Reliable design of an integrated supply chain with expedited shipments under disruption risks

Abstract: This paper proposes a mathematical model for the design of a two-echelon supply chain where a set of suppliers serve a set of terminal facilities that receive uncertain customer demands. This model integrates a number of system decisions in both the planning and operational stages, including facility location, multi-level service assignments, multi-modal transportation configuration, and inventory management. In particular, we consider probabilistic supplier disruptions that may halt product supply from certain suppliers from time to time. To mitigate the impact from supplier disruptions, a terminal facility may be assigned to multiple supplies that back up each other with different service priorities. With such multi-level service assignments, even when some suppliers are disrupted, a facility may still be supplied by the remaining functioning suppliers. Expensive expedited shipments yet with assured fast delivery may be used in complement to less expensive regular shipments yet with uncertain long lead times. Combining these two shipment modes can better leverage the inventory management against uncertain demands. We formulate this problem into a mix-integer nonlinear program that simultaneously determines all these interdependent system decisions to minimize the expected system cost under uncertainties from both suppliers and demands. A customized solution algorithm based on the Lagrangian relaxation is developed to efficiently solve this model. Several numerical examples are conduced to test the proposed model and draw managerial insights into how the key parameters affect the optimal system design.