Showing papers by "Jan A. Van Mieghem published in 2007"

Risk Mitigation in Newsvendor Networks: Resource Diversification, Flexibility, Sharing, and Hedging

Abstract: This paper studies how judicious resource allocation in networks mitigates risk. Theory is presented for general utility functions and mean-variance formulations and is illustrated with networks featuring resource diversification, flexibility (e.g., inventory substitution), and sharing (commonality). In contrast to single-resource settings, risk-averse newsvendors may invest more in networks than risk-neutral newsvendors: some resources and even total spending may exceed risk-neutral levels. With normally distributed demand, risk-averse newsvendors change resource levels roughly proportionally to demand variance, while risk-neutral agents adjust only proportionally to standard deviation. Two effects explain this operational hedge and suggest rules of thumb for strategic placement of safety capacity and inventory in networks: (1) Risk pooling suggests rebalancing capacity toward inexpensive resources that serve lower-profit variance markets. This highlights the role of profit variance (instead of demand variance) in risk-averse network investment. (2) Ex post revenue maximization suggests rebalancing capacity toward substitutable flexible but away from shared capacity when markets differ in profitability. Capacity imbalance and allocation flexibility thus mitigate profit risk and truly are operational hedges.

Multimarket Facility Network Design with OffShoring Applications

Abstract: Moving production to low-wage countries may reduce manufacturing costs but increases logistics costs and is subject to foreign trade barriers, among others. This paper studies a manufacturer’s multimarket facility network design problem and investigates the offshoring decision from a network capacity investment perspective. We analyze a rm that manufactures two products to serve two geographically separated markets using a common component and two localized final assemblies. The common part can be transported between the two markets that have different economic and demand characteristics. Two strategic network design questions arise naturally: (1) Should the common part be produced centrally or in two local facilities? (2) If a centralization strategy is adopted for the common component, which market should the facility be located in? We present a transportation cost threshold that captures costs, revenues, and demand risks, and below which centralization is optimal. The optimal location of commonality crucially depends on the relative magnitude of price and manufacturing cost differentials but also on demand size and uncertainty. Incorporating scale economies further enlarges the centralization’s optimality region.