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Use of Probability of Default to Measure Operational Risk for a Three-Level Supply Chain

Date: 10-18-2007
Start Time: 1:00pm
End Time: 2:00pm
Speaker: Nesim Erkip, Bilkent University
Location: Uris 333

ABSTRACT

We consider a buyer facing random demand, a first tier supplier (OEM manufacturer) and a second tier supplier (supplier of the OEM). We investigate the supply chain under arbitrary contract structures resulting in a negotiated supply quantity, all enforcing total satisfaction of the random demand. We assume that unit manufacturing cost of additional units supplied to satisfy the realized demand (if needed) is more than the initial cost. We specify a number of models depending on the availability of the information on demand distribution at the different levels of the supply chain.

Our main interest lies in measuring operational risk using default probabilities of different parties, as well as for the supply chain in this environment. We show that computing the desired probabilities is possible. We also depict different properties for information availability, including situations where buyer benefits sharing demand information only with the second-tier supplier. We finally come up with ideas on how to incorporate the default probability notion into supply chain contracts.

This presentation is a report of an ongoing research with Prof. Sila Cetinkaya.

BIO

Nesim K. Erkip is a professor of industrial engineering at Bilkent University, Ankara. He received his undergraduate degree from the Middle East Technical University, Ankara and Ph.D. in IE from Stanford University. Nesim K. Erkip has been doing research on multi-echelon inventory systems, analytical models for supply chain management, inventory/production planning under uncertainty.
 
Prof. Erkip was a Fulbright Scholar in 1995-96 and had a position at the Middle East Technical University for over 20 years. He has been a visiting faculty member at Cornell University, Stanford University, University of California, Berkeley and Technische Universiteit Eindhoven. He has consulted to industry and served in editorial capacities for professional and academic journals. Dr. Erkip’s research has been published in journals like Management Science, Operations Research, European Journal of Operational Research, IIE Transactions, International Journal of Production Economies and Transportation Science.