Surprising supply chain disruptions: Mitigation effects of operational slack and supply redundancy

Abstract

The growing literature on supply chain disruptions has demonstrated how the detrimental consequences following their occurrence differ based on the scope of their severity. However, much less is known about the effects of disruptions due to the element of surprise experienced by firms. We draw on literature in operations management, systems engineering, and financial risk management to explain the effects of a firm's exposure to surprising disruptions. We present a conceptual framework that combines perspectives from System Reliability Theory and Modern Portfolio Theory to address the performance implications of exposure to sudden-onset (surprising) disruptions and explains the role of operational slack and supply redundancy in mitigating their effects. We test our proposed framework by using data from a cross-section of 195 manufacturing firms. Results suggest that exposure to minor supply chain surprises carries a direct negative effect on performance. More interestingly, operational slack and supply redundancy are found to moderate the relationships between exposure to major supply chain surprises and firm performance in notably different ways. Through customer satisfaction, these effects are related to firm financial performance (ROA and ROE). Our findings provide theoretical and managerial insights on the significance of minor and major surprises and firm investments in redundancy to manage them.