The Supply Chain Investment Risk Management: A Real Option Approach

In the context of globalization and Information Age, the supply chain has developed rapidly. The structure of supply chain has become more and more complex, which not only brings opportunities to the enterprises, but also makes the Supply Chain Risk Management face a severe challenge. Risk management in supply chain is not only essential to enterprises and supply chain, but also of great importance to the entire economy.In this paper, supply chain risk management is carried out from the aspect of investment, one of the main activities of enterprises and supply chains. The failure of investment decision making will bring certain risk to an enterprise and its supply chain. Real Options, derived from financial options, have been widely used as an investment decision-making tool. Compared to the traditional decision-making analysis tools, real options can better adapt to uncertainty, reflecting the value of management flexibility and strategic growth. The purpose of this paper is to introduce real options into supply chain investment decisions, in order to improve the flexibility of supply chain management and control supply chain investment risks.Based on theoretical analysis and literature review, the paper studies how to embed real options into supply chain investment risk management, from the following two aspects:First, investment risk management of an individual firm as a supply chain member. Due to supply chain risk conductivity, the risk facing a member will spread to other members, so the effective supply chain investment risk management of a member will have a positive effect on the whole supply chain. Real option approach is an ongoing process throughout the life cycle management of a project, which gives investors "management flexibility" and contributes to risk management. The paper illustrates various risks of investment and forms a framework which corresponds real options to investment risk management, providing a guide for supply chain risk management.Second, supply chain risk management of co-investment projects. The paper extends investment decision maker from a single firm to several firms in a supply chain. Due to external risks similarity and interdependence acts of supply chain members, the supply chain can plan investments as a whole, which helps enterprises in the supply chain better coordinate the scale and timing of investment. This paper uses the stage options in R & D investment as an example and studies the decision making process both in a single firm and in supply chain. The study shows that, the decision maker continuously gains access to new information during investment evaluation process and has the option to decide if further investment should be made. On the context of joint R & D investments, the use of real options can help supply chain better plan the size and timing of investment, which elevate the overall performance of the supply chain and build a trust mechanism of the supply chain.