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Uncertainty of Supply Chains: Risk and Ambiguity

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  • d'Artis Kancs

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.

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  • d'Artis Kancs, 2024. "Uncertainty of Supply Chains: Risk and Ambiguity," Papers 2405.03451, arXiv.org.
  • Handle: RePEc:arx:papers:2405.03451
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    1. d'Artis Kancs, 2024. "Uncertainty of supply chains: Risk and ambiguity," The World Economy, Wiley Blackwell, vol. 47(5), pages 2009-2033, May.
    2. Zengming Liu & Yanan Wang & Xiaoyong Huang & Zihan Zhang & Qingsheng Lai & Meng Li, 2024. "Assessment of national economic repercussions from Shanghai’s COVID-19 lockdown," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-12, December.

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    More about this item

    JEL classification:

    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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