SGER: Pricing and Managing Risks in Global Manufacturing Enterprise

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The research objective of this award is to develop models for effective management of the manufacturer?s demand risks, and explicitly price the risks the supplier takes in joining a global manufacturing enterprise. Currently, such risks are implicitly included in the contracts between the manufacturer and the supplier. In this research, financial engineering concepts, such as fair pricing and real-options will be rigorously applied to effectively price the risks in the area of manufacturing. The research focus is on the applicability of these models to realistic situations faced by a global manufacturing enterprise. Thus, the models will include inventory and lead time processes and their effects on these risks. Deliverables include documentation of the models, documentation and verification of research results and involvement in engineering education.If successful, this research will advance our understanding of how an enterprise should be created to explicitly manage risks and will provide a scientific basis for the compensation paid to supplier. The research results will benefit manufacturers and suppliers involved in a global enterprise. This relationship between the two is increasing the pressure on both to manage risks adequately and reduce costs with shorter turn-around times. Explicit pricing of risks will provide benefits to the US manufacturing industry beyond benefits realized by incremental improvement of the management of operational risks using inventory control and capacity utilization. The concepts and results will be disseminated through various publications and will be included in the graduate courses in Industrial and Operations Engineering, Financial Engineering and Mechanical Engineering at the University of Michigan. Students will be exposed to multidisciplinary research and development as a result of this award.