Design Your Supply Chain as a Portfolio of Options.

Wave after wave of disruptions have roiled global supply chains. In addition to navigating the tariff wars triggered by the United States, companies have had to contend with export controls on critical inputs such as rare-earth metals, advanced semiconductors, and pharmaceutical precursors; shifts in geopolitical alignments as the Global South has deepened its ties with China; and conflicts in the Middle East and Ukraine, where trade sanctions have been used as weapons. Yet the supply chain planning tools most companies use were built for a world where this level of volatility was the exception. Now it is the rule.

For more than a decade—and especially since the pandemic—the guiding principle for supply chain management has been to design supply chains for resilience: Build buffers, diversify suppliers, engage in collaborative planning with members of the network, and so on. That makes sense when shocks are relatively rare. But it is inadequate in a world where the rules themselves—trade agreements, tariff regimes, regulatory standards—keep changing. In such an environment, companies need to design their supply chains as portfolios of real options that provide them with the right—but not the obligation—to take future actions.

Companies have long applied this approach to strategy formulation and capital budgeting. But it has not been widely employed in supply chain management. A few multinationals—particularly those with extensive experience managing cross-border operations—have intuitively adopted elements of this approach, but most companies still evaluate supply chain investments using traditional discounted cash-flow methods that treat flexibility as a cost, not an asset. Real options give companies the ability to defer an investment in new capacity until the regulatory picture clears, to decrease operations in jurisdictions that become unfavorable, to expand production into new jurisdictions, and to switch sourcing or assembly from one location to another.

In this article we present a framework for designing a supply chain that way. It is based on our combined research and consulting work with global manufacturers navigating trade policy shifts, as well as others’ work on the theory of real options as applied to strategic investments. Our framework rests on three interconnected ideas. First, the major sources of uncertainty are not just volatile markets and unpredictable events; they include volatile institutions and their rules. Second, a company should view its supply chain as a portfolio of interrelated options whose value depends on how those options are structurally coordinated. And third, the constraint on exercising the options is not just capital but also capabilities: the local production expertise, qualified vendor networks, and regulatory knowledge that take years to build.

The Supply Chain Options Framework

In a world of stable trade rules, the right supply-chain strategy is straightforward: Commit to the lowest-cost configuration and optimize. But when the rules themselves are volatile, the goal is not to find the optimal configuration but to maintain the ability to reconfigure—and that requires a portfolio of options. Our framework can help. (See the exhibit “The Supply Chain Options Framework.”) It organizes four options according to their primary purpose: protecting the company when conditions worsen or positioning it to capture value when conditions improve.

The objective for leaders is to maintain the right to act as conditions shift: committing when clarity is sufficient and preserving flexibility when it is not. Sometimes this requires actions that are defensive, and sometimes it requires actions that are offensive. Having options to make both types of moves is essential.

The original article contains on the site of Harvard business review.