Essays on supply-chain risk management

Hwang, Woonam (2015) Essays on supply-chain risk management. Doctoral thesis, University of London: London Business School.

Abstract

This dissertation aims to improve risk management in supply chains. We focus on both supply-side and demand-side risks, which have grown in importance as supply chains have become more global and complex. Traditionally, the operations management literature has treated both supply and demand uncertainty as exogenous. We relax these assumptions and delve into the micro-foundations of the two sources of uncertainty to uncover new insights in supply-chain risk management. In the first essay, we investigate supply-side risk. In particular, we study when and why simple contracts perform well in a decentralized supply chain where the supplier can exert effort to improve his reliability. Complex contracts could be used to align the incentives of buyer and supplier; but in practice, firms often prefer to use simple contracts that are easier to implement and enforce. We find that simple wholesale price contracts can be remarkably efficient in inducing reliable supply, and this depends on three key factors: (i) the type of supply risk (whether the supplier's capacity is random or the supplier's yield is random), (ii) the relative bargaining power of the buyer and the supplier, and (iii) whether the buyer or the supplier determines the production quantity decision. The results have important implications for contract choice and the optimal design of the procurement process. In the second essay, we look into demand-side risk. Although the operations management literature typically assumes consumers behave rationally, the growing literature on behavioral economics suggests otherwise. The literature has proposed various consumer preference models that capture different behavioral biases, but often targeting a specific type of consumer-choice anomaly, and failing to explain the others. Therefore, we propose a model of mental accounting that jointly explains various consumer-choice anomalies, including sunk-cost effects, payment depreciation, reluctance to trade, preference for pre-payment, and the at-rate bias. Our model provides a foundation for modeling aggregate consumer demand with behavioral biases, which in turn can be used to study the downstream firms' pricing and inventory decisions. In an era of outsourcing and globalization, managing both supply-side and demand-side risks in supply chains is of paramount importance. This dissertation yields new insights into how to better manage those risks, and also provides the micro-foundations of those risks for future research in supply-chain risk management.