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 supply chain 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, this study illustrates 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.
Highlights
Chains (SCs) of firms are intrinsically pregnable to risk
In case of sourcing decision of a firm where an array of SC risks and associated interconnectivity among the different risk sources add to the complexity (Kayis and Karningsih, 2012)
Understanding the dependency structure can better assist the decision maker to arrive at optimal solutions to a number of SC network problems (Bombelli et al, 2020; Hearnshaw & Wilson, 2013), especially sourcing decision where sources of risks are interconnected (Wagner et al, 2014)
Summary
Chains (SCs) of firms are intrinsically pregnable to risk. While involvement of multiple supply chain components has added to the complexity of SCs over the years, the practitioners and academicians witness intense SC incidences due to interconnected nature of components in SC (Sheffi, 2007; Waters, 2011). Understanding the dependency structure can better assist the decision maker to arrive at optimal solutions to a number of SC network problems (Bombelli et al, 2020; Hearnshaw & Wilson, 2013), especially sourcing decision where sources of risks are interconnected (Wagner et al, 2014). In the case of a risk averse manufacturer where the optimal level of sourcing (or input choice) varies with change in the interconnectedness (Fischl et al, 2014) between the background risks and the supply-side risks under a regulated market condition, which has not been investigated in the literature till date. As an example of this class of decision-makers, we consider the context of a generic drug manufacturer of a pharmaceutical industry, wherein a representative firm operates in a perfectly competitive framework under regulated environment A detailed simulation exercise is carried out to investigate the impact of mitigation measures on SC risks and illustrates the analytical and practical applications in the conclusion section
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