Which of the following best explains why it can be riskier for a firm to own parts of the supply chain rather than rely on external supply chains?

• A. Firms that own their supply chain have no control over production quality.
• B. External supply chains prevent firms from facing any market fluctuations.
• C. Owning parts of the supply chain exposes the firm to higher fixed costs and operational risks.
• D. Relying on external supply chains always guarantees lower costs and higher flexibility.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of vertical integration, which occurs when a firm owns multiple stages of its supply chain, such as production, distribution, or raw materials.
2. Step 2: Recognize that owning parts of the supply chain means the firm incurs fixed costs related to maintaining and operating these stages, which can increase financial risk if demand fluctuates.
3. Step 3: Consider operational risks, such as disruptions in production or logistics, which the firm must manage internally when it owns the supply chain, rather than outsourcing these risks to external suppliers.
4. Step 4: Compare this to relying on external supply chains, where the firm can often adjust orders and avoid some fixed costs, gaining flexibility but potentially sacrificing some control.
5. Step 5: Conclude that owning parts of the supply chain exposes the firm to higher fixed costs and operational risks, making it riskier compared to relying on external suppliers who share or absorb some of these risks.