Economic risk management for design and planning of chemical manufacturing supply chains

A company faces economic risks when it decides among products to introduce and facilities in which to produce them. Uncertainties in the demands for products result in the risk that plant investments will not pay off. A model for the design and planning problem accounts for the economic loss of overproduction relative to uncertain market demands, with uncertainty in price as well. The expected investment value and its variance, as a measure of risk, are calculated exactly by polytope volume integration without the need for Monte Carlo simulation. This method of integrating over uncertain variables allows for a variety of possible demand and price distributions. A decision between design alternatives is based on the mean and variance of the investment returns. The company should expect a risk premium at least as good as the alternative investments in the financial market. The key decisions about production rate, capacity location, and customer service are made on this basis. The new ideas in this work are demonstrated on a design case study based on an agricultural chemical manufacturing example.