Group for Research in Decision Analysis

Managing Operational Risks in Decentralized Supply Chains

Fernando Bernstein

To mitigate the risks associated with demand variability and supply variability, firms employ a variety of operational hedging strategies -- i.e., methods for leveraging operational flexibility. For example, the implementation of postponement strategies and the use of common components in manufacturing allow companies to offer a large selection of products while avoiding excessive inventory costs. Similarly, by diversifying their portfolio of suppliers, firms can reduce the amount of safety stock required to avoid disruptions caused by uncertainties in the supply process. We investigate the impact of outsourcing manufacturing operations on the implementation of these operational hedging approaches for managing uncertainty. In particular, several of our findings indicate that outsourcing production may inhibit the implementation of operational hedging strategies.