Where a Coverage Procurement Approach Doesn’t Pay: Empirical Evidence of the Cost of Flexibility



Market uncertainty can drive procurement decisions that favor flexibility and delayed decision-making to mitigate financial risk. However, we empirically demonstrate how doing so can in fact lead to higher costs. This is observed in the full truckload transportation services industry. To avoid price escalations and volatility in a spot market, buying firms (shippers) establish non-binding contracts with trucking companies (carriers). We build a set of empirical models of shippers’ and carriers’ strategic and operational behaviors to test the effects of shippers’ choice to establish contracts but ultimately not to use them. Our results demonstrate that despite firms’ intentions to reduce costs and mitigate risks with flexibility and future options, the strategy can have tangible costs. We add to the literature on financial risk, flexibility, and options by exploring a context in which these tactics are unfavorable, quantifying the costs, and offering practical ways to reduce them.

This seminar will take place in T09-67. To join online, find the details below:

Meeting ID: 956 1950 7505