Disruption and Rerouting in Supply Chain Networks

John Birge, Agostino Capponi () and Peng-Chu Chen ()
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Agostino Capponi: Industrial Engineering and Operations Research Department, Columbia University, New York, New York 10027
Peng-Chu Chen: Department of Industrial and Manufacturing Systems Engineering, The University of Hong Kong, Pokfulam, Hong Kong

Operations Research, 2023, vol. 71, issue 2, 750-767

Abstract: We study systemic risk in a supply chain network where firms are connected through purchase orders. Firms can be hit by cost or demand shocks, which can cause defaults. These shocks propagate through the supply chain network via input-output linkages between buyers and suppliers. Firms endogenously take contingency plans to mitigate the impact generated from disruptions. We show that, as long as firms have large initial equity buffers, network fragility is low if both buyer diversification and supplier diversification are low. We find that a single-sourcing strategy is beneficial for a firm only if the default probability of the firm’s supplier is low. Otherwise, a multiple-sourcing strategy is ex post more cost effective for a firm.

Keywords: Operations and Supply Chain; supply chain networks; disruption risk; contingent rerouting; secondary markets; systemic risk (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:71:y:2023:i:2:p:750-767

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