The importance of decoupling recurrent and disruption risks in a supply chain

Abstract

This paper focuses on the importance of decoupling recurrent supply risk and disruption risk when planning appropriate mitigation strategies. We show that bundling the two uncertainties leads a manager to underutilize a reliable source while over utilizing a cheaper but less reliable supplier. As in Dada et al. (working paper, University of Illinois, Champaign, IL, 2003), we show that increasing quantity from a cheaper but less reliable source is an effective risk mitigation strategy if most of the supply risk growth comes from an increase in recurrent uncertainty. In contrast, we show that a firm should order more from a reliable source and less from a cheaper but less reliable source if most of the supply risk growth comes from an increase in disruption probability.

Managing Disruption Risk: The Interplay Between Operations and Insurance

“…inventory (e.g., Tomlin (2006) and Schmitt et al (2009)), emergency sourcing (e.g., Chopra et al (2007) and Yang et al (2009)), dual sourcing (e.g., Parlar and Perry (1996), Dada et al (2007) and Babich et al (2007)), demand management (Tomlin, 2009), and process improvement (Wang et al (2010) and Bakshi and Kleindorfer (2009)). Financial mechanisms for managing supply risk, e.g., supplier subsidies to reduce the likelihood of bankruptcy-induced disruptions, have been considered by Swinney andNetessine (2009) andBabich (2010).…”

A tight approximation for an EOQ model with supply disruptions

“…Schmitt, Snyder and Shen (2007) prove several properties of this system and provide an approximation for such systems with stochastic demand. Chopra, Reinhardt and Mohan (2007) consider a newsvendor facing both supply disruptions and yield uncertainty in a single-period setting. They examine the error inherent in "bundling" the two sources of supply risk; i.e., acting as though the disruptions are simply a manifestation of yield uncertainty.…”

Optimal Ordering Policy in Dual-Sourcing Supply Chain Considering Supply Disruptions and Demand Information

“…Here, supply uncertainty is a major issue in both the industrial and academic worlds. Most of the papers considering supply uncertainty focus on the production planning problems of uncertain production capacity, random manufacturing yield, or unreliable supplier (Gerchak et al, 1988;Parlar and Perry, 1996;Zimmer, 2002;Gupta and Cooper, 2005;Chopra et al, 2007;Serel, 2008;He and Zhang, 2008;Keren, 2009;Pac et al, 2009;Xu, 2010;He and Zhang, 2010;Li et al, 2010;Giri, 2011;He and Zhao, 2012;Li et al, 2012;Tang et al, 2012aTang et al, , 2012bXanthopoulos et al, 2012;Li et al, 2013). Giri (2011) focused on an inventory model for a single type of products and a single period in which the retailer could source from two suppliers.…”