How do firms perceive and react to extreme weather risk in their supply bases?

Abstract

Extreme weather events occur frequently and severely as a part of worldwide climate change. Such extreme weather events are macro supply chain risks that pose significant threats to the global supply chain. However, the current literature has provided a limited understanding of how this supply chain risk is changing firms' perception and behavior in global sourcing. In this study, we examined how a supply base's extreme weather risk affects a buying firm's trade risk perception and the sourcing value. We conducted a two-way fixed-effect regression analysis with a panel data set of U.S.-listed manufacturers and their supply bases. Our findings suggest that when the supply base has a higher level of extreme weather risk, the buying firm perceives a higher trade risk and a lower sourcing value with this supply base. We also found that a higher degree of flexibility, indicated by supply flexibility, production flexibility, and inventory slack, can mitigate the buying firm's concern caused by the supply base's extreme weather risk. Our study contributes to the literature on extreme weather, flexibility, and supply chain risk management. We also provide suggestions for supply chain practitioners and policymakers.