Cost Driver Uncertainty and Price Risk in the Supply Chain: A Research Agenda

Uncertainty and risk is a fact of managing supply chains today. There are numerous sources of risk that can detrimentally affect firm and supply chain performance, and in many ways. However, one common factor of risk manifestation concerns financial losses. The last twenty years of research has experienced a significant increase in investigating how firms can manage supply chain risk and create resilience from product flow disruptions in the supply chain. Although this is a critical area for academic study and business practice, supply chain disruptions are just one form of risk that many firms experience in managing their supply chains. Other forms of risk can likewise arise in a firm’s supply chains, such as the loss of revenues from counterfeiting and damage of reputation from supplier performance. One form of risk, which is starting to gain traction in the supply chain management literature and practice, concerns financial loss exposure due to volatility and uncertainty of cost drivers in the supply chain. Examples of these can include the volatility of commodity prices and shifts in foreign currency valuations along global supply chains, among others. Although commodity price volatility and foreign exchange risk have traditionally been mitigated through financial hedging approaches (Brown, 2001; Eaker and Grant, 1987), there are limits to the effectiveness of these approaches, especially in circumstances where commodity prices or currency valuations shift in unexpected directions, such as experienced by Southwest airlines with hedging fuel prices in 2016 (Levine-Weinberg, 2016). These challenges continue to create financial problems in firms due to the dramatic changes occurring in supply chains from the COVID-19 pandemic. For example, commodities such as lumber (Tatevosian 2021) coffee (Anonymous, 2021), as well as services such as container freight charges (Murray, 2021) have experienced significant price swings during the past year. Our research program focuses on investigating the various uncertainties associated with cost-driver uncertainty and price risk, and hence, how this can affect a firm’s profitability. Examples of cost driver elements experiencing volatility include material purchases, energy costs, packaging costs, transportation costs, foreign exchange risk, and changing government policies such as tariffs and trade embargos. In addition, our research program aims at addressing how companies act in order to mitigate these risks, using both financial tools and supply chain approaches. Our goals in the research stream is to garner a more holistic view of cost driver uncertainty by investigating the multitudes of threats existing in the supply chain, and how organizations adopt and optimize risk mitigation tools in order to protect the firm’s profitability. This research program will use a multi-method approach for studying the uncertainty associated with cost drivers in the supply chain. We will first conduct an exploratory study through interviews with supply chain professionals, and then an empirical investigation - using a survey instrument - across a significant sample of companies.