Multiobjective capital allocation for supplier development under risk

Supplier development is increasingly important due to the complexity of today’s supply chains and the globalisation of businesses. Since manufacturers have only limited resources, they need to make an informed decision about which suppliers to develop. Moreover, the returns from investment in supplier development are uncertain, so manufacturers have to take this risk into account when choosing their suppliers for development programmes. In this paper, we propose a multi-objective model for capital allocation for supplier development under risk. We apply it to an example of a global car manufacturer and support the decision-making process with data downloaded from the Bloomberg database. We use stock market returns and cost of capital of suppliers to assess their performance. Our model supports an informed decision, which is that tradeoffs exist between risk and cost of supplier development programme. Depending on the risk aversion of the manufacturer, we demonstrate different allocation schemes for supplier development.