Real-time large-scale supplier order assignments across two-tiers of a supply chain with penalty and dual-sourcing

Supplier selection and order allocation (SSOA) are key strategic decisions in supply chain management which greatly impact the performance of the supply chain. The SSOA problem has been studied extensively but the lack of attention paid to scalability presents a significant gap preventing adoption of SSOA algorithms by industrial practitioners. This paper presents a novel real-time large-scale industrial SSOA problem, which involves a multi-item, multi-supplier environment with dual-sourcing and penalty constraints across two-tiers of a supply chain of a manufacturing company. The problem supports supplier preferences to work with other suppliers through bidding. This is the largest scale studied so far in literature, and needs to be solved in a real-time auction environment, making computational complexity a key issue. Furthermore, order allocation needs to be undertaken on both supply tiers, with dynamically presented constraints where non-preferred allocation may results in penalties by the suppliers. We subsequently propose Mixed Integer Programming models for individual-tiers as well as an integrated problem, which are complex due to NP-hard nature. The use case allows us to highlight how problem formulation, modelling and choice of modelling can help reduce complexity using Mathematical Programming (MP) and Genetic Algorithm (GA) approaches. The results show an interesting observation that MP outperforms GA to solve the individual-tiers problem as well as the integrated problem. Sensitivity analysis is presented for sourcing strategy, penalty threshold and penalty factor. The developed model was successfully deployed in a supplier conference which helped in significant procurement cost reductions to the manufacturing company.