POSTPONED: Andrea Roncoroni (ESSEC Business School, Paris)

Financially Driven Operational Resilience

Abstract. Extreme events, such as pandemics or geopolitical crises, may lead to unexpected and sudden disruptions in the global supply chain. This reality may necessitate prompt and significant adjustments in physical operations (e.g., reshoring, nearshoring). Empirical evidence indicates that while many companies recognize this necessity, far fewer actually implement or are capable of doing so. In such contexts, academic research provides a range of operational tools to foster operational resilience. We propose a novel purely financial instrument to enable firms to enhance their operational resilience. Our approach is normative in nature. We develop, analyze, and evaluate it using two integrated risk management (IRM) models. One model is a stylized newsvendor model featuring a risk-averse decision maker contending with an unreliable supplier, where reliability diminishes following a supply chain disruption. We derive our IRM policy and empirically assess its effectiveness in bolstering operational resilience. The other model is a multinational capacity allocation model encompassing both reliable and unreliable suppliers. We calibrate it using historical gas market data and evaluate the resulting recommendations in light of the European gas supply chain disruption subsequent to the Russian attack on Ukraine. Our findings reveal that: i. (Operational contraction) A reduction in reliability prompts a decrease in optimal ordering/allocation; ii. (Financially-driven resilience) IRM can mitigate this decrease compared to mere operational management, and: iii. (All-weather feature) Traditional single-claim hedging offers uneven mitigation across reliability reductions compared to utilizing a combined custom hedge. In summary, our analysis indicates that the presence of an optimal IRM strategy mitigates the need for relocation, thereby offering managers a new avenue to strengthen operational resilience.