Supplier Network Configuration and Contingency Planning Considering Multiple Demand Points and Supplier Failures

This paper deals with the optimal allocation of demand across a set of suppliers given the risk of suppliers’ failure to deliver. We consider items that are used in multiple facilities (demand points) and that can be purchased from multiple suppliers with different cost and reliability characteristics. Suppliers have production flexibility that allows them to deliver a contingency quantity in case other suppliers fail. Costs considered include supplier fixed costs and variable costs per unit, while failure to deliver to a demand point results in a financial loss particular to that demand point. The model considers all the possible states of nature when one or more suppliers fail. The model results in a base allocation to one or more of the available suppliers and a state of nature specific delivery contingency plan from the suppliers to each demand point. A numerical example, as well as sensitivity analyses, is presented to illustrate the model and provide insights.