Andrea Roncoroni (ESSEC Business School)

Operational Resilience Anew

Abstract: Unexpected and significant disruptions in the global supply chain may necessitate prompt and substantial adjustments in corporate physical operations, such as downsizing or reshoring. Although many companies recognize this need, fewer are able to execute such changes. This underscores the importance of strategies that reduce the need for major adjustments, thereby enhancing operational resilience. While academic research exclusively presents operational tools to foster resilience, we conjecture that combining these with appropriate financial hedges can additionally reduce those operational changes and further strengthen resilience. Our approach is normative. We identify, develop, and evaluate classes of such hedges within a newsvendor-type model, where a risk-averse decision-maker faces unreliable supply. We analytically derive the optimal operational and the optimal integrated risk management (IRM) policies, assessing the effectiveness of the latter in improving resilience. Our theoretical findings reveal: i) Operational contraction: When supply reliability decreases, companies should reduce operations such as in-house ordering or capacity allocation; ii) Financially driven resilience: Optimal IRMs featuring suitable hedging spaces significantly mitigate operational reductions compared to pure operational strategies; iii) All-weather hedging: Combined financial hedges provide more consistent resilience across decreasing levels of supply reliability compared to conventional single-underlying hedges. We empirically validate these findings with a novel multinational procurement/capacity allocation model applied to a representative European gas firm balancing Russian natural gas and U.S. LNG procurement upon the supply chain disruption caused by the Russo-Ukrainian war. Our analysis demonstrates that IRM featuring suitable financial hedges would have reduced the need for procurement relocation.