Analyzing Risks Measurement and Transmission of Supply Chain with Retail Price Fluctuation

1. Analyzing Risks Measurement and Transmission of Supply Chain with Retail Price Fluctuation Yonghong Li Lindu Zhao 2009-10-31

2. Contents • 1. Introduction • 2. Risks Model of a Supply Chain • 3. Transmission Mode Analysis • 4. Numerical Example • 5. Conclusions and Extensions

3. 1. Introduction

4. 1. Introduction

5. 1. Introduction

6. Most papers generalize and introduce supply chain risk just from the micro level • Few papers analyze quantificationally the measurement methods, transfer process, and impact extent of risk in a supply chain caused by the fluctuation of price.

7. c w d p Supplier Distributor Retailer Materials flow Capital flow 2. Risks model of a supply chain Figure 1. Supply chain flowing model without inventory

8. To simplify the analysis, assumptions of the paper are as follows: • (1)The information of costs structure and market demand of supplier, distributor and retailer are perfect information, and all of the supplier, distributor and retailer are risk-neutral; • (2)The supplier, distributor and retailer are independent economic entities; • (3)The situations of out of stock and holding inventory are irrespective; • (4)The retail price is a random variable;

9. The market demand: The relationships among the orders of retailer, distributor, purchases of supplier and the market demand:

10. The variance of profits of retailer : The variance of profits of distributor : The variance of profits of supplier:

11. 3. Transmission mode analysis There is a ripple effect in a supply chain. Because of the ripple effect, the risk caused by a certain factor will flow along the supply chain when the factor of the chain flows. That is, the risk of downstream echelon caused by factors has changed, there are a series of ripple effects and it will cause the risk of upstream echelon arising from the relevant factors to change. There is reduction effect, invariable effect and amplification effect for the change.

12. Measuring the risk of retailer and distributor by the variances of profits, so the difference of risk is the difference of variances :

13. The difference of risk between distributor and supplier is the difference of variances :

14. Theory: In a three-supply chain system, a reduction effect on risks caused by retail price fluctuation takes place when the wholesale price and distribution price satisfy conditions of

15. 4. Numerical Example Assume that the production cost and wholesale price are c=0.2, the maximum market demand and the price-sensitive coefficient are a=50 and b=0.1. The random variable subjects to the probability density function

16. Table 1. Expectations of retail price The conditions of risks reduction effect is:

17. Figure 2. Cures of distribution price d, wholesale price w and differences

18. From the simulation model: when the wholesale price and distribution price satisfy certain conditions in a three-echelon supply chain, risks of upstream echelon are lower than that of the downstream echelon and it is a reduction effect.

19. 5. Conclusions and Extensions • Characterize the risks of supply chain members by variances of profits • Analyze the influence of distribution price and wholesale price on the transmission mode of risks caused by price fluctuation in a supply chain • When the distribution price and wholesale price satisfy certain conditions, the upstream will suffer lower risks caused by retail price fluctuation than the downstream echelon

20. Further research • to characterize the risk of multi-echelon supply chains • to research the risk of three-echelon supply chains with inventories • to measure the risk when considering the retail price as a random variable by other methods

21. Thank You !