Systematic risk in supply chain networks

Nikolay Osadchiy, Vishal Gaur, Sridhar Seshadri

Research output: Contribution to journalArticle

Abstract

Industrial production output is generally correlated with the state of the economy. Nonetheless, during times of economic downturn, some industries take the biggest hit, whereas at times of economic boom they reap most benefits. To provide insight into this phenomenon, we map supply networks of industries and firms and investigate how the supply network structure mediates the effect of economy on industry or firm sales. Previous research has shown that retail sales are correlated with the state of the economy. Since retailers source their products from other industries, the sales of their suppliers can also be correlated with the state of the economy. This correlation represents the source of systematic risk for an industry that propagates through a supply chain network. Specifically, we identify the following mechanisms that can affect the correlation between sales and the state of the economy in a supply chain network: propagation of systematic risk into production decisions, aggregation of orders from multiple customers in a supply chain network, and aggregation of orders over time. We find that the first effect does not amplify the correlation; however, the latter two intensify correlation and result in the amplification of correlation upstream in supply networks. We demonstrate three managerial implications of this phenomenon: implications for the cost of capital, for the risk-adjusted valuation of supply chain improvement projects, and for supplier selection and risk.

Original languageEnglish (US)
Pages (from-to)1755-1777
Number of pages23
JournalManagement Science
Volume62
Issue number6
DOIs
StatePublished - Jun 2016
Externally publishedYes

Keywords

  • Empirical study
  • Risk management
  • Supply chain network

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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