Disruption and Rerouting in Supply Chain Networks

Forthcoming in Operations Research

71 Pages Posted: 12 Sep 2020 Last revised: 1 Nov 2022

See all articles by John R. Birge

John R. Birge

University of Chicago - Booth School of Business

Agostino Capponi

Columbia University

Peng-Chu Chen

The University of Hong Kong

Date Written: October 31, 2022

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 and supplier diversification is 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: supply chain networks, disruption risk, contingent rerouting, secondary markets, systemic risk.

JEL Classification: D57, E23, E32

Suggested Citation

Birge, John R. and Capponi, Agostino and Chen, Peng-Chu, Disruption and Rerouting in Supply Chain Networks (October 31, 2022). Forthcoming in Operations Research , Available at SSRN: https://ssrn.com/abstract=3669363 or http://dx.doi.org/10.2139/ssrn.3669363

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Agostino Capponi (Contact Author)

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Peng-Chu Chen

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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