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Disruption and Rerouting in Supply Chain Networks

Author

Listed:
  • John R. Birge

    (Booth School of Business, University of Chicago, Chicago, Illinois 60637)

  • 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)

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.

Suggested Citation

  • John R. Birge & Agostino Capponi & Peng-Chu Chen, 2023. "Disruption and Rerouting in Supply Chain Networks," Operations Research, INFORMS, vol. 71(2), pages 750-767, March.
    • Handle: RePEc:inm:oropre:v:71:y:2023:i:2:p:750-767
    DOI: 10.1287/opre.2022.2409
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