Bayesian belief network-based framework for sourcing risk analysis during supplier selection

Abstract

Increasing trend in global business integration and movement of material around the world has caused supply chain system susceptible to disruption involving higher risks. This paper presents a methodology for supplier selection in a global sourcing environment by considering multiple cost and risk factors. Failure modes and effects analysis technique from reliability engineering field and Bayesian belief networks are used to quantify the risk posed by each factor. The probability and the cost of each risk are then incorporated into a decision tree model to compute the total expected costs for each supply option. The supplier selection decision is made based on the total purchasing costs including both deterministic costs (such as product and transportation costs) and the risk-associated costs. The proposed approach is demonstrated using an example of a US-based Chemical distributor. This framework provides a visual tool for supply chain managers to see how cost and risks are distributed across the different alternatives. Lastly, managers can calculate expected value of perfect information to avoid a certain risk.