Sourcing Decision with Correlated Supplier Disruption: An MV Framework

This paper investigates the sourcing strategy of a buyer who faces demand uncertainty, as well as supply disruption. Under disruption, a bankruptcy at one supplier may cause collapse of other suppliers. Hence, it is important to highlight the modeling of codependence between two or more risky suppliers. If location of the suppliers is in the same geographic proximity, then one natural disaster can affect all the suppliers in that region. Therefore, it is important to consider the impact of supplier disruption correlation for deciding the sourcing strategy. In this context, we use Markowitz's mean-variance (MV) framework to develop an MV formulation. We illustrate the case of perfectly positive and negative correlated suppliers, their order quantity and MV objective through numerical study. The result shows that the buyer should allocate the order to negatively correlated supplier to maximize the MV objective.