Managing Supply Flexibility And Inventory Risks In An Innovative Product Supply Chain

As one of the key drivers for global economic development and boom, technological innovation is creating a more knowledge-intensive, complex and uncertain environment. The increasing rate of innovation shortens each product's duration in the market, thereby compressing each product's life cycle, facilitating product proliferation. In order to survive in this competitive environment and keep sustained competitive advantage, many companies are forcing to increase their rates of innovation by developing and introducing innovative products and improving their process technology. Innovative products, such as hi-tech products and style items, are increasingly becoming the focus on enhancing profitability by many companies. On the other hand, owing to short life cycle and high uncertainty of supply and demand, many companies will have to confront with some risks exposure to capacity or inventory issue when they launch an innovative product to market. This challenges to the supply chain management to innovative products. For example, when market demand is ramp-up or downside, large variability of demand continues to result in some supply risk for production capacity shortage and penalty to lose some sales or some inventory risks for markdown or obsolescence. All these risks badly affect on its supply chain performance. So how to produce and delivery innovative products to customer in a responsive and cost-efficient way become the research topic and focus in this dissertation.Some oversea studys on innovative products are limited to qualitative description on its concept and relevant SC strategic design and quantitative analysis on Bayesian updating of demand forecast and non-stable demand process. It's seldom discussed by domestic researchers. All of these studys lack of a overall framework on on innovative products supply chain design and feasible measurement against demand uncertainty. Some quantitative analysis is too complex to have maneuverability. Those limitations restrict the production and delivery of innovative products and some feasible theory and method should be proposed.Flexibility is a mechanism that enables firms to match their products'supply to market demand in the face of uncertainty because it facilitates a quick response and provides the ability for firm to provide niche and customized products to the consumer. This is especially important in the provision of innovative products. Therefore, to meet customer needs, flexibility must be built into its supply chains design and coordination to hedge against the demand uncertainty, so as to build up an overall concept framework on supply flexibility for this dissertation. Moreover, supply flexibility contained the flexibility to re-configurate supply chain strategically and the capacity flexibility and leadtime flexibility tactically. The purpose of this research target that supply flexibility is captured to improve supply chain performance for innovative products through re-configurating this chain and to share or to hedge the inventory risks tactically through using capacity flexibility and leadtime flexibility to act as a buffer mechanism to demand uncertainty. Some theories such as optimization, contract theory, game theory and real option were used to model and analyze the relevant problems qualitatively and quantitatively. Some originative results are deduced as follow:Firstly, supply chain design on innovative products was discussed at the strategic level. Innovative products can be categorized into technological innovative products and fashion innovative products according to their life cycle length, demand characteristic and required responsiveness. The different products require different supply chain strategy. On different stages of product life cycle, the required supply chain strategy may also change. It is necessary to built up supply flexibility by the strategic positioning of decoupling point in an innovative products supply chain and adjusting or reconfigurating supply chain strategy on the product life cycle. It was found that it is key important to succeed in launching innovative products by building supply flexibility in an innovative products supply chain and match uncertain demand with uncertain supply and affect on a company competitive strategy. Secondly, the strategic positioning of decoupling point in an innovative products supply chain was optimized by a non-linear optimaztion model. one of the methods to acquire supply flexibility strategically is the selection and optimization of strategic positioning of decoupling point in an innovative products supply chain. Decoupling point, defined as a point for real demand to penetrate to upstream along supply chain, separate innovative products supply chain into two parts of lean supply and agile supply. The tradeoff between production and flexibility in the whole chain is required by the strategic inventory at this point. An optimization model on the strategic positioning of decoupling point was used to minimize the objective founction under the constraint of customer's service level. This founction is the total cost for each stage, which is made up of inventory holding cost, shortage backorder cost and operation cost of production system. It was found that optimal decoupling points and optimal buffer size are decreasing in service level, increasing in average demand arrival rate.Thirdly, the roubust optimization for the palnnig of production and distribution of innovative products was taken by a roubust mix integer programming model. It should be considered when lunching innovative products. A robust mix integer programming model involves in production and distribution two stages. Its objective function concludes the fixed cost and variable cost, the transportation cost from factory to DC, the inventory holding cost and fixed operation cost in DC, and the transportation cost from DC to customer regime. Relative robustness measurement is selected as penalty term for various scenarios and incorporated in the objective function. Using the weighted average ensures that the model solution is not driven by one remote case. It was found that the model is robust to demand uncertainty for innovative products.Fourthly, two coordination mechanisms ware designed through build capacity flexibility and leadtime flexibility into customized components purchase by real option in contract manufacturing. Rather than using traditional inventory as a buffer, capacity flexibility and leadtime flexibility are acted as a buffer mechanism to absorb demand uncertainty and provide some supply flexibility for innovative products supply chain at the tactical level.Fifthly, capacity flexibility, built in contract on real option between supplier and buyer, may be used to deal with innovative products'demand uncertainty and share in the inventory risks. In the environment of contract manufacturing, quantity flexibility contract is not significant until suppler have flexible capacity and used as a buffer mechanism to demand uncertainty. Thus, it is necessary for buyer and supplier to sign flexible capacity reservation contract through negotiation, so as to deal with supply shortage or obsolescence phenomena occurring in the purchase of customized components when innovative products'demand is ramping up. So a real-option-based flexible capacity reservation model provide an opportunity for supplier select optimal capacity option pricing and buyer determine their optimal capacity reservation through Stackelberg game. It was found that component inventory risks resulted from demand uncertainty may be transferred to supplier due to the flexibility of option contract. In return, supplier may build up its flexible capacity to counter against these inventory risks and be compensated from this capacity option to hedge against the demand uncertainty and risks.Sixthly, delivery leadtime flexibility, built in contract on real option between supplier and buyer, may also be used to deal with innovative products'demand uncertainty and share in the inventory risks. In the environment of contract manufacturing, since reduction of supplier replenishment leadtime and the variety of leadtime may reduce inventory without harming provided service level, a option mechanism on leadtime flexibility was built up to share the component inventory risk in innovative products supply chain. After determining a component delivery due-date but before execution, buyer observed demand changing and want to modify the delivery leadtime to expedite or postpone. Apparently, this negotiate mechanism is a real option on leadtime. Buyer burdens a proportional of cost to build leadtime flexibility and encourages supplier execute option on leadtime so that response to demand uncertainty and share the risks of component inventory. It was found that this Stackelberg game negotiation on leadtime flexibility may enable buyer to order the optimal quantity and channel to obtain a Nash equilibrium solution through reasonable sharing proportional of leadtime flexibility cost.Some originalities in this dissertation:(1)It was proposed that efficiency and responsiveness of innovative products SC should be tradeoffed by the strategic positioning of decoupling points between lean supply and agile supply so as to improve SC performance. M/M/1 queue theory and PH-distribution approximate arithmetic were taken to mesure some parameters. The non-linear optimaztion was resolved by Genic Arithmetic.(2)The definition of relative robustness was taken as Lagrangian slack variable to incorporate in the robust model for an innovative product supply chain. Some decision variables on strategic production and distribution planning are optimized under the extreme case of demand or the worst condition and robust solutions are achieved.(3)Real option was incorporated in the purchase decision of customized component of innovative products and a decision model was proposed for flexible capacity reservation contract. This model can better the condition for buyer to deal with demand uncertainty of innovative products and shareing or hedging the relevant inventory risks of customized component.(4)A real-option-based model on leadtime flexibility presents another supply flexibility of component purchase decision. This flexibility may replace partial inventory so as to deal with the demand uncertainty. if the sharing proportion of leadtime flexibility cost is determined reasonably through bargaining negotiation, some inventory may be hedged and buyer's order quantity will be optimal and channel acquire coordination.In the optimization model of decoupling points, when there are different utilization rates, to resolve the optimal solution of decoupling points may be complicated. This is the limitation of this dissertation.The model of supply flexibility for innovative products may provide some guide and management insight in new product development, supply network configuration, introducing and launching new product.