Supply Disruptions and Optimal Network Structures

60 Pages Posted: 26 Oct 2017 Last revised: 16 Aug 2018

See all articles by Kostas Bimpikis

Kostas Bimpikis

Stanford Graduate School of Business

Ozan Candogan

University of Chicago - Booth School of Business

Shayan Ehsani

Stanford University, Management Science and Engineering

Date Written: October 1, 2017

Abstract

This paper studies multi-tier supply chain networks in the presence of disruption risk. Firms decide how to source their inputs from upstream suppliers so as to maximize their expected profits, and prices of intermediate goods are set so that markets clear. We provide an explicit characterization of equilibrium prices and profits, which allows us to derive insights on how the network structure, i.e., the number of firms in each tier, production costs, and disruption risk affect firms' profits. We discuss the prescriptive implications of our findings by exploring how a firm should prioritize among its suppliers (direct and indirect) when investing in improving their production reliability. Furthermore, we establish that networks that maximize profits for firms that operate in different stages of the production process, i.e., for the upstream supplier and the downstream retailer, are structurally different. In particular, the latter have relatively less diversified downstream tiers and generate more variable output than the former. Finally, we study the question of endogenous chain formation by considering a game of entry, i.e., firms decide whether to engage in production by forming beliefs about their profits in the post-entry supply chain. We argue that endogenous entry leads to chains that are inefficient in terms of the number of firms that engage in production.

Keywords: Multi-sourcing, Competition, Disruption risk, Supply chain networks

Suggested Citation

Bimpikis, Kostas and Candogan, Ozan and Ehsani, Shayan, Supply Disruptions and Optimal Network Structures (October 1, 2017). Available at SSRN: https://ssrn.com/abstract=3058973 or http://dx.doi.org/10.2139/ssrn.3058973

Kostas Bimpikis (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Ozan Candogan

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/ozan.candogan/

Shayan Ehsani

Stanford University, Management Science and Engineering ( email )

Stanford, CA 94305
United States

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