Abstract: To mitigate the risk of supply disruption to the manufacturers resulting from the suppliers production interruption, the manufacturer needs to optimize the level of supply chain recovery capacity investment prior to a disruption. Conditional ValueatRisk (CVaR) is introduced to characterize the supply chains operation goal under disruption. A decisionmaking model of supply chain recovery capacity investment under certain confidence control level is established. Furthermore, the degree of the manufactures risk aversion on the optimal level of supply chain recovery capacity investment is investigated. In a decentralized supply chain, the manufacturer uses the PerformanceBased Contract to encourage suppliers to invest right recovery capacity in order to coordinate a supply chain. The results show that the CVaR criteria can describe the behavior of supply chain recovery capacity investment, the higher the degree of the manufactures risk aversion, the more the optimal supply chain recovery capacity is. The supply chain is coordinated when the conditional expected value of penalty coefficient of unit outage time is equal to the conditional expected value of goodwill cost of unit outage time.

Key words: supply disruption, capacity recovery, disruption management, supply chain coordination, conditional value at risk (CVaR)