Supply Chain Design Optimization With Heterogeneous Risk-Aware Agents

Modern supply chain networks (SCN) are becoming increasingly complex, with vulnerable entities exposed to uncertain disruptions that affect local or global supply chain attributes. We model a stochastic mixed-integer program to minimize the overall cost of SCN design and operations, in response to lead-time and demand uncertainties following given probability distributions. We formulate a heterogeneous risk-aware model to trade off between cost and delay/shortage by considering different risk-attitudes amongst supply chain agents. In particular, we employ the Conditional Value-at-Risk (CVaR) as a coherent risk measure for quantifying risk while attaining solution tractability. We derive managerial insights from our numerical studies, finding the most benefit from diversifying agents in the root tier, since their disruptions affect all other tiers in the SCN. We find that as agents become more risk averse, the optimal solutions for key agents (such as assemblers), seek more backup suppliers and allocate extra capacities to achieve resiliency and reliability. Practitioners can use the outcomes of our framework and studies to guide SCN design considering heterogeneous risk attitudes between agents. Note to Practitioners—With growing uncertainties in global supply chains, inefficient responses to disruptions can lead to large penalties and long-term impacts such as customer dissatisfaction. This research is motivated by the challenges arising during the operations of supply chains under both lead-time and demand uncertainties. We employ optimization and centralized control approaches to optimize supply-chain network design as well as response strategies to disruptions, and our framework can handle heterogeneous risk preferences as it models the risk attitude of each individual entity or agent in supply chains. Our model can be utilized to completely or partially re-design resilient supply chains, to better prepare for unknown features and uncertainties. Our case study provides insights about risk-averse supply-chain designs that can reduce response cost, but increase initial investments on backups and redundancies.