Robust Sourcing Under Multilevel Supply Risks: Analysis of Random Yield and Capacity

Ming Zhao (), Nickolas Freeman () and Kai Pan ()
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Ming Zhao: Department of Business Administration, University of Delaware, Newark, Delaware 19716
Nickolas Freeman: Department of Information Systems, Statistics, and Management Science, The University of Alabama, Tuscaloosa, Alabama 35487
Kai Pan: Department of Logistics and Maritime Studies, Faculty of Business, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

INFORMS Journal on Computing, 2023, vol. 35, issue 1, 178-195

Abstract: We consider the optimal sourcing problem when the available suppliers are subject to ambiguously correlated supply risks. This problem is motivated by the increasing severity of supply risks and difficulty evaluating common sources of vulnerability in upstream supply chains, which are problems reported by many surveys of goods-producing firms. We propose a distributionally robust model that accommodates (i) multiple levels of supply disruption, not just full delivery or no delivery, and (ii) can use data-driven estimates of the underlying correlation to develop sourcing strategies in situations where the true correlation structure is ambiguous. Using this framework, we provide analytical results regarding the form of a worst-case supply distribution and show that taking such a worst-case perspective is appealing due to severe consequences associated with supply chain risks. Moreover, we show how our distributionally robust model may be used to offer guidance to firms considering whether to exert additional effort in attempt to better understanding the prevailing correlation structure. Extensive computational experiments further demonstrate the performance of our distributionally robust approach and show how supplier characteristics and the type of supply uncertainty affect the optimal sourcing decision.

Keywords: decision analysis; risk; supply uncertainty; distributionally robust (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:orijoc:v:35:y:2023:i:1:p:178-195

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