Systematic Risk in Supply Chain Networks

Forthcoming in Management Science

39 Pages Posted: 1 Jul 2011 Last revised: 5 Apr 2015

See all articles by Nikolay Osadchiy

Nikolay Osadchiy

Emory University - Goizueta Business School

Vishal Gaur

Cornell University - Samuel Curtis Johnson Graduate School of Management

Sridhar Seshadri

University of Illinois at Urbana Champaign; Indian School of Business

Date Written: February 2015

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.

Keywords: Supply chain network, Risk management, Empirical study

Suggested Citation

Osadchiy, Nikolay and Gaur, Vishal and Seshadri, Sridhar, Systematic Risk in Supply Chain Networks (February 2015). Forthcoming in Management Science. Available at SSRN: https://ssrn.com/abstract=1876443 or http://dx.doi.org/10.2139/ssrn.1876443

Nikolay Osadchiy

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322
United States

HOME PAGE: http://www.bus.emory.edu/nosadch/

Vishal Gaur (Contact Author)

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 Illinois at Urbana Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

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