Borders, Variability and International Supply Chains

Arnold Maltz, Ph. D.W. P. Carey School of Business

Arizona State University

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Topics

• Why borders matter• The analytical issues• The empirical questions• Organization of the research• Progress to date

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The Import Process – Physical Flow

THE IMPORT PROCESS

ShippingLine

Port OperatorLongshoremen

Forwarder/BrokerCustoms Officials

Drayage towarehouse

Warehouse/Transload

Truck Inland

Rail Inland

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Why International Borders Matter

• Border crossings (sea or land) introduce uncertainty/variability into the supply chain– Geographic features– Political involvement– Cultural concerns

• The concrete result is lead time variability which is on top of demand variability

• The managerial responses might be:– Accumulate additional inventory – Adjust promised delivery dates to customers– Change sources/customers

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INVENTORYAnalytical approaches

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Stochastic Lead Time Inventory Models

• Long history – Kaplan (1970), Nahmias (1979), Ehrhardt (1984)– Song and Zipkin (1993, 1996)

• Rarely applied to borders– Lewis et al. (2005)– Muharremoglu and Yang (2010)

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Control Theory – A Second Approach

• Based on Simon (1952), Forrester (1958), but considerably elaborated (Sterman (1989), Towill (1982), and others).

• Critical concerns are:– Variance amplification (Bullwhip)- Dejonckheere

et al. (2003)– Stability – Warburton et al. (2004), Disney and

Towill (2005)

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Research Questions

• Much of the U. S. literature is focused on “disruptions.” When does a delay become a disruption, and is that relevant for individual importers? Moreover, how important is the likelihood of delay vs. the length of delay?

• How to relax unrealistic assumptions?– Orders cannot cross (see M & Y)– Continuous review vs. periodic review– “Linear” order costs

• Can the strategic network planning models incorporate stochastic inventory results?

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LEAD TIME QUOTING/ADJUSTMENTAnalytical approaches

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Lead Time Quoting Models

• Typically based on manufacturing process– Yano, 1987– Duenyas and Hopp, 1995– Spearman and Zhang, 1999

• Direct consideration of transportation variability rarely seen in literature, although safety lead time is commonly considered– Beamon, 1999– Lee and Billington, 1992

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Incorporating Variability

Initial model

Where a = quoted lead time p(a) = probability order will be placed given quoted lead time R = net revenue from order c = penalty cost of late order y = actual lead time, which is stochastic

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Research Questions

• Suppose we can approximate f(y), the distribution of actual lead times. Can we then look at the effect of mitigating the uncertainty and how it will improve on-time performance?

• Prior research has shown that customers value reliability as much as speed. Thus, can we get a better look at p=probability of order placement if we consider p(a, s(a))?

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EMPIRICAL CHALLENGES

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Issues

• How do you define “delay”?– Total lead time vs. promise?– Some deviation(s) from mean?– When do you start and stop the time?

• Where do you get the data?– CBP both uncooperative and possibly not reliable– Shippers and receivers may not measure– Intermediaries most likely, e.g. World Bank– Current government programs and projects

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RESEARCH ORGANIZATION

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Multiple Contacts

• Analytical-primarily secondary research, with some advancement later.

• Empirical– Contacts with major transport companies– Contacts with sophisticated shippers– Contacts with intermediaries– Web scraping?

• FOIA for Customs?

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Extensions of Previous Work

• Culture and low cost country evaluation (Maltz et al., 2011)

• Analyze World Bank data on delays, etc., by country

• Cost of delays (Hummels)

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PREVIOUS WORK ON CULTURE AND PROCUREMENT

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Reliability is Important

Reliability

Cost

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Summary

• Lead time variability is likely magnified in international supply chains

• Both analytical and measurement issues remain, as international increases in importance

• BORDERS WILL ALWAYS BE WITH US

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Questions? Comments?

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