Procurement Planning for a Single Selling Season with Supply Disruptions and Stochastic Demand

Risk mitigation strategies to protect firms from devastating and costly disruptions include increasing safety inventory, adding flexible and/or redundant capacity, procuring from spot markets, and working with multiple suppliers. Determining the best procurement strategy for a firm is a challenging task that should account for both cost efficiency and supply chain resilience. This paper develops optimization models to determine an optimal set of suppliers when suppliers are subject to disruptions. We consider a newsvendor who has multiple all-or-nothing suppliers, i.e., each supplier ultimately delivers its order quantity in full or not at all. We model a two-stage decision process; in the first stage, the decision maker determines the quantity to order from each supplier. In this stage, the firm may also have a capacity reservation opportunity via an option contract with a backup supplier. In the second stage, the firm receives its order quantities from suppliers who are not disrupted, and, if needed, purchases from an external source, where the external source corresponds to a spot market or to the contracted backup supplier. This work provides models, solution methods, and insights for this complex problem class. We propose a heuristic solution approach based on the key criteria of the optimal solution, as well as a sample average approximation method. The results of our computational tests demonstrate the efficiency our proposed approach compared with a commercial solver.