Robust Sourcing Under Multilevel Supply Risks: Analysis of Random Yield and Capacity

Abstract

We consider the optimal sourcing problem when the available suppliers are subject to ambiguously correlated supply risks. This problem is motivated by the increasing severity of supply risks and difficulty evaluating common sources of vulnerability in upstream supply chains, which are problems reported by many surveys of goods-producing firms. We propose a distributionally robust model that accommodates (i) multiple levels of supply disruption, not just full delivery or no delivery, and (ii) can use data-driven estimates of the underlying correlation to develop sourcing strategies in situations where the true correlation structure is ambiguous. Using this framework, we provide analytical results regarding the form of a worst-case supply distribution and show that taking such a worst-case perspective is appealing due to severe consequences associated with supply chain risks. Moreover, we show how our distributionally robust model may be used to offer guidance to firms considering whether to exert additional effort in attempt to better understanding the prevailing correlation structure. Extensive computational experiments further demonstrate the performance of our distributionally robust approach and show how supplier characteristics and the type of supply uncertainty affect the optimal sourcing decision. History: Accepted by Pascal Van Hentenryck, Area Editor for Computational Modeling: Methods and Analysis. Funding: K. Pan was supported in part by the Research Grants Council of Hong Kong [Grant 15501920] and in part by the National Natural Science Foundation of China [Grant 72001185]. Supplemental Material: The software that supports the findings of this study is available within the paper and its Supplemental Information ( https://pubsonline.informs.org/doi/suppl/10.1287/ijoc.2022.1254 ) or is available from the IJOC GitHub software repository ( https://github.com/INFORMSJoC ) at http://dx.doi.org/10.5281/zenodo.7129356 .