Decision-Centric Portfolio Selection for Sustainable Supply Chain Risk Management: A Simulation-Optimization Framework for Robust Decision Support

Abstract

Sustainable supply chains are increasingly vulnerable to systemic risks, such as geopolitical conflicts at critical trade routes like the Strait of Hormuz or climate disasters, which reveal deep Environmental, Social, and Governance (ESG) weaknesses. Conventional optimization often fails in these “deep uncertainty” contexts, where reliable historical data are often scarce and qualitative factors are paramount. This study introduces a simulation-optimization framework that reframes risk management as a decision process rather than a purely computational one. Portfolios are parameterized across five key characteristics—prevention, vulnerability, resilience, recovery, and detection—to enable a genetic algorithm (GA) to generate a diverse ensemble of high-performing strategies. Instead of providing one “best” answer, the GA allows managers to evaluate multiple options against quantitative tail-risk measures and qualitative institutional factors. The framework produces a “trade-off map,” or Pareto frontier, visualizing the cost of protecting against downside risks. By adjusting the GA’s settings, decision makers can toggle between improving current plans and exploring new, structurally different strategies. The numerical results demonstrate that the GA consistently identifies high-performing portfolios, achieving at least 99.55% of the true optimal performance across all metrics while requiring only 25% of the computational evaluation budget of an exhaustive search space. Furthermore, the framework successfully generates a structurally diverse menu of near-optimal alternatives across all performance metrics, consistently outperforming Monte Carlo sampling in the quality of near-optimal solutions identified, particularly for tail-risk measures such as conditional value-at-risk. Ultimately, this approach integrates the manager’s professional judgment regarding non-quantifiable factors, such as political stability and social responsibility, with simulation data to support the selection of a robust, sustainable portfolio.