Tactical Approaches for Mitigating Supply Chain Risks: Financial and Operational Hedging

Abstract

In addition to supply and demand risks, global supply chains are vulnerable to financial risks arising from uncertain costs of input materials, labor, currency exchange rates, and supplier defaults. This chapter presents both financial instruments and operational mechanisms for mitigating financial risks, including those tied to input prices and currency exchange, as well as supply and demand risks. These financial instruments are designed to hedge against short-term risks, while the operational mechanisms are intended to manage medium- and long-term risks. We also illustrate how firms can reduce risk significantly by combining financial and operational hedging strategies.