A portfolio approach to supply chain disruption management

A new, computationally efficient portfolio approach to supplier selection in the presence of supply chain disruption risks is proposed, where the selection of supply portfolios for parts is combined with production scheduling of finished products. Unlike most of reported research on the supply chain risk management which focuses on the risk mitigation decisions taken prior to a disruption, the proposed portfolio approach combines decisions made before, during and after the disruption. The two decision-making approaches are considered: an integrated approach with the perfect information about the future disruption scenarios, and a hierarchical approach with no such information available. In the integrated approach, which accounts for all potential disruption scenarios, the primary supply portfolio that will hedge against all scenarios is determined along with the recovery supply portfolio and production schedule for each scenario. In the hierarchical approach, first the primary supply portfolio is determined, and then, when a primary supplier is hit by a disruption, the recovery supply portfolio is selected. For the integrated and the hierarchical decision-making, mixed integer programming models are developed with the two risk-neutral conflicting objectives that account for both time and cost of recovery: minimising expected cost or maximising expected service level. The findings indicate that for both objectives, the integrated decision-making selects a more diversified primary supply portfolio than the hierarchical approach and when all primary suppliers are shutdown by disruption, a single sourcing recovery portfolio is usually selected.