Including costs of supply chain risk in strategic sourcing decisions

Cost evaluations do not always include the costs associated with risks when organizations make strategic sourcing decisions. This research was conducted to establish and quantify the impact of risks and risk-related costs on sourcing decisions for the automotive industry. The focus is on comparing distant, global suppliers entailing long supply chains with domestic, US-based suppliers. The risk factors effecting supplier selection were classified into eight categories. A model was developed using Monte Carlo simulation for scenario generation and Value-at-Risk methodology from finance theory for developing the risk-cost relationship. The model was tested using multiple scenarios which were generated by varying the risk profiles of suppliers. The results indicate that there is distinct and quantifiable relationship between supplier-related risk and total costs of sourcing. Furthermore, under high risk conditions, distant, global suppliers with relatively lower contract costs can exceed cost budgets as well as the cost of domestic sourcing. The model developed through this research can be used to compare two or more suppliers and map the total cost variation for suppliers under particular risk scenarios. Thus, the model can be used for strategically selecting low-cost and long-term suppliers.

Department dc:contributor.department

Massachusetts Institute of Technology. Engineering Systems Division.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2009

Author dc:creator

• Jain, Avani

Advisor dc:contributor.advisor

• Amanda Schmitt.

• Engineering Systems Division.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/53051

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/53051