As a new management mode, great attention has been paid to virtual enterprise (VE). While there is much research material on risk management of VE, a relationship perspective on owner and partner performance assessment and management can bring an added dimension. The coordination of risk management in fashion and textiles (FTs) supply chain organized as a VE is studied in this paper. The aim of this study is to find proper decision mechanisms that can improve the overall performance of risk management for the whole VE as well as each member. For the risk management problem in VE, a centralized mechanism is given as the base case, and then a distributed decision-making (DDM) mechanism with incentive scheme is introduced to establish a practicable strategic partnership. Under the DDM mechanism, a relationship performance definition that incorporates the financial dimension is investigated. For the two resulting optimization problems, a particle swarm optimization (PSO) algorithm is designed. In the numerical examples, the study shows that the DDM mechanism with incentive scheme can improve the overall benefit of risk management beyond the centralized one. Additionally, sensitivity analysis is conducted with respect to the bonus parameter, and suggestions are made for further research.
In the past decade, fashion and textiles (FTs) industry become one of the most rapidly developed industries. Virtual enterprise (VE) is becoming the important organized pattern of FTs supply chain. VE is defined as an organization that brings complementary individuals and interest groups together in an association in order to meet short-term objectives and exploit fast changing market trends. The essential characteristics of VE are as follows: the involvement of legally independent partners, a limited lifespan, the existence of a common mission for all participants, a focus on each partner’s key competencies, and the intensive use of information technologies [
In the past, various models and mechanisms have been developed to provide a more scientific and effective way for managing the risk of a VE. Zhi (1995) [
Much of the existing literature focuses on identifying risk, providing risk evaluation method, and developing risk management models. Many models proposed in the literature only discuss the risk management issues in a traditional centralized structure, few develop distributed decision-making model by considering the diversity of the members and the distribution characteristics of the VE. But the models they proposed did not involve any additional way, like incentives, to improve the coordination of members in VE.
This study attempts to establish the risk management of VE by determining appropriate mechanisms of coordination and independency among members in the VE. The study differs from the existing literature in that it not only attempts to discuss the risk management issues in a functional centralized mechanism, but also investigates distributed decision-making ones in terms of financial incentives which, in addition to giving a higher level of coordination among all parties in the VE, maximizes the benefit of the whole VE. In view of the fact that the models of the risk management problem are considered as NP-hard, and a nonlinear with discrete variables, a particle swarm optimization (PSO) is designed. The comparative study between the distributed decision-making (DDM) mechanism with incentive schemes and the centralized mechanism is presented in the numerical examples.
The rest of this paper is structured as follows. In Section
The risk management problem can be described as follows.
In an FTs supply chain organized as VE, the owner (an FTs enterprise) finds a business project consisting of several subprojects. The owner is not able to complete the whole project using its own capacity. Therefore, it has to invite partners for the subprojects. Of course, the risk management of the sub-projects is also an important responsibility of partners. The owner determines the upper bound of the budget for each subproject first. The partners who accept the budget condition will respond to the risk management of its sub-project and propose the benefit of the risk management that they need to finish according to the resources they have. The risk loss for subproject should not go beyond the value which is expected by the owner. In this process, the owner manages the risk of the entire project to ensure the success of VE, while maximizing the benefit of risk management from the entire project.
For each partner, there are several risk factors which threaten its safety. Being dealt with risk control strategies, the risk factor will be controlled by some way. There are some strategies for each risk factor. The effect of each strategy on the corresponding risk is different. Thus, the description for each risk factor and the cost of the different control strategies are different. The partner has to maximize its benefit of risk management by optimally combining these strategies, under the budget allocated by the owner. The benefit of risk management for each partner/subproject is a difference between the initial risk loss of the subproject and the risk loss under risk management. The conceptual representation of risk management in VE is shown in Figure
The conceptual representation of risk management in VE.
For comparison purposes, the models in this study are constructed and separated according to the centralized mechanism and the DDM mechanism respectively, which are the centralized model and improved DDM model with incentives.
The following notations and assumptions are used in all the studied models.
costac: activated cost for each partner ($).
The VE in the study consists of one owner and several partners. One partner responds to one subproject. It is assumed that the failure of risk management for each sub-project is an independent event. The impact of different risk factors on one sub-project/partner is assumed to be an independent event. Generally the bonus for the partner is not-less than its activated cost. Only one strategy will be selected for each risk factor or will do nothing with it. All information referred to the risk management process is available for the owner, such as the initial risk loss and the risk loss under the allocated budget of each partner. The value of activated cost for each partner is the same.
The centralized model views the system as one entity where there is one central planner (owner) who makes all decisions so as to maximize the benefit from the risk management of the whole system. Under this situation, a casual relationship is formed between owner and partner, but there is no mechanism to push forward their mutual trust. Each party must still be aware of the uncertainty caused by the other, such as whether the budget will be allocated correctly and on time to the partner or whether a strong enough risk control strategy will be selected to mitigate the risk by the partner.
subject to
The goal of risk management in the study is to maximize the benefit of risk management, which consists of the benefit of risk management from owner and partners. The benefit is a difference between the downsize of risk loss and the allocated budget, as shown in (
VE involves the coordination of independently managed enterprises/partners who seek to maximize their own profits. Although overall performance of the VE on the partners’ joint performance, the operational goals may conflict and result in an inefficiency for risk management of the entire VE. Therefore, one of the main issues in risk management of VE is to find suitable decision mechanisms for coordinating the risk management processes that are controlled by owner and various partners, in order to achieve an overall maximum benefit from risk management [
A DDM model with incentives is proposed to enhance the relationship formed between owner and partners. In practice, mutual relationship and trustful information are hardly achieved for independent companies without any financial benefits. This should be the first step leading to the full cooperation from members in the VE. Therefore, the owner should contribute some incentives to partners as a means to make a link between them and as an aim to improve the performance of the VE as well as their own company. The decision process of risk management is described by a two-level DDM model, namely, top-level and base-level, which demonstrates the decision process of owner and partners, respectively [
The DDM model for risk management of VE.
subject to
In top-level, the decision maker is the owner who allocates the budget to the members of the VE, including himself/herself. The owner’s aim is to maximize the benefit of risk management for the whole VE; the decision variables are therefore given by
The base-level:
In base-level, the decision makers are the partners and there are
There are two decision variables in the model, which are the budget for members (
Due to the complexity of the studied models, which include a number of if-else conditions (as seen in Section
To simplify the discussion, let
For the continuous variable
For the discrete variable
Here “
In the two types of models, the fitness of particles is calculated by the following different fitness functions.
The fitness function for the centralized model:
Here
According to the two-level structure of the DDM model, the fitness functions for the top-level and the base-level are presented, respectively.
The fitness function for the top-level:
The fitness function for the base-level:
The particles are updated by different formulas for the continuous and discrete problems respectively.
Here
The velocity value can be constrained in the interval
For this problem, only one strategy will be selected for one risk factor or will do nothing with it. Considering this characteristic, in particle
Let particle For For End For If Action End Next_risk_factor End
The maximum number of iteration is used as the termination rule. For the centralized problem, the maximum number of iteration is
The procedure of PSO for the centralized problem is shown in Figure
The procedures of PSO for the centralized problem.
The procedure of PSO for the DDM problem is shown in Figure
The procedures of PSO for the DDM problem.
An example of an FTs supply chain organized as VE is built to demonstrate the proposed algorithm and highlight the financial benefits from the incentive. One owner and one partner are considered in the example, so the number of members in the VE is 2,
For the partner, there are
The parameters
The partner has to pay for the cost of risk control strategies under its budget. The cost of the strategy is assumed to be a concave increasing function of the corresponding strategy, which is approximated by
Here the parameter
The relation between risk loss function and cost function.
For the DDM model with incentives, a bonus
The values of data.
Input data | Set values |
---|---|
Number of member in the VE ( |
2 |
Upper bound of total budget ( |
$1,200 |
Initial risk loss of owner and the partner ( |
$3,000 |
Number of risk factors for the partner ( |
10 |
Number of available risk control strategies for each risk factor ( |
4 |
Bonus for the partner |
$400 |
Target value of risk loss by the owner ( |
$1,000 |
Activated cost parameter ( |
0.8 |
Activated cost (costac) | $320 |
The results of the centralized mechanism are used to be the base case for further improvement. As seen in Table
Computational results of the centralized mechanism and DDM mechanism with incentives.
Performances of the VE | Centralized mechanism | DDM |
---|---|---|
Benefit of VE ($) | 2,410 | 2,755 |
Benefit from owner ($) | 1,296 | 1,493 |
Benefit from partner ($) | 1,014 | 1,263 |
Benefit of partner ($) | — | 2,347 |
Investment for owner ($) | 500 | 596 |
Investment for partner ($) | 700 | 604 |
Total investment ($) | 1,200 | 1,200 |
Risk loss of partner ($) | 1,286 | 733 |
Cost of partner ($) | 697 | 870 |
Strategies combination for partner | 1 0 0 3 3 3 2 3 0 0 | 0 3 3 2 1 1 1 0 0 0 |
Get bonus from owner | No | Yes |
The total risk management benefits of the VE from the DDM mechanism are clearly increased from the base case as shown in Table
Comparison of the risk management benefits from centralized mechanism and DDM mechanism.
It would be premature to draw too many conclusions from the initial study. But as a pilot study, the research fulfills its purpose, which is to demonstrate the proposed algorithm by using PSO to compare the traditional centralized mechanism without incentive schemes and the functional DDM mechanism with incentive schemes. Although the solutions given by PSO may not always be optimal, it has proven to generate reasonably good solutions. This is far better than comparing a system with better parameter settings to another system with poor parameter settings. The two optimization problems have the same parameter settings of PSO, which is shown in Table
Parameters setting of PSO for the two optimization problems.
Parameters | Value |
---|---|
|
100 |
|
80 |
|
80 |
|
80 |
|
2.05 |
|
2.05 |
|
2 |
|
2 |
The results obtained from this study reveal a preliminary outline of benefits from providing incentives among partners in the VE. More experiments of this perspective are still required. This sensitivity of input parameters, as they are usually not known, is another area where further study is needed. Even though there are many variable parameters in the system, not all of them have a major influence on the outcome. Therefore, the incentive scheme (i.e., bonus) is selected to do the sensitivity analysis on the main focus of the study. PSO is used to search for accepting or rejecting the bonus; the amount of bonus in this study is always fixed at
By varying the bonus (
Effect of the bonus variation on the performance of VE.
Effect of the bonus variation on the performance of partner.
When the bonus is increased, the benefits of the owner and the partner are both increased. However, it is noticeable that when the bonus is increased up to
The strategic partnerships among the members in an FTs supply chain, which is organized as a VE, are essential for improving the performance and responsiveness of the VE. Coordination among the members of VE is a potential way to establish a strategic partnership. However, under conflicting interests among members from different companies, such coordination is not easily implemented. This paper introduced a DDM mechanism with incentive schemes in forming the coordination. The DDM model with incentive schemes has been identified and put into comparison with the centralized one. The simulation results show that appropriate decision mechanism can allow the VE to achieve the best performance (the highest benefit of risk management) and establish a practicable strategic partnership. Besides the FTs supply chain organized as VE, the proposed DDM mechanism is also very useful for other industry supply chains which can be organized as VEs.
There are also several areas for further research. First, it is assumed that all information refers to the idea that risk management process is available to owner. This may not be suitable in some situations where the asymmetric information among the members of VE is possible. Second, the study can be extended to other types of model configuration, such as multiple partners and also different types of coordination: rebate, profit sharing, or other incentive schemes. This would make the study more realistic and cover wider perspectives.
The position of particle
This work is supported by the National Natural Science Foundation of China under Grant no. 71071028, no. 71021061, no. 70931001, and no. 61070162, the National Science Foundation for Distinguished Young Scholars of China under Grant no. 61225012; the Specialized Research Fund for the Doctoral Program of Higher Education for the Priority Development Areas under Grant no. 20120042130003; Specialized Research Fund for the Doctoral Program of Higher Education under Grant no. 20110042110024 and no. 20100042110025; the Specialized Development Fund for the Internet of Things from the Ministry of Industry and Information technology of China; the Fundamental Research Funds for the Central Universities under Grant no. N110204003.