Uncertainty propagation in a supply chain or supply network

A supply chain is characterized by uncertain demands (demand-side uncertainty) and uncertainties associated with the performances of the production facilities (supply-side uncertainty). In this paper, a method is proposed to plan production in a supply chain with a multi-echelon supply process with unreliable production facilities working in markets with uncertain demand. In such a system it is necessary to consider the global and cumulative effects on the performance of the entire supply chain. We introduce the salient features of uncertainty propagation in supply chains and demonstrate their impact quantitatively using a test problem from the automotive industry. 2014 Elsevier Ltd. All rights reserved. 1. Frame of reference Today companies are improving their competitiveness by reducing production costs, by higher productivity, by improving quality through concentrating on their core competencies and by improving their flexibility to respond to rapidly changing customer expectations. All these requirements disperse previously centralized production systems into a network of core-competency-centered companies called ‘‘Supply Chains’’ (SC) or, more accurately, ‘‘Supply Networks’’ (SN). Along with all the advantages of SCs/SNs, decentralization reduces their controllability and makes them more vulnerable to uncertainties. This highlights the importance of uncertainty management in SC/SN to predict, control and mitigate the negative effects of uncertainty on SN performance. Uncertainty management capability of a SC/SN are mainly reflected in one of its performance metrics, the service level. Recently service level has become an important competition factor and many companies attempt to improve their market share by providing better service levels. For example, two well-known book retailers, Amazon and Barnes and Noble, who share more than 85 percent of online sales, initiated competition by promising the same business day delivery in different parts of the country. Blockbuster, a well-known company in the video rental industry, advertises its high fill rate and backs its promise up with a free rental guarantee. The same is happening in the fast food industry, Domino’s, for example, guarantees 30-min delivery or free delivery. Black Angus restaurants advertise free lunch if the customer’s order is not provided in 10 min. Retailers such as Lucky emphasize their short checkout times. Well Fargo Bank guarantees less than five minutes wait for its customers or gives them a $5 reward. Airline companies advertise based on their percent age of on-time arrivals. Several independent internet sites provide information about the company performance such as their service level warranties, back-up chargeback agreements, etc. Moreover, specifying a delivery window is common in business-to-business settings. Thus, service is becoming one of the most important competition factors. Service level is the capability of a company to balance demand and supply quantities. This balancing is not easy in reality because both demand and supply processes are stochastic. By assuming perfect production systems, supply side uncertainty has usually been ignored in the extensive service level literature. But in reality there is no perfect production system. Increasing the http://dx.doi.org/10.1016/j.tre.2014.10.01