Applying compound options in logistics enterprise risk management

In demand-driven manufacturing, the firm places emphasis on on-time delivery. When the economy is booming, this will cause the numbers orders to be too high and beyond a manufacturer’s own cargo load. This study aims to develop a compound option mechanism for both manufacturers and outside logistic carriers concerning demand uncertainty. The mechanism provides manufacturers the option to outsource logistic carriers if they receive too many orders. When the outsourcing logistic carrier also overloads, then the carrier also have the option to use outside carriers. The study use a Taiwan printed circuit board (PCB) manufacturer case to demonstrate. Results show that an option mechanism could help demand-driven manufacturing hedge the future demand uncertainty risk, when shipments overload its own fleet limit or are under the cost equilibrium point. Furthermore, they can indeed reduce the hedging cost.