The Power of Flexibility for Mitigating Supply Chain Risks

Despite the fact that many firms are instituting risk assessment programs to systematically uncover and estimate supply chain risks, very few firms are making concomitant investments to reduce risk. While the exact reasons for this are not known, Rice and Caniato (2004), Zsidisin et al. (2001, 2004) suspected that the lack of precise cost/benefit or return on investment (ROI) analyses can be one of the key reasons. To garner support for implementing certain risk reduction programs without exact analyses of certain risk reduction programs, Tang (2006) argued that risk reduction programs must provide strategic value to the firms regardless of the occurrence of major disruptions that rarely occur. Indeed, in addition to disruption risks, firms should be concerned about routine risks: frequently occurring problems that cause mismatches in supply and demand or higher than expected procurement costs. Specifically, Tang (2006) highlighted the strategic value of nine different supply chain risk reduction programs that would enable a firm to reduce these routine risks and those rare but severe supply disruption risks.