Contingency planning during the formation of a supply chain

Abstract

With today’s growing number of geographically dispersed facilities amplifying the likelihood of supply disruptions, contingency planning has become an important strategic issue for manufacturers and distributors. This paper studies how the addition of reserve capacity in the supply chain—one of the most common strategies in contingency plans against supply disruption—can alleviate the effects of supply disruption on product and income streams and total supply chain profit. We also perform a preliminary study to find the potential implications of utilizing excess production capacity for alternative uses particularly when a firm tries selling some of its intermediate products to an external buyer who in turn could process them into finished products and compete with the firm in the same markets. We formulate a network design optimization model for supply chain contingency planning and present a decomposition procedure which exploits the natural separation between the logistics and pricing decisions in the model. Computational results are presented.