De-risking as a source of supply chain value

Abstract

This paper develops a framework for valuing the supply chain initiative of a 'supplier' firm. Three generic sources of value are identified; cost savings, revenue increases, and risk reduction. The central thesis of this paper is that de-risking (risk here is used in a capital asset pricing model sense) may be a significant source of value to the shareholders of a supplier firm. The contention is that a well-conceived supply chain initiative can so alter the relationship between a supplier firm and a customer, as to reduce risk. This reduced risk follows from customer stickiness, by which we mean that the market share of supplier firm may be higher when the industry faces an adverse economy. A state-preference theory/capital asset pricing model framework is used to show that customer stickiness can indeed reduce risk and the cost of capital. Evidence from the Indian automobile industry supports the thesis of customer stickiness.