Optimal Investment Decision for Industry 4.0 Under Uncertainties of Competence and Capability Building for Managing Supply Chain Risk

We consider a risk-averse firm’s decision problem of investing in Industry 4.0 under supply chain risk. Industry 4.0 yields to the firm the advantages of competence and capability building for managing supply chain risk. Using a mean-variance decision-theoretic model, we examine the risk-return trade-off of investing in Industry 4.0 under uncertainties in competence and capability. We analyse the firm’s investment decision based on the utility of the expected value and variance of the firm’s random final profit from investing in Industry 4.0. We show how the firm should optimally invest in Industry 4.0 when facing uncertainties associated with supply chain risk affecting competence and capability dimensions. We also show how the firm’s optimal investment decision changes as competence and capability dimensions vary due to supply chain risk. To quantitatively validate the theoretical model, we use a vignette based on-field experiment data to find the relative trade-offs between risk and return to demonstrate the model’s predictive power and analytical merits