How Much Flexibility Does It Take to Mitigate Supply Chain Risks?

In light of the number of severe, and well publicized, supply disruptions over the past decade, it is not surprising that firms are instituting risk assessment programs to gauge their vulnerability. Using both formal quantitative methods and informal qualitative ones, risk assessment programs attempt to systematically uncover and estimate supply chain risks. What is surprising, perhaps, is that there has not been a concomitant investment in risk reduction programs. While the exact reasons for this are not known, a number of researchers, e.g., Rice and Caniato (2004), Zsidisin et al. (2001) and Zsidisin et al. (2004), have offered the following as potential explanations for why risk reduction efforts are less widespread: (1) Some firms are not familiar with the different approaches for managing supply chain risks; (2) Lacking credible estimates for the probability of a major disruption, many firms cannot perform the formal cost/benefit or return on investment (ROI) analyses to justify risk reduction investments.

The rest of the chapter is organized as follows. In the next section, we discuss some key supply chain risks and the role that flexibility can play in mitigating the risks. In Sect. 10.3, we introduce a flexibility measure and review some stylized models intended to illustrate the power of flexibility. Based on our models, we show that only a small amount of flexibility is required to mitigate risk. Section 10.4 concludes this chapter. We note that this chapter is based on research presented in Tang and Tomlin (2007).