blocked - M.Sc. in Economics

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Course Syllabus: Risk Management in Global Markets
Risk Management in Global Markets
An Advanced Elective in the Integrated Master Program (MEP, MF, MIE)
University of Freiburg
Department of Economics
Winter Semester 2009
Professor Paul R. Kleindorfer
Anheuser-Busch Professor of Management Science (Emeritus)
The Wharton School of the University of Pennsylvania
&
Distinguished Research Professor
INSEAD, Fontainebleau
[email protected]
December 3-4, 2009 (10 a.m. to 6 p.m.)
December 17-18, 2009 (10 a.m. to 6 p.m.)
Course Description
The last two decades have seen immense changes in the forces and institutions that
govern economic activity. They encompass the on-going changes associated with
the European Union, and the changes in liberalization and governance initiated by
the World Trade Organization (WTO). Cross-border acquisitions and alliances,
together with new markets and new forms of contracting are supporting outsourcing,
unbundling, contract manufacturing and a variety of other forms of extended value
constellations. On the market side, the Internet has empowered consumers and
given rise to peer-to-peer networks. In the process, it has transformed whole
industries – the impact of Skype on the telecommunications industry, search engines
(Google) and e-Retailing, and the growth of e-Bay, to mention a few of the more
evident signs of change. In tandem, revolutionary developments in transportation
and integrated logistics providers such as FedEx, UPS and DHL are providing global
fulfillment architectures for B2B and B2C commerce.
These developments have revolutionized industry procurement and supply
activities, especially for companies with global reach. In the spirit of Adam Smith’s
Wealth of Nations (1776), the two fundamental factors driving economic growth are
specialization, to reap economies of scale, and trade, to assure that the most cost
effective sources for product design and manufacture can be linked to end markets.
This logic has been a friendly background accompaniment to international trade
growth for millennia, and especially since the industrial revolution launched mass
production of sufficient volume to make international distribution the key to
profitability for textiles, spices and foodstuffs. Adam Smith’s logic of specialization
and trade emerged from background accompaniment for local and regional
Integrated Master Program
1
economies to become the dominant theme of national economic growth in the 1990s
and beyond. Signs of the increasing global economic integration are everywhere
evident.
In Europe, the fall of the Berlin Wall in 1989 augured the integration of Central and
Eastern Europe into the market-based and financial institutions of Western Europe,
leading to the current 27-country marketplace of the European Union. In Asia, after
decades of “transition” and uncertainty, China and India emerged from the shadows
to begin their ascent to global leadership in low-cost manufacturing and informationbased technology support. This is reflected in the huge increases in outsourcing and
off-shoring evident in the past decade as low-cost sources of goods and services are
increasingly being plugged into global supply chains in the unbundling strategies of
companies.
The interdependent trends that are driving these developments are shown in the
Figure below. What should be noted in particular there is the growing importance
of eMarkets in enabling both better contracting in value chains as well as hedging
and risk management practices that were simply not thinkable prior to the launching
of the eMarkets and the derivative instruments that have come with them. These
markets and instruments have become the primary tools for price discovery, for
hedging and for valuation purposes in global supply.
Growth in International Trade*
Total Exports (M & S) 2000 = $7.94 Trillion
Total Exports (M & S) 2008 = $19.86 Trillion
Technology
Drivers
Globalization
• increasing cross-border
trade flows
• increasing demand for
cross-border logistic
& other services
• Outsourcing
•
•
•
•
Decision aids
Communications
e-Commerce
Open Innovation
Business
Transformation
Market
Liberalization
• Integrated Service
Offerings
• integration with
business processes
• Increasing deregulation
and liberalization/WTO
• Markets & Politics/Sustainability
Growth of Supporting
Infrastructure for Logistics
and Contracting
*Figures are in current $’s.
Source: WTO--http://stat.wto.org/Home/WSDBHome.aspx; for a
Dicussion, see Kleindorfer and Wind, The Network Challenge, Wharton Publ. 2009.
This course explores these issues and in particular the integration of financial and
physical markets as the emerging fabric of modern supply management. The course
will consist of 16 lectures, with the usual written examination following at a later date.
Typical questions for the final examination will be distributed as part of the course
lectures.
2
The lectures will be structured in four modules:
1. Introduction to the drivers underlying globalization (per above Figure) and to
some related issues on climate change and sustainability
2. Introduction to new decision tools for supply management and risk hedging
(including valuation methods for derivatives and options of various types)
3. Introduction to real options for project management and investment valuation
4. Coordination risk and hedging in commodity and near-commodity markets
(such markets include energy, chemicals, plastics, foodstuffs, agricultural
products and logistics services)
As part of the course, simulation methodology based on Crystal Ball® will be
introduced and used extensively. Crystal Ball® is an example of new and powerful
spreadsheet based simulation programs that have become important elements of
decision making in this new environment. These simulation tools allow the
quantitative solution of supply management problems which involve not just
complex contracts but also overlays of financial derivatives to hedge price risk. An
example (taken from one my recent papers) may be useful to indicate the nature of
the problem.
Consider the beverage industry. Aluminum is an extremely important element of the
cost structure of the beverage industry. For major buyers like Anheuser Busch
Company (an American brewer and soft drink manufacturer), a restricted set of
aluminum suppliers is used, even though the aluminum spot market price is a key
benchmark for sourcing and hedging and is determined by the actions of scores of
global players. Here, sourcing arrangements with main suppliers are typically set
according to the spot price plus processing costs, and contracts are marked to
market on a daily basis. Thus, AAA credit rating is essential for the main contract
partners. Second, there may be value-added services undertaken by these
contractors to take aluminum ingots and prepare them in a more suitable fashion for
can production, and again here this would be done only with specifications for these
services worked out with a few sellers. Similar situations occur in energy markets,
semiconductors, logistics and many other commodities and near-commodities. How
should contracts be priced for buyers and sellers in this market? What is the value
of various options for flexibility that can be built into such contracts? How can
derivative instruments be used to hedge the risk of such contracts? These are the
kinds of questions we will examine in this course.
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Group Assignments
There will be a number of group assignments to be done in learning teams. If you
have not already set up such teams, we will do so in the first class. Since some of
these group assignments will be done in class, it would be good if you would sit next
to your group (if you already know your group members). Concepts and tools used
in the group assignments will be tested in the final exam.
Readings, Handouts, and the Course Materials
All required cases and readings for this course are included in the bulkpack. In
addition, exercises, lecture notes, readings and other notes of interest will be
distributed in class during the course.
Course Schedule
Session 1: Thursday, December 3rd (10:00 to 13:00)
In this module, I will introduce and discuss the drivers of the current globalization
trends, together with an overview of the profit impacts of innovations in eMarkets of
the past two decades. I then begin with a review of supply management, which we
will need throughout the course as most of the risks we will consider are associated
with global supply chains.
Assignment:
Read: Hau Lee, “The Triple-A Supply Chain”, Harvard Business Review, October,
2004, Vol 82, No. 10 (R0410F).
Read: H. Lee, V. Padmanabhan, S. Whang, “The Bullwhip Effect in Supply
Chains”. Sloan Management Review, Spring 1997, pp. 93 – 102.
(If you do not have a chance to read these materials in advance, I will summarize
them in my lecture.)
I will provide a general introduction to and review of the following strategies
employed in designing supply chains for flexibility, time and cost performance:
•
•
•
•
•
•
•
Increase forecast accuracy.
Buffer inventory or excess capacity.
Find sources of new data to serve as leading indicators.
Reduce length of supply chain or increase its responsiveness.
Have different products share components so demand becomes more
predictable.
Differentiate products and components as late as possible in Supply
Chain.Develop supply chain flexibility towards a “build to order” strategy.
Use eMarkets to improve Supply Chain Coordination
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Preparation/Discussion Questions:
1. What is the “Bullwhip or Whiplash Effect” in industries, can you give some
additional examples other than those cited in the Lee et al. paper?
According to Lee et al., what are the causes of the Bullwhip Effect? Do you
agree or disagree? Can you think of additional causes other than those
discussed in the paper?
2. Why does information distortion cause inefficiencies in Supply Chains?
What do you think of the value and the risks of information sharing? What
are the benefits of supply chain coordination?
Session 2: Thursday, December 3rd (14:30 to 18:00)
Part a: Vendor-Managed Inventory: Barilla SpA case
This session addresses the implementation of vendor-managed inventory (VMI) to
improve supply chain performance with the case of the Italian pasta industry. The
discussion addresses the benefits, costs and implementation challenges of VMI from
multiple perspectives.
Assignment (please read this case before class if possible; we will have some time
to discuss this in groups during class, but prior preparation will help):
Hammond, J., “Barilla Pasta (A),” HBS Case, 694-046, June 1994.
Preparation/Discussion Questions:
•
What causes the fluctuations in distributor orders to the CDC? What costs do
these fluctuations impose on Barilla?
•
Identify barriers to implementing the JITD system.
•
Prepare to argue for or against the JITD system from the perspective of a sales
person at Barilla, a manager in the Barilla logistics organization, and the owner of
the Cortese DC.
Part b: Introduction to Crystal Ball® Simulation & Optimization
The final part of this session will be spent introducing the Crystal Ball simulation
program and learning some of its features that will be useful in both this course and
beyond. While no prior knowledge is assumed of Crystal Ball, it would not be badly
used time if you were to acquaint yourself with this software package in advance. It
is available on the Freiburg Server for student use.
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Session 3: Friday, December 4th (10:00 to 13:00)
This session will cover the sources of risk in global supply chains and what can be
done to mitigate and manage these. There are two basic approaches to risk
management in supply chains: one is the design of the supply chain, including
ownership/outsourcing, technology choice, facility location and sizing, product
allocation, inventory points and logistics; the second is the use of contracting
innovations to better manage volume and price risk along the supply chain. This
session will focus on the first area.
Assignment:
Exercises on Crystal Ball. If you have time, it would be good to undertake these
exercises prior to class. We will do these exercises in groups.
Read: Kleindorfer, Paul R. and Germaine H. Saad, “Disruption Risk Management
in Supply Chains”, Production and Operations Management, 14(1), Spring, 2005,
53-68. Download at:
http://grace.wharton.upenn.edu/risk/downloads/05-08-PK.pdf
Arthur D. Little, “Ensuring Survival: Business Models in a Low-Carbon World”,
September, 2009.
Skim (just to get an idea of what scenario planning is in case you do not already
know): D. Garvin and L. Levesque, “A Note on Scenario Planning”, Harvard
Business School Case 9-30-003, July, 2006. Skim also the Arthur D. Little Paper.
We will be conducting a short scenario planning exercise in class on some of the
major drivers of international trade for the next 15 years, focusing on climate
change issues.
This session continues the discussion of Session 3, now focusing on contracting
issues. Various examples of contract and portfolio management in capital-intensive
industries will be discussed using Crystal Ball to evaluate these. Using data for
several problems from the world of commodity procurement and supply
management, we will explore in class exercises how eMarkets can be used to
integrate physical and financial contracting and hedging. We will consider both
traditional commodity markets and the new carbon markets used to value and
reduce carbon emissions.
Assignment (Read before class if possible, focusing on the first reading)
Read: Paul R. Kleindorfer and Luk Van Wassenhove, “Risk Management in Global
Supply Chains”, Chapter 12 in the Wharton-INSEAD volume, The Alliance on
Globalization, edited by H. Gatignon and J. Kimberly (2004).
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Paul R. Kleindorfer, “Integrating Physical and Financial Contracting in Supply
Management, in Helyette Geman (ed), Risk Management for Commodity Markets,
Wiley Finance, 2008. Can be downloaded at:
http://opim.wharton.upenn.edu/risk/library/WP2008-05-11_PRK_Integrating.pdf
Session 5: Thursday, December 17th (10:00 to 13:00)
This session will cover the fundamentals of commodity risk management. We will
cover the first few chapters of the basic treatise on this subject by Geman, together
with doing some options-related problems to make sure that everyone is
comfortable with computing real options.
Assignment:
Chapters 1 through 4 of Helyette Geman, Commodities and Commodity
Derivatives, Wiley, 2005.
Corporate Financial Management: Options Exercises. HBS Case 9-293-095.
Exercises 1, 2 and 4 will be discussed in class. It would be good if you can try
to do them before class yourself. In any case, everyone should understand
these exercises, as some of these questions will be on the final examination.
Session 6: Thursday, December 17th (14:30 to 18:00)
This session will continue the previous session on commodities risk management
and consider the issue of computing complex real options values for Project
Management.
Assignment:
Read: Aswath Damodaran, Real Options, Chapter 8 in Strategic Risk Taking,
Wharton School Publishing, 2008.
Read: (Before class) INSEAD Case Study: “Supply Risk Management at
Unilever: Managing Spend at Risk” (estimated reading time—60 minutes).
We will discuss the following questions in class concerning this case:
1. What is an efficient portfolio of instruments for UL’s North America annual
HDPE spend?
2. Suppose that Uwe Schulte has decided, in cooperation with UL treasury, not to
exceed 1% of total spend on any commodity in maximum exposure from risk
hedge instruments (e.g. for a commodity with annual spend of $100 million,
no greater out of the money loss than $1 million on hedge instruments will be
allowed). What benefits can be obtained in reducing the right-hand tail of the
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Spend distribution for HDPE in North American that are consistent with this
rule?
3. What specific challenges do you see for UL SMLT in implementing the
process mapped out by the Plastics Team and applying it to other
commodities
This session will feature a capital budgeting problem associated with a major project
bid for an international copper mine, where the bidding is subject to some
interesting wrinkles that make it into a real options problem. We will solve this in
groups using Crystal Ball to assist us. We will also use this case as a backdrop to
illustrate a number of problems associated with using real options in practice.
Assignment:
“Bidding for Antamina”, HBS Case 9-297-054.
Questions to consider for the Antamina case (estimated reading time 90 minutes):
1. In what way is the development of a copper mine like Antamina a real option?
In what way is the bidding structure put in place by the Peruvian Government
a real option? What other real options does the owner of Antamina have?
2. What data and assumptions would you need to build a real options model for
the Antamina bid? (We will put use a Crystal Ball Model in Class to evaluate
the actual bid your team would make for Antamina, but you may wish to think
ahead of time as to what the structure of such a model should be.)
In this concluding session, I will present a summary of the results of recent research
on “Network-based Strategies and Competencies”. This includes discussion of the
recent financial crisis in global markets, and its relationship to supply risk
management and climate change. I will underline some of the basics of this course in
terms of the impact of globalization on financial and physical contracting. Risk
management will be a central theme of the new economic order, which emphasizes
eMarkets as mechanisms for both physical fulfillment as well as for price discovery
and hedging. The implications of this new economic order for the theory of the firm
will be highlighted. These include new approaches to innovation, to marketing, to
supply chain management, to strategy and to finance.
I will also briefly review the structure of the written examination for the course. This
exam will be taken from questions that I will distribute based on the lectures from
the course (so there should be no great surprises in the examination).
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Assignment: We will discuss the following questions:
What competencies do you have to develop to succeed in global commodity risk
management and in coping the impacts of climate change? What new strategies and
capabilities will be required for companies to compete successfully in the next 20
years and in responding to the risks posed by climate change?
Examination
There will be an examination covering course material with time and date
announced by the Prüfungsamt.
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blocked - M.Sc. in Economics

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