Supply Chain Risk and Risk Mitigation: Which Strategies Tackle Identified Risks Most Efficiently?

Abstract

It is well-known that firms face risks in their upstream and downstream supply chains, and although operational strategies exist that can fully or partially decouple a firm from the adverse effects of possible supply chain disruptions, implementing these strategies is costly. At the same time, firms also face intense pressure on margins, forcing them to keep operating costs low. These conflicting goals require further investigation on whether and to what extent different types of risk can be mitigated by different operational strategies. Drawing on information processing theory, this paper presents a model that is developed and empirically tested to identify the operational strategies that mitigate the exposure to supply chain risk with minimum negative influence on performance. For the measurement of a firm's exposure to supply chain risk, an adapted latent Dirichlet allocation approach from computational linguistics is used to scrutinize corporate qualitative risk disclosures in annual reports (form 10-K). The results suggest that operational strategies mitigate the negative association between supply-related risk and performance, though they do not mitigate the negative association between demand-related risk and performance.