International Journal of Production Research Integrated supply chain risk management via operational methods and financial instruments Integrated supply chain risk management via operational methods and financial instruments

Abstract

Supply chain risk management (SCRM) is an emerging field that generally lacks integrative approaches across different disciplines. This study contributes to narrowing this gap by developing an integrated approach to SCRM using operational methods and financial instruments. We study a supply chain composed of an aluminium can supplier, a brewery and a distributor. The supply chain is exposed to aluminium price fluctuation and beer demand uncertainty. A stochastic optimisation model is developed for managing operational and financial risks along the supply chain. Using this model as a base, we compare the performance of an integrated risk management model (under which operational and financial risk management decisions are made simultaneously) to a sequential model (under which the financial risk management decisions are made after the operational risk management decisions are finalised). Through simulation-based optimisation and using experimental designs and statistical analyses, we analyse the performance of the two models in minimising the expected total opportunity cost of the supply chain. We examine the supply chain performance as a function of three factors, each at three levels: risk aversion, demand variability and aluminium price volatility. We find that the integrated model outperforms the sequential model in most but not in all cases. Furthermore, while the results indicate that the supply chain improves its performance by being less risk averse, there exists a threshold beyond which accepting a higher risk level is not justified. Managerial insights are provided for various business scenarios experimented with. Keywords: risk management; supply chain; finance; inventory; integrated methods; optimisation via simulation Introduction Risk management provides an important arena to visualise and understand the true nature of supply chain management and its interdisciplinary context. As corporate risk management spans several disciplines such as procurement, finance, operations and marketing, the approaches used to manage risks along a supply chain also need to be interdisciplinary. As reported in a survey by , the literature is short on studies using interdisciplinary and integrated approaches to supply chain risk management (SCRM). This article contributes to research on SCRM by examining an integrated approach to risk management using operational and financial risk management methods. The application venue considered is the beer industry with three members along its supply chain: an aluminium can supplier, a brewery and a beer distributor. Faced with beer demand uncertainty and volatile aluminium prices, a simulation-based optimisation model is developed which incorporates both operational and financial risk management methods. The operational risk management method exploits the timing and sizes of aluminium sheet procurements, as well as the inventory levels of raw material, work in process and finished goods maintained at all three supply chain members. The financial risk management method focuses on the optimal purchase of call, and put options on aluminium futures to manage aluminium price uncertainty and the uncertainty in aluminium demand. The optimisation model developed minimises the expected total opportunity cost of the supply chain over an eight-week peak demand period