Modeling supplier selection and the use of option contracts for global supply chain design

As supply chains become more and more dependent on the efficient movement of materials among facilities that are geographically dispersed there is more opportunity for disruption. One of the common disruptions is the loss of production capability at supplier sites. We formulate a two-stage stochastic program and a solution procedure to optimize supplier selection to hedge against these disruptions. This model allows for the effective quantitative exploration of the trade-off between cost and risks to support improved decision-making in global supply chain design. A realistic case study is explored.