Preparing for the Worst

Abstract

Investments in supply chain risk management (SCRM), like other risk management initiatives, often require an upfront investment in an initiative that has no guaranteed or even likely payoff because the value is linked to a highly uncertain contingency. Such investments in SCRM can be modeled as real options that give a company the right but not the obligation to take action in the future, such as in response to a risk event. This chapter revisits supply chain risk by describing how companies are now managing supply chain risks. It illustrates four common categories of investment—each of which can be looked upon as a real option—that companies make in preparation for disruptions in supply (although these preparations also serve to handle surges in demand). The categories are investments in redundancy (e.g., inventory), flexibility (i.e., of facilities and processes), emergency operation centers (EOC), and business continuity planning (BCP).