentioned risks on the optimum input choice of the manufacturer. To contextualise this study, an India-based generic drug manufacturer cum seller has been considered as a case in the parametric example of our model. Adaptation of the mean-variance framework helps obtaining all the results in terms of the relative trade-off between risk and return, with simple yet intuitive interpretations.
Decision analysis, Interconnected risks, Mean–variance model, Sourcing decision, Supply chain risk
0254-5330
Mukherjee, Soumyatanu
3eb37c57-3efd-4203-a81b-de3acad02811
Padhi, Sidhartha S.
56f1be5a-eeba-4a43-8c3f-03a22fce13cd
Mukherjee, Soumyatanu
3eb37c57-3efd-4203-a81b-de3acad02811
Padhi, Sidhartha S.
56f1be5a-eeba-4a43-8c3f-03a22fce13cd

Mukherjee, Soumyatanu and Padhi, Sidhartha S. (2022) Sourcing Decision under Interconnected Risks: An Application of Mean-Variance Preferences Approach. Annals of Operations Research. (doi:10.1007/s10479-021-04485-3).

Record type: Article

Abstract

Supply chains are customarily associated with multiple interconnected risks originated from supply side, demand side, or from the unanticipated background uncertainties faced by a firm. Also, effective functioning of supply chain hinges on sourcing decisions of inputs (raw materials). Therefore, there is a striking need to analyse the risk preference of the decision maker while going for optimal sourcing decision under varying degree of interconnected SC risks. This study addresses this issue by analysing the comparative static effects under interconnected supply chain risks for a risk averse decision-maker, manufacturing and selling products in a regulated market under perfect competition. The decision-maker faces not only supply-side risk (due to random input material prices) but also interconnected risks arising out of background risk (setup costs risk) and demand-side risk (output prices risk). With preferences defined over the mean and standard deviation of the uncertain final profit, we illustrate the effects of the changes in the pairwise correlations between the three above mentioned risks on the optimum input choice of the manufacturer. To contextualise this study, an India-based generic drug manufacturer cum seller has been considered as a case in the parametric example of our model. Adaptation of the mean-variance framework helps obtaining all the results in terms of the relative trade-off between risk and return, with simple yet intuitive interpretations.

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Full-manuscript_interconnected-risk_r-n-r_4-8-2021 - Accepted Manuscript
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More information

Submitted date: 26 December 2019
Accepted/In Press date: 6 December 2021
e-pub ahead of print date: 7 January 2022
Keywords: Decision analysis, Interconnected risks, Mean–variance model, Sourcing decision, Supply chain risk

Identifiers

Local EPrints ID: 439163
URI: http://eprints.soton.ac.uk/id/eprint/439163
ISSN: 0254-5330
PURE UUID: 7a8125c0-0cc7-4f4c-a797-b4b66a6674b0
ORCID for Soumyatanu Mukherjee: ORCID iD orcid.org/0000-0003-0674-1064

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Date deposited: 06 Apr 2020 16:30
Last modified: 28 Apr 2022 02:30

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Contributors

Author: Sidhartha S. Padhi

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