Risk analysis of sourcing problem using stochastic programming


Department of Industrial Engineering and Management Systems, Amirkabir University of Technology, 424 Hafez ‎Avenue, Postal Code: 1591634311, Tehran, Iran


Nowadays Sourcing problemhas become more challenging for supply chain members. Different types of sourcing for different market conditions are presented in the literature. In this paper an option contract as an efficient tool for sourcing is developed in a multi-period setting in which the price and demand follow two stochastic processes. Sourcing decision is analyzed from risk neutral and risk averse decision maker’s point of view. This paper applies the stochastic programming approach to model the presented option contract based on price and demand uncertainties. Next, using CVaR as a coherent risk measure, the effects of risk on sourcing problem are studied. By numerical example, using the presented efficient frontier, the simulation results of our developed models show that the decision maker can make a trade-off between risk and cost associated with the sourcing problem. The paper also performs sensitivity analysis in order to demonstrate the effects of change in cost parameter on results of our option model.