Strategic reliable supply chain network design: determining tradeoffs between cost and risk

The design of a supply chain network (SCN) should address two conflicting objectives, i.e. inexpensive yet reliable operation. This paper presents models to choose supply facilities and determine distribution options while considering the expected risk of not serving customers attributed to supply shortages. The goal is to design a reliable network with a lower cost under traditional cost objectives. We formulate a stochastic mixed-integer biobjective programming model considering the protection of facilities and solve this problem with a progressive hedging algorithm (PHA). We examine the tradeoff curve between the cost and risk through a case study involving Shanghai in China. The results indicate that substantial improvements in reliability can be reached with a limited increase in the total cost.