Surface vs. Air Shipment of Humanitarian Goods under Demand Uncertainty

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Author Information : John H. Park, Seaver College, Pepperdine University
Burak Kazaz, Whitman School of Management, Syracuse University
Scott Webster, W.P. Carey School of Business, Arizona State University

Year of Publication : Production and Operations Management (forthcoming)

Summary of Findings : This study enables humanitarian organizations, e.g., UNICEF, determine the optimal amount of budget and corresponding inventory of humanitarian goods so that when there is breakout, it can provide a rapid and efficient response to humanitarian crises (e.g. malnutrition).

Research Questions : 1. How can a humanitarian organization prepare best for its inventory positioning (e.g., how much inventory to send to each country in advance of a humanitarian crisis) and transportation response (amount of inventory reserved for emergency shipments)?

2. What is the impact of variation in demand (needs for humanitarian goods) in determining the level of inventory allocated to local country offices and the mount reserved for emergency shipments?

3. What is a good intervention for the monies that might improve response management to humanitarian crises? For example, the humanitarian organization might have to choose between improving the accuracy of forecasting in local countries and reserving additional supplies for emergency shipment.

What we know : Each year, humanitarian organizations like UNICEF have to solve the problem of allocating inventory of humanitarian goods to each country and reserving some supplies in case of an outbreak. World Health Organization reports that nearly 20 million children under the age of five suffer from severe acute malnutrition; nearly one million children die every year from malnutrition. To eradicate malnutrition, UNICEF and other organizations purchase ready-to-use-therapeutic food (RUTF). They send supplies to each country that is likely to have this problem. The question is how much to give each country. Moreover, if there is an outbreak (for example, due to a drought reducing food production), then the humanitarian organization has to send emergency supplies. If the amount of emergency supplies is not sufficient, then the humanitarian organization has to convince donor organizations (e.g. The Gates Foundation) to raise additional funds, have manufacturers (e.g. Dannon) to produce additional RUTF, and have logistics companies ship it to the regions of need. Even if successful, it is often too late in response to such crises. Our work prepares humanitarian organizations to provide a fast and effective response mechanism by determining the best levels of inventory to be shipped via surface to local country offices and the best level of inventory reserved at a central location to be responsive to potential outbreaks.

Novel Findings : Academic studies often focus on maximizing profit, or shareholder value, in determining the optimal levels of inventory. Our study maximizes coverage, or in turn, minimizes expected shortage of humanitarian supplies. Moreover, it shows how a humanitarian organization should budget between inventory that is purchased and shipped via surface to local country offices versus the inventory that is reserved for air (and drone) shipment in case of an emergency.

Implications for Policy: It is essential for a humanitarian organization to prepare in the best possible manner for humanitarian crises. Our study enables them to determine the best budgeting infrastructure. It helps determine the level of humanitarian goods to provide to local offices in advance of a crisis and the level of supplies to be reserved for emergency shipments after an outbreak.

Implications for Society: Better planning by humanitarian organizations can reduce human fatalities significantly. The fact that nearly one million children die from severe acute malnutrition tells us the need for the kind of contribution our study can make in eradicating, or at the least significantly reducing, the number of human losses in such disasters.

Implications on Research: Our study is the recipient of the best paper award from the Production and Operations Management Society’s College of Humanitarian Operations and Crises Response. It will hopefully inspire other studies to go beyond the budgeting, inventory and transportation planning.

Full Citations : Park, J.H., B. Kazaz, S. Webster. 2018. Surface vs. air shipment of humanitarian goods under demand uncertainty. Forthcoming in Production and Operations Management. http://onlinelibrary.wiley.com/doi/10.1111/poms.12849/

Abstract : The combination of insufficient funds and limited information regarding the demand in regions of desperate need presents a great challenge to many humanitarian organizations. This paper examines how a humanitarian organization can minimize the expected shortage in delivering relief aid to regions of need, either though surface or air transportation, in the presence of demand uncertainty with a budget constraint.

The paper makes four contributions. First, we show that when there is reserved supply for air transportation, it is optimal to provide a higher service level through surface shipment to regions with greater demand uncertainty. Second, we show that the demand variation plays a significant role in the allocation of funds between surface and air shipments. The reaction of the humanitarian organization to higher degrees of demand uncertainty can be determined by the optimal level of inventory purchased for surface shipment. If the optimal inventory for surface shipment is less (greater) than the mean demand, then we show that increasing degrees of demand uncertainty leads to increasing (decreasing) reliance on the air shipment option with greater (smaller) levels of inventory reserved for air transportation and decreasing (increasing) levels of inventory reserved for surface shipment. Third, when there are opportunities to invest in better forecasting, we find that a humanitarian organization should focus its resources on improving the demand forecast in one region as opposed to evenly allocating resources to all regions. Fourth, we show that the expected amount of shortages reduces with a higher number of regions to serve due to a risk-pooling effect.

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Burak Kazaz

Burak Kazaz

Professor Kazaz is The Steven R. Becker Professor of Supply Chain Management, The Laura J. and L. Douglas Meredith Professor and professor of supply chain management. His research interests include the integration of operations (purchasing, production, distribution), marketing (pricing, market segmentation) and finance (managing economic/currency risks, hedging), with a special interest in managing uncertainty and risk in global supply chains.
Burak Kazaz
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