Optimising Procurement Portfolios to Mitigate Risk in Supply Chains

Abstract

In recent years the management of risk in supply chains has become an important issue in the scientific literature. This aspect is of primary interest in market side decisions of a company such as in the procurement of materials. So far, traditional supply chain planning methods solely focus on improving cost efficiency and reducing inventory buffers in supply chains. These approaches are successful as long as the assumption of a stable supply chain environment holds. But when risks on the demand side and on the supply side occur these approaches become contraproductive and make the supply chain more vulnerable. What is needed now are new concepts which improve the flexibility of supply chains even in uncertain environments. In this work we will investigate a mid-term procurement decision where the buyer has to agree with his suppliers on supply contracts while facing demand and supply risk. We assume that the buyer negotiates with multiple suppliers who can supply products with the same quality. The problem we are dealing with is how to design a portfolio of optimal supply contracts in a mid-term planning horizon (e.g. one year) by specifying minimum and maximum quantities of a product in a contract. The objective of our planning problem is to minimise the total expected cost of supply.