Evaluation of emergency sourcing risk mitigation strategies for a discrete part manufacturer

Abstract

Powerful socioeconomic factors have been transforming dramatically traditional supply chains into complex multi-national, multi-echelon supply networks of conflicting interests on the part of the engaged stakeholders. Today’s globalised supply chains are more vulnerable than ever to disruptions and delays; hence, increased resilience against various types of risks that threaten an organisation’s operational continuity is required. This paper explores emergency sourcing (ES), a common risk mitigation strategy, in the context of a discrete part manufacturer. Alternative ES strategies are examined through a quantitative tool based on discrete-event simulation. The proposed methodology determines the optimal capacity level to be reserved from the emergency supplier of each discrete part taking into account all inventory-related costs including the premium cost to be paid for emergency capacity reservation. Thus, it is possible to decide on: (a) the feasibility of emergency sourcing, i.e. the maximum premium cost to be paid to an emergency supplier in order to ensure the long-run feasibility of the applied ES strategy given the contracted capacity level, or (b) the optimal levels of the contracted emergency capacity for a given premium cost. The proposed quantitative simulation-based methodology could be employed by decision-makers when deciding on the potential implementation of an ES risk mitigation strategy. Moreover, the key findings of the research document the critical effect that disruptions impose on the economic and operational performance of a manufacturer’s supply chain, as well as the beneficial role of emergency dual sourcing in mitigating risk impacts and safeguarding operational continuity.

Keywords:

• risk mitigation strategy
• emergency sourcing
• capacity
• supply chain disruption
• discrete event simulation
• risk management
• dual sourcing

Acknowledgements

This research has received funding from the European Union’s Seventh Framework Programme (FP7-REGPOT-2012-2013-1) under Grant Agreement No. 316167, Project Acronym: GREEN-AgriChains, Project Full Title: “Innovation Capacity Building by Strengthening Expertise and Research in the Design, Planning and Operations of Green Agrifood Supply Chains”, Project Duration: 2012-2016. All the above reflect only the authors’ views; the European Union is not liable for any use that may be made of the information contained herein.