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The importance of decoupling recurrent and disruption risks in a supply chain. (English) Zbl 1143.90302
Summary: This paper focuses on the importance of decoupling recurrent supply risk and disruption risk when planning appropriate mitigation strategies. We show that bundling the two uncertainties leads a manager to underutilize a reliable source while over utilizing a cheaper but less reliable supplier. As in {\it M. Dada} et al. [working paper, University of Illinois, Champaign, IL (2003)], we show that increasing quantity from a cheaper but less reliable source is an effective risk mitigation strategy if most of the supply risk growth comes from an increase in recurrent uncertainty. In contrast, we show that a firm should order more from a reliable source and less from a cheaper but less reliable source if most of the supply risk growth comes from an increase in disruption probability.

MSC:
90B05Inventory, storage, reservoirs
90B50Management decision making, including multiple objectives
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