Disruption and Rerouting in Supply Chain Networks

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.

Funding: J.R. Birge acknowledges financial support from the University of Chicago Booth School of Business. The research of A. Capponi has been supported by the NSF/CMMI CAREER-1752326 award. P.-C. Chen acknowledges financial support from the Research Grant Council of Hong Kong [Early Career Scheme Grant 27210118].

Supplemental Material: The e-companion is available at https://doi.org/10.1287/opre.2022.2409.