Disruption Risk Management in Serial Multi-Echelon Supply Chains

This research focuses on managing supply chain disruption risk using inventory and reserve capacity in serial multi-echelon supply chains. The research problem is to determine the optimal risk mitigation inventories and reserve capacities when product transformation occurs at each echelon. Disruptions at each echelon are modeled as a random process. We derive insights on the optimal location and quantity of risk mitigation inventory (RMI) and reserve capacity held in serial supply chains. We show that the downstream echelon typically holds at least as much RMI as the upstream echelon. At the same time, it is often optimal to hold additionally more reserve capacity downstream than upstream. These results hold under the assumption that inventory and reserve capacity holding costs are larger downstream than upstream. Our research also suggests that RMI is preferred to reserve capacity as a risk mitigation lever in long serial supply chains, i.e., in supply chains with a large number of echelons. This research problem is inspired by a risk management problem of a leading pharmaceutical company.