Investigating operational and financial risk hedging strategies in supply chains under gasoline price, carbon price, and demand uncertainties

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Gasoline price uncertainty has a great impact on the performance of a supply chain, and recent observation has shown gasoline price as very volatile. Volatile gasoline price affects transportation cost, which in turn affects supply chain costs. For example, even if manufacturing is outsourced to a site where this cost is lower, a higher shipping cost to the distribution site will still have an adverse impact on the supply chain cost. To reduce the shipping cost, a company may employ several operational flexibilities such as redesigning packages to load more on fewer trucks or selecting closer suppliers to reduce the distance between the buyer and supplier. Such managerial flexibilities not only yield a reduction in the amount of fuel burnt and lower carbon emissions but also help satisfy the stricter environmental rules enforcing the levels of carbon companies may emit to minimize the effects of climate change. Many companies have incorporated carbon emission trading, buying or selling "certificates" as needed to keep their emissions within acceptable levels. Such trading, however, causes uncertainty in the carbon price, which combined with gasoline price uncertainty leads to financial risks that cannot be underestimated. These financial risks can be hedged by using tradable financial instruments - a process called financial hedging. This research aims to not only understand the magnitude of these new risks from gasoline and carbon price uncertainty, but also incorporate traditional demand uncertainty to examine their combined effects. This research will ultimately develop risk management strategies by integrating operational and financial hedging in supply chain models. The analysis will guide supply chain managers in minimizing downside risk from gasoline price, carbon price, and demand uncertainties and offer a series of new managerial opportunities to enhance the sustainability of supply chains.