Supply Chain Viability: Risk-Neutral Decision-Making

This chapter presents a novel quantitative approach and stochastic quadratic optimization model to maintain supply chain viability under the ripple effect. Instead of viability kernel commonly used in the viability theory, this chapter 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 optimized quadratic objective function that minimizes 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 space and cause greater losses. Numerical examples and computational results are reported and comparison between the viable and resilient solutions indicates their close relationship. The major decision-making insights drawn from the theoretical and computational studies are summarized at the end of this chapter.