Modeling Supply Chain Network under Risk and Uncertainty
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Date
2017-06
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Addis Ababa University
Abstract
Supply Chain network design (SCND) is a principle emphasizing the utilization of an
efficient integrated system of suppliers, producers, warehouses, retailers and customers, so
that items can be produced and distributed system-wide at the right quantities and right
locations so as to minimize costs and maximize services. It deals with strategic decisions
such as deciding on the number, location, capacities and technologies of facilities to be
opened, changes to existing facilities and supplier as well as wholesaler or customer
selection. In addition it includes tactical decisions such as production, shipping plans and
material flow through the network. The supply chains are complex, dynamic and highly
uncertain. Uncertainty in supply chain may take in the form of demand uncertainty(inaccurate
forecasting, seasonality, changes in customer preferences, etc.), supply uncertainty(e.g.
supply yields, supply capacities, etc.).
Underestimating the impact of uncertainties of supply chain and optimizing under the
assumptions of deterministic parameters is risky. Uncertainties of supply chain should be
explicitly included in the decision making process. In this paper, a stochastic single objective
optimization model have been considered for the supply chain network optimization problem
under risk and uncertainty and finally cost effective supply chain network is forwarded.
This thesis address the design of four echelon (supplier, plants, warehouse and wholesaler)
supply chain network(SCN), where both the plant‟s supplier and customer demand are
considered to be uncertain and stochastic but other parameters are deterministic and known in
advance. This paper proposes a single objective-single product optimization model for
handling the inherent uncertainties in the forward supply chain for designing the supply chain
network problem. A linear programming(LP) model is applied to realize the design of supply
chain network problem effectively. First a survey questionnaire on the existence of risk and
uncertainty to the Ethiopian textile industries, found in Addis Ababa, have been conducted
so as to have contextual meaning on the literature review towards the Ethiopian textile
industries context. Then the survey has been analyzed in a way that can be understandable
clearly so that risks to be taken into the model has been prioritized based on the respondent
rate and finally these with high respondent rate have been modeled into the transportation
cost minimization problem, which considers the shipment cost per kg and capacity(quantity)
in kg.General Algebraic Modeling System (GAMS 24.8.3) is used as a tool to formulate and solve
the LP model. A case study of Yirgalem Addis textile factory PLC is taken to demonstrate
the validity of the model. By evaluating the output data, the supply chain network for this
case is designed and the optimal product flow and or material flow between the suppliers,
plant, warehouse and wholesalers is calculated. The result of the optimization model is
compared to the existing transportation cost of the case company and by the application of
this model about 9% annual cost reduction is achieved.
Finally a sensitivity analysis of the supply and demand uncertainty have been conducted to
illustrate their impacts on the expected minimum cost. The result of the sensitivity analysis
shows that the suggested network diagram has a consistency to tolerate the variations in
demand and supply uncertainty. This contradicts with the case of the deterministic
environments in a way that, the variation in demand and supply will cause the network
structure and this requires another network development. Optimization of the supply chain
network has great importance in the case of stochastic environment in such a way that, the
developed network is tolerable to the demand and supply uncertainty and risk. If there is a
variation in the supply and demand, the suggested network diagram will not fail easily, it has
the ability to resist these variations of demand and supply uncertainty. Therefore the author
concludes that, optimization of the supply chain network under the assumption of
deterministic feature of supply and demand is risky and this may cause to the uncertainty of
the supply chain structure.
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Keywords
SCND and uncertainty, supply chain network optimization, Linear Programming(LP), Yirgalem Addis Textile factory PLC, GAMS build system