From Just in Time, to Just in Case, to Just in Worst-Case: Simple models of a Global Supply Chain under Uncertain Aggregate Shocks

54 Pages Posted: 1 Oct 2021

See all articles by Bomin Jiang

Bomin Jiang

Massachusetts Institute of Technology (MIT)

Daniel Rigobon

Princeton University - Department of Operations Research & Financial Engineering (ORFE)

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 29, 2021

Abstract

Covid-19 highlighted the weaknesses in the supply chain. Many have argued that a more resilient or robust supply chain is needed. But what does a robust supply chain mean? And how do firms' decisions change when taken that approach? This paper studies a very stylized model of a supply chain, where we study how the decision of a multinational corporation changes in the presence of uncertainty. The two standard theories of supply chain are Just-in-time and Just-in-case. Just-in-time argues in favor of pursuing efficiency, while Just-in-case studies how such decision changes when the firm faces idiosyncratic risk. We find that a robust supply chain is very different specially in the presence of systemic shocks. In this case, firms need to concentrate on the worst-case. This strategy implies a supply chain where the allocation of resources and capabilities does not correspond to the standard theories studied in economics, but follow a heuristic behavioral rule called ``probability matching''. It has been found in nature and in experimental research that subjects appeal to probability matching when seeking survival. We find that a robust supply chain will reproduce this behavioral outcome. In fact, a multinational optimizing under uncertainty, follows a probability matching which leads to an allocation that is suboptimal from the individual producer point of view, but rules out the possibility of supply disruptions.

Keywords: Global Supply Chain, International Trade, Robustness, International Trade Policy

JEL Classification: E7, F02, F12, F13, L15

Suggested Citation

Jiang, Bomin and Rigobon, Daniel and Rigobon, Roberto, From Just in Time, to Just in Case, to Just in Worst-Case: Simple models of a Global Supply Chain under Uncertain Aggregate Shocks (September 29, 2021). Available at SSRN: https://ssrn.com/abstract=3932708 or http://dx.doi.org/10.2139/ssrn.3932708

Bomin Jiang

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
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Daniel Rigobon (Contact Author)

Princeton University - Department of Operations Research & Financial Engineering (ORFE) ( email )

Sherrerd Hall, Charlton Street
Princeton, NJ 08544
United States

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-447
Cambridge, MA 02142
United States
617-258-8374 (Phone)
617-258-6855 (Fax)

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