27 September 2018
Disruptions can cascade along supply chains and induce high losses. Mitigating such risks can be challenging, as supply chains are nowadays becoming increasingly complex owing to outsourcing and specialization. We introduce a stylized model in which firms mitigate the risks of disruptions in their supply chains using inventories. As each firm’s mitigating strategy influences the profits of other firms, we analyze their interactions using evolutionary game theory. On this basis, we report the following findings. (1) Downstream firms need disproportionately larger inventories, the optimal sizes of which are highly context-dependent. (2) Inventories greatly reduce total losses from disruption cascades despite moderately increasing direct losses. (3) Incentives for such mitigation efforts are progressively reduced in more fragmented supply chains. (4) Durable inventories enlarge the range of conditions enabling robust risk mitigation. (5) Prescribing inventory sizes based on network analysis is substantially superior to one-size-fits all prescriptions, greatly reducing fragmentation-induced systemic risks.
Last edited: 16 November 2018
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