Uncertainty of Supply Chains: Risk and Ambiguity

d'Artis Kancs

EERI Research Paper Series from Economics and Econometrics Research Institute (EERI), Brussels

Abstract: Motivated by the recently experienced systemic shocks (the COVID-19 pandemic and the full-fledged Russia’s war of aggression against Ukraine) – that have created new forms of uncertainties to our supplies – this paper explores the supply chain robustness under risk aversion and ambiguity aversion. We aim to understand the potential consequences of deeply uncertain systemic events on the supply chain resilience and how does the information precision affect individual agents’ choices and the chain-level preparedness to aggregate shocks. Augmenting a parsimonious supply chain model with uncertainty, we analyse the relationship between the upstream sourcing decisions and the supply chain survival probability. Both risk-averse and ambiguity-averse individually-optimising agents’ upstream sourcing paths are efficient but can become vulnerable to aggregate shocks. In contrast, a chain-level coordination of downstream firm sourcing decisions can qualitatively improve the robustness of the entire supply chain compared to the individual decision-making baseline. Such a robust decision making ensures that in the presence of an aggregate shock – independently of its realisation – part of upstream suppliers will survive and the final goods’ supply will be ensured even under the most demanding circumstances. Our results also indicate that an input source diversification extracts a cost in foregone efficiency.

Keywords: Resilience; Robustness; Global Supply Chain; uncertainty; risk; ambiguity. (search for similar items in EconPapers)
JEL-codes: E7 F02 F12 F13 L15 (search for similar items in EconPapers)
Date: 2024-04-03
New Economics Papers: this item is included in nep-cis, nep-ind, nep-int and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Uncertainty of supply chains: Risk and ambiguity (2024)
Working Paper: Uncertainty of Supply Chains: Risk and Ambiguity (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eei:rpaper:eeri_rp_2024_03

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