Supplier selection and order allocation problem through option contracts under supply disruption risks

Abstract

Selecting well-performed suppliers and ordering at the right time are the keys to success. Many types of unpredictable disasters such as breakdowns, labour strikes, and natural calamities have occurred, which are essential elements, resulting in supply disruption risk. This paper presents a supplier selection model and order allocation to minimise costs incurred in multi-product supply chains under disruption risks at supplier sites or groups of suppliers in the same situation under cap-and-trade regulation. In order to reduce disruption risk, options contracts are applied to hedge against adverse effects of supplier disruptions. Numerical instances exemplify the proposed method. The results indicate that option contracts reduce costs significantly and, even at a very high initial cost, are still cost-effective. The results of sensitivity analyses also show carbon emissions levels can have a significant impact on the income and behaviour of decision makers.