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http://ssrn.com/abstract=1931737
 
 

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Systematic Risk in Supply Chain Networks


Nikolay Osadchiy


Emory University Goizueta Business School

Vishal Gaur


Cornell University - Samuel Curtis Johnson Graduate School of Management

Sridhar Seshadri


University of Texas at Austin - Red McCombs School of Business

December 18, 2014

Johnson School Research Paper Series No. 41-2011
McCombs Research Paper Series No. IROM-04-11

Abstract:     
Industrial production output is generally correlated with the state of the economy. Nonetheless, during the times of economic downturn some industries take the biggest hit, while at the times of economic boom they reap most benefits. To provide insight into this phenomenon we map supply networks of industries and firms and investigate how the supply network structure mediates the effect of economy on industry or firm sales. Previous research has shown that retail sales are correlated with the state of the economy. Since retailers source their products from other industries, the sales of their suppliers can also be correlated with the state of the economy. This correlation represents the source of systematic risk for an industry that propagates through a supply chain network. Specifically, we identify the following mechanisms that can affect the correlation between sales and the state of the economy in a supply chain network: propagation of systematic risk into production decisions, aggregation of orders from multiple customers in a supply chain network, and aggregation of orders over time. We find that the first effect does not amplify the correlation, however, the latter two intensify correlation and result in the amplification of correlation upstream in supply networks. We demonstrate three managerial implications of this phenomenon: implications for the cost of capital, for the risk-adjusted valuation of supply chain improvement projects, and for supplier selection and risk.

Number of Pages in PDF File: 39

Keywords: Supply chain network, Risk management, Empirical study

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Date posted: September 22, 2011 ; Last revised: December 19, 2014

Suggested Citation

Osadchiy, Nikolay and Gaur, Vishal and Seshadri, Sridhar, Systematic Risk in Supply Chain Networks (December 18, 2014). Johnson School Research Paper Series No. 41-2011; McCombs Research Paper Series No. IROM-04-11. Available at SSRN: http://ssrn.com/abstract=1931737 or http://dx.doi.org/10.2139/ssrn.1931737

Contact Information

Nikolay Osadchiy (Contact Author)
Emory University Goizueta Business School ( email )
1300 Clifton Rd NE
Atlanta, GA 30326
United States
Vishal Gaur
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Gaur/

Sridhar Seshadri
University of Texas at Austin - Red McCombs School of Business ( email )
Austin, TX 78712
United States
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