Demand Risks

Fortunately for petroleum coke consumers, middle marketers exist who are willing to hold inventories and expose themselves to supply and demand risks. In return, marketers receive profit margins that could indeed be avoided if a consumer were to purchase petroleum coke directly from a producer (refiner). Middle marketers, therefore, absorb much of the risk involved in petroleum coke trade, stabilizing prices, and allowing more solid fuel consumers to consider and plan coke purchases. 

In a distribution supply chain, products flow out in a fan-shaped structure to the retailers. Consider the example of a warehouse and retailers in Figure 2.2. Even if the retailers serve independent markets, the retail supplies are linked because the warehouse inventory policy affects the supply to otherwise independent retailers. But the presence of the warehouse may generate significant benefits to the supply chain by enabling bulk commitments by the wholesaler or plant, which can deliver to the warehouse, followed by a distribution to retailers as their demands unfold. The warehouse thus offers the benefits of demand risk pooling and enables geographic postponement of the deliveries to retailers. We will analyze the impact of such risk pooling in Section 2.3. 

In all the examples discussed until this point, the manufacturer chose capacity and thus absorbed supply chain risk. Consider the case where the retailer has to order ahead of observing demand (i.e., at time L before the start of the season), while the manufacturer produces this certain order. The retailer thus absorbs all demand risk through its choice of inventory. Given that demand is variable, this demand risk manifests itself at the end of the season through either excess inventory that has to be salvaged or shortages that generate opportunity costs. 

The data above suggest that a trucking company providing trucks faces demand risk because on 20% of the days Smart will require no trucks, while on 10% of the days Smart will require 5 trucks. The next step is to understand how a carrier has to plan capacity to make trucks available to Smart. Smart has contacted a trucking company (Quick) that will supply... 

Express delivery companies, such as FedEx, offer services such as critical parts supply. This service stores critical parts for OEMs at one of FedEx s hubs. As soon as there is demand for a part, FedEx will schedule to get it delivered to the desired location based on the promised guarantee. The transportation mode used may vary from a next flight out from a regular airport to a FedEx same-day shipment to a next-day shipment. While premium transport is an expense, such services permit geographic postponement and thus an opportunity to pool demand risk across locations. 

Demand orchestration The process of making trade-offs market to market based on the right balance of demand risk and opportunity. These trade-off decisions are dependent on the use of advanced analytics to sense and shape demand simultaneously. 

Workplace risk assessment can be defined as a systematic procedure for analysing workplace components to identify and evaluate hazards and safety characteristics (Harms-Ringdahl 2001). Due to EU regulation (Council Directive 89/391/EEC) each member state of the European Union has to establish national legislation to demand risk assessment procedures in enterprises of all sizes. In Estonia, the Act on Occupational Health and Safety that requires risk assessment at the every workplace was adopted in 1999. Workplace risk assessment has to be conducted by the employers using their own resources or by registered practitioners in occupational health (Occupational Health and Safety Act 1999). 

Aggregating customer demands reduces demand risk... 

Reduction in demand risk reduces total inventory in the supply chain... 

Take the risk Here the company owns the risk and takes actions to reduce it. Maintaining inventory to manage supply and demand risks is an example of this strategy. 

Share the risk Here the company takes some risks and asks its supply partners to take the rest. An example of this is the "portfolio strategy" followed by HP to mitigate demand risk. We will discuss HP s portfolio strategy in detail in Section 7.7. 

Inventory—It is commonly used as a buffer to manage unpredictable supply and uncertain demand risks. However, inventory is expensive and may become a risk for high-tech products due to obsolescence. 

HP has developed a successful portfolio approach to procurement. It is similar in concept to the portfolio approach in investment, where an investor buys several different stocks in order to reduce the risk of capital loss. HP emphasizes multiple sources for parts and different geographical regions for suppliers in order to reduce the supply and demand risks. Instead of one or two sources with long-term contracts, HP uses a portfolio of several options as follows ... 

The following method describes a way of determining the relationship level and thereby the information level within the supplier and customer relationship. In this way one can determine different factors, such as customer/supplier relationship, supply/demand risk and uncertainty, dynamic product innovation and technology, global operations and network and business process complexity according to the different customer and supplier segments and their relationship level ... 

Supply/demand risk and uncertainty describes the level of volatility in different aspects of the company s operations such as purchasing, where shortage risks are common. 

To protect against the upside demand risk, the buyer may buy an option to purchase the needed quantity of the item at an agreed upon price, which is exercised by the buyer at some future date when demand is high. The option price is determined by the stock market based on the extent of market volatility. 

The retailer maximizes her expected profit from sales in ME, by choosing an appropriate value of Q, and supplier 1 maximizes his profit by choosing an appropriate value of W. Finally, supplier 2 maximizes profit with respect to W2 and R. Note that the retailer transfers her demand risk to supplier 2, who will therefore be justified in charging a premium price. The details of this model can be found in Appendix 2, where the optimal values of Q, w, W2, and R are established. 

Consider a chain comprising a retailer in ME, a manufacturer in EE, and a bank in ME. Demand for the product is where is a random variable. Clearly, there are different ways of managing the demand risk (i) only retailer bears the risk, (ii) only bank bears the risk, (iii) only supplier bears the risk, and (iv) the three parties share the risk. We consider a simple case where only the supplier bears the risk. This implies that the retailer pays the bank an amount equal to the minimum of her sales revenue and invoice value. In turn, the bank pays the supplier what it receives from the retailer less the service charges. 

For emergency relief, contracts must reflect the uncertainties of disasters. This can be achieved in multiple ways. Instead of a fixed delivery time, the buyer can require supplies to be delivered at a time (to be specified by buyer) within a time window. The buyer may also insist that they should be able to change the order quantity, if needed and vary the wholesale price within some botmd. Buyer can buy insurance or financial options to hedge against demand volatility. Buy back contracts, where unsold items can be returned by the supplier at a discounted price, leads to sharing of demand risk by both buyer and supplier. 

Next, managers must identify demand risk, exchange-rate risk, and political risk associated with regional markets. They must also identify regional tariffs, any requirements for local production, tax incentives, and any export or import restrictions for each market. The goal is to design a network that maximizes after-tax profits. 

Sodhi, M.S. (2005). Managing demand risk in tactical supply chain planning for a global consumer electronics company. Production and Operations Management, 14(1), 69-79. 

Firms can deploy a ntrmber of flexibility strategies to mitigate the negative irrrpact of these demand risks. In particular, they can deploy one of the following ... 

As noted in the introduction, firms may be reluctant to invest in flexibiUty to reduce the impact of rare-but-seveie dismptions because a lack of precise likeUhood estimates prevents them from conducting accurate cost-benefit analyses. However, the fact that the types of flexibility that mitigate the more routine supply, process and demand risks also mitigate raie-but-seveie dismption risks should encourage managers to invest in flexibiUty. 

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