The Power of Flexibility for Mitigating Supply Chain Risks

Lee (2004) articulated that alignment, adaptability, and agility are the basic ingredients for managing supply chain risks. While it is clear that flexibility (agility) enhances supply chain resiliency, it remains unclear how much flexibility is needed to mitigate supply chain risks. Without a clear understanding of the benefit associated with different levels of flexibility, firms are reluctant to invest in flexibility especially when reliable data and accurate cost and benefit analysis are difficult to obtain. In this paper, we present a unified framework and 5 stylized models to illustrate that firms can obtain significant strategic value by implementing a risk reduction program that calls for a relatively low level of flexibility. Some of our model analyses are based on or motivated by models presented in recent literature. Our findings highlight the power of flexibility, and provide convincing arguments for deploying flexibility to mitigate supply chain risks.