Essays on risk management in logistics

Abstract

This thesis addresses two issues about risk management in ocean transport and manufacturing decisions, respectively. In the first essay, we study a retailer (shipper) who transports products from overseas factories to the destination market via ocean lines in order to satisfy a stochastic demand during a selling season with markdowns. We first consider two ocean carriers providing uncertain transit times with the corresponding freight rates. Our models reveal two benefits of maintaining a carrier portfolio. First, allocating shipments to more than one carrier spreads the risk of markdown losses. Second, we find that using heterogeneous carriers can tackle the demand-side uncertainty. As for multiple candidate carriers, the optimal solution is derived in closed form if transit time uncertainty is negligible. By numerical experiments, we demonstrate that a two-carrier portfolio performs quite well, although there can be multiple carriers selected in the optimal solution. The second essay studies the inventory competition under yield uncertainty. Two firms with random yield compete for substitutable demand: If one firm suffers a stockout, which can be caused by yield failure, its unsatisfied customer may switch to its competitor. We first study the case in which two competing firms decide order quantities based on the exogenous reliability levels. The results from the traditional inventory competition are generalized to the case with yield uncertainty and we find that quantity and reliability can be complementary instruments in the competition. Further, we allow the firms to endogenously improve their yield reliability before competing in quantity. Under some conditions, we show that the reliability game is submodular. Our results indicate that competition in quantity can discourage reliability improvement.

Date of Award	2013
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology