Managing risks of supply-chain disruptions : dual sourcing as a real option

Abstract

This thesis examines how firms should prepare against disruption in their supply-chain and focuses on how they can use real options to value dual sourcing strategies. As an introduction, it defines a general framework to help managers to think about supply chain disruptions and determine adapted strategies. The logic of the paper is based on this framework. First it establishes a general review of the possible solutions to manage risk disruptions. A literature research points out that firms can use two complementary types of actions to respond to uncertainty: securing the supply-chain and developing resilience. Both can be performed in many different ways and it seems that there is no single best solution. The problem for managers is to choose a good strategy, and quantifying the benefits of the various solutions can be very helpful. The thesis focuses on the particular approach of dual sourcing and shows that the real options concept is an adapted tool to evaluate such a strategy. It develops an analytic model to analyze and value the benefits of relying on dual sourcing. This model takes into account various parameters such as the frequency of disruption and the loss of market share. Using MATLAB, it defines the particular circumstances that justify a second supplier. Sensitivity analyses permit to determine the impact of each parameter. The model also demonstrates the value of the option of delaying decision and shows that a time-varying dynamic strategy works the best. The thesis finishes with a few recommendations to help managers build a more resilient supply chain and use real options to quantify their choices.