Working Paper: NBER ID: w29345
Authors: Bomin Jiang; Daniel E. Rigobon; Roberto Rigobon
Abstract: Covid-19 highlighted the weaknesses in the supply chain. Many have argued that a more resilient or robust supply chain is needed. But what does a robust supply chain mean? And how do firms’ decisions change when taken that approach? This paper studies a very stylized model of a supply chain, where we study how the decision of a multinational corporation changes in the presence of uncertainty. The two standard theories of supply chain are Just-in-time and Just-in-case. Just-in-time argues in favor of pursuing efficiency, while Just-in-case studies how such decision changes when the firm faces idiosyncratic risk. We find that a robust supply chain is very different specially in the presence of systemic shocks. In this case, firms need to concentrate on the worst-case. This strategy implies a supply chain where the allocation of resources and capabilities does not correspond to the standard theories studied in economics, but follow a heuristic behavioral rule called “probability matching”. It has been found in nature and in experimental research that subjects appeal to probability matching when seeking survival. We find that a robust supply chain will reproduce this behavioral outcome. In fact, a multinational optimizing under uncertainty, follows a probability matching which leads to an allocation that is suboptimal from the individual producer point of view, but rules out the possibility of supply disruptions.
Keywords: supply chain; robustness; uncertainty; aggregate shocks; probability matching
JEL Codes: E7; F02; F12; F13; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supply chain decisions (M11) | presence of uncertainty (D89) |
| systemic shocks (F41) | supply chain decision-making (M11) |
| multinational corporation's choice to internalize supplier locations (F23) | mitigate risks associated with aggregate shocks (E71) |
| decentralized supply chain (M11) | vulnerable to aggregate shocks (E19) |
| robust decision-making (D87) | different allocation strategy than traditional expected utility maximization (D81) |
| ambiguity aversion (D81) | shaping supply chain strategies (L14) |