A stochastic optimisation approach to maintain supply chain viability under the ripple effect

Abstract

This paper presents a novel quantitative approach and stochastic quadratic optimisation model to maintain supply chain viability under the ripple effect. Instead of viability kernel commonly used in the viability theory, this paper establishes the boundaries on acceptable production states for which the production can be continued under the ripple effect, with no severe losses. For a given implementable portfolio of controls, the boundaries on acceptable production trajectories associated with the two conflicting objectives, cost and customer service level are determined. The decision maker selects a viable production trajectory in-between the two boundary trajectories: the cost-optimal and the service-optimal. The selection depends on the decision maker preference, represented by a chosen weight factor in the optimised quadratic objective function that minimises weighted deviations from the cost-optimal and from the service-optimal production schedules under the ripple effect. The findings indicate that for the extreme values of the weight factor, the viable production trajectory is inclined toward the corresponding boundary trajectory and remains in-between the two boundaries, when both objectives are equally important. Keeping production trajectory in-between the two boundaries makes the supply chain more resilient to disruption risks, while the supply chain resilience diminishes as the production trajectory approaches a boundary trajectory. Then a more severe disruption may push the production outside the viability region and cause greater losses.