Supplier selection under disruption risk with hybrid procurement

Abstract

In today’s global landscape, supply chains face a plethora of risks due to the increasingly dynamic and turbulent business environment. In this study, we introduce a supplier selection model with hybrid procurement under disruption risk. Specifically, we consider the supplier selection problem of a firm with multiple units (or business segments) demanding several products, raw materials, and services. The firm has a centralized supplier selection strategy at the corporate level. However, instead of allocating orders to selected suppliers, the corporate management allows each unit to use its most preferred suppliers from the selected ones in a decentralized manner. To mitigate the impact of disruptions, less preferred suppliers of each unit serve as a backup. We present a mathematical model for this problem and study the structural properties of our formulation. We develop an exact Benders decomposition algorithm, and also present a method to generate upper and lower bounds. We compare the performance of the proposed solution algorithms on large-scale instances. Finally, we present a numerical example to demonstrate the impact of decentralized procurement with different objectives. Our results show that the expected procurement cost can increase significantly if suppliers are selected without considering the decentralized decisions of units.