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Supply network design: Risk-averse or risk-neutral?

2014; Elsevier BV; Volume: 78; Linguagem: Inglês

10.1016/j.cie.2014.09.030

1879-0550

Alireza Madadi, Mary E. Kurz, Kevin Taaffe, Julia L. Sharp, Scott J. Mason,

Sustainable Supply Chain Management

In this paper, we investigate a supply network design in supply chain with unreliable supply with application in the pharmaceutical industry. We consider two types of decision making policies: (1) a risk-neutral decision-making policy that is based on a cost-minimization approach and (2) a risk-averse policy wherein, rather than selecting facilities and identifying the pertinent supplier–consumer assignments that minimize the expected cost, the decision-maker uses a Conditional Value-at-Risk (CVaR) approach to measure and quantify risk and to define what comprises a worst-case scenario. The CVaR methodology allows the decision-maker to specify to what extent worst-case scenarios should be avoided and the corresponding costs associated with such a policy. After introducing the underlying optimization models, we present computational analysis and statistical analysis to compare the results of the risk-averse and risk-neutral policies. In addition, we provide several managerial insights.