The value of flexibility in mitigating supply chain transportation risks

This paper investigates the value of the flexibility created by the transportation options in mitigating supply chain transportation risks. We accomplish this aim by developing an innovative computational model which uses the Real Option Valuation method to model the inner flexibility mechanism of the transportation options to choose between the Safety Net carrier and the spot market carrier on the basis of the actual conditions of the spot market (price, service level, and required transportation capacity), which is the foundation of the mitigation capability of transportation options. Through the case of a real supply chain of a large Fortune 100 multinational leader in the Fast Mover Consumer Goods (FMCG) industry, we also investigate the implications of a transportation options response in case of several sources of uncertainties, namely transportation capacity shortage, price volatility and service level reliability. Findings of the application support the understanding of which conditions increase the value of flexibility of the transportation options and how much flexibility is attractive given the initial sunk cost to acquire it.