Optimal Allocation of Reliability Targets within a Supply Chain

Authors: Quigley John, Walls Lesley

Management Science Working Paper No. 8 (2005)

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Abstract

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The development of complex systems, such as aircraft, involves companies organised in a multi-tier supply-chain with each organisation allocated a reliability target for their sub-system or component part apportioned from system requirements. Agreements about targets are made early in the system lifecycle when considerable uncertainty exists about the design details and potential failure modes. Hence resources required to achieve reliability are unpredictable, but costs can escalate. Some types of contractual agreements, such as service level contracts, require mechanisms to support negotiation of targets between organisations so that system reliability requirements are met, but at minimum cost to the supply chain. This paper proposes a mechanism for deriving a fair price for optimal allocation of reliability targets between suppliers using information gained about potential failure modes through development and the costs of activities required to generate such information. The approach is supported using a Bayesian reliability growth model and an associated empirical cost model. An illustrative example demonstrates the feasibility of the approach.