Abstract
The existing models utilise a mean value approach with deterministic failure cost to determine the optimal number of suppliers in the presence of supplier failure risks. The mean value approach assumes, the firm has a linear utility function with respect to the supply disruptions. For major disruptions that could threaten the survival of the firm, the linearity assumption is questionable. Furthermore, the operating cost of working with the suppliers and the financial loss cause by failure of suppliers are subject to uncertainty. This article utilises the mean-variance approach to determine the optimal set of suppliers in the presence of supplier failure risks. The importance of cash-flow variability in the supplier selection/planning process is considered explicitly. Our methodology allows us to balance the two desirable, but conflicting objectives of cost minimisation and service levels achieved. Furthermore, traditional risk management tools like insurance are incorporate into the optimal suppliers' selection process.
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