Supply Chain Resilience and Food Supply Chains

During the first few months of the COVID-19 pandemic, food producers threw out millions of pounds of food while grocery store shelves stood empty. Despite the overall efficiency of the modern food system, COVID-19 uncovered a general lack of resilience in food supply chains. While we know quite a bit about what it means for a supply chain to be resilient, there are few formal theoretical or empirical models that provide quantitative measures of resilience. We interpret observations of wasted food during this period as a lack of resilience in the food supply chain. We develop both a theoretical explanation for the lack of resilience and an empirical example that demonstrates how a lack of resilience affects food supply chains. We base our definition of resilience on the theory of real options and economic hysteresis. Economic hysteresis is the perpetuation of a particular course of action after the original rationale has disappeared, or, in our case, failing to invest in new distribution channels. Our analytical model of supply chain resilience demonstrates how the real option embedded in investments to adapt to a disruption leads to hysteresis and a lack of resilience. Although hysteresis results from rational responses to uncertain economic environments, managers should be aware that delays in responding to disruptions have real social consequences – wasted food in our empirical example. Indeed, we find that a firm’s rational responses to disruptions result in excessive hysteresis compared to what is best for society as a whole because a firm’s “value of waiting” differs from a social planner’s. We demonstrate the comparative static properties of hysteresis and examine a range of policy solutions for mitigating the supply-chain loss that results from hysteresis. We show how building redundancy, increasing flexibility, and increasing supply chain collaboration are all ways in which the hysteretic effect of uncertainty on supply chain resilience can be reduced. More generally, we provide a framework that can help policymakers assess the merits of alternative interventions to improve supply chain resilience.