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Risk Reduction of the Supply Chain Through Pooling Losses in Case of Bankruptcy of Suppliers Using the Black–Scholes–Merton Pricing Model

Title:

Risk Reduction of the Supply Chain Through Pooling Losses in Case of Bankruptcy of Suppliers Using the Black–Scholes–Merton Pricing Model

Valverde, Raul and Talla, Malleswara (2013) Risk Reduction of the Supply Chain Through Pooling Losses in Case of Bankruptcy of Suppliers Using the Black–Scholes–Merton Pricing Model. In: Some Recent Advances in Mathematics and Statistics. World Scientific, pp. 248-256.

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Official URL: http://www.worldscientific.com/worldscibooks/10.11...

Abstract

In recession times, slower demand, shrunk liquidity, and increasing pressure on cost can lead to bankruptcy of suppliers. The risks due to supplier bankruptcy include (a) losses due to supply chain disruption, (b) delayed or stopped finished goods shipments, (c) difficulty in finding cost-effective alternate suppliers and sourcing contracts, (d) emergency procurements, (e) loss of reputation and market share loss, etc. Bankruptcy models can be used to estimate the probability that a supplier may go bankruptcy, and a level of probability can be established that triggers the risks. This paper uses the Black-Scholes-Merton option pricing model for estimating the probability of bankruptcy of supplier by extracting and examining the riskiness in stock market price of supplier. The paper uses the pooling arrangements among companies that source from multiple suppliers as a way to reduce the risk due to supplier bankruptcy.

Divisions:Concordia University > John Molson School of Business > Decision Sciences and Management Information Systems
Item Type:Book Section
Refereed:Yes
Authors:Valverde, Raul and Talla, Malleswara
Date:1 May 2013
Keywords:Supply chain risk management, supply chain finance, Black-scholes-Merton
ID Code:979165
Deposited By: RAUL VALVERDE
Deposited On:24 Feb 2015 18:19
Last Modified:18 Jan 2018 17:48

References:

1. Zsidisin and Wagner, Do Perceptions Become Reality?: The Moderating Role of Supply Chain Resiliency on Disruption Occurrence,” Journal of Business Logistics , Vol. 31 No. 2, pp. 1-20 (2010).
2. Milne, Richard, "Early Warnings in the Supply Chain," Financial Times Europe, No. 36957,p p. 10 (2010).
3. Wagner, S.M and J.L Johnson, “Configuring and managing strategic supplier portfolios”, Industrial Marketing Management, vol 33, pp. 717-730 (2004).
4. Black F. and M. Scholes, “The Pricing of Options and Corporate Liabilities, The Journal of Political Economy, Vol. 81, No. 3. (May - Jun., 1973), pp. 637-654 (1973).
5. D.S.Levi, P.Kaminsky and E. Simchi-Levi "Chapter 3: Inventory Management and Risk Pooling"; Designing & Managing the Supply Chain, Second Edition (p-66) (2003).
6. Hillegeist, Stephen A., Elizabeth K. Keating, Donald P. Cram, and Kyle G. Lundstedt, "Assessing the Probability of Bankruptcy", Review of Accounting Studies, Vol. 9, No. 1, pp. 5-34 (2004).
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