Integrated Selection of Supply Portfolio and Scheduling of Production

This chapter presents a stochastic MIP approach to integrated supplier selection and customer order scheduling in the presence of supply chain disruption risks, for a single or dual sourcing strategy. The suppliers are assumed to be located in two different geographic regions: in the producer’s region (domestic suppliers) and outside the producer’s region (foreign suppliers). The supplies are subject to independent random local disruptions that are uniquely associated with a particular supplier and to random regional disruptions that may result in disruption of all suppliers in the same geographic region simultaneously. The domestic suppliers are relatively reliable but more expensive, while the foreign suppliers offer competitive prices, however, material flows from these suppliers are more exposed to unexpected disruptions. Given a set of customer orders for products, the decision maker needs to decide which single supplier or which two different suppliers, one from each region, to select for purchasing parts required to complete the customer orders and how to schedule the orders over the planning horizon, to mitigate the impact of disruption risks. The problem objective is either to minimize total cost or to maximize customer service level. The obtained combinatorial stochastic optimization problem will be formulated as a mixed integer program with conditional value-at-risk as a risk measure. The risk-neutral and risk-averse solutions that optimize, respectively, average and worst-case performance of a supply chain are compared for a single and dual sourcing strategy and for the two different objective functions. Numerical examples and computational results are presented and some managerial insights on the choice between the two sourcing strategies are reported.