- September 21, 2011 - 13:00
- ZLC, Lecture Room 221, Zaragoza (Spain)
MIT-Zaragoza International Logistics Program, Zaragoza Logistics Center, Zaragoza, Spain
“Risk Propagation in Supply Chains”
(joint work with Rogelio Oliva and Santiago Kraiselburd)
The supply chain literature has devoted much attention to studying how the variability of orders propagates upstream. In this paper instead, we focus on how the variability of payments to suppliers propagates upstream, which has a major impact on risk. To do so, we build a supply chain model based on empirical findings from the financial literature. We show that payments variability may occur even if orders are constant, and that this variability may propagate and increase at upper echelons. We show that this phenomenon is caused by the limited access to debt and identify the factors that drive the propagation of variability, the existence of a financial leverage target, the cost of debt, the rm’s operational leverage, and the industry risk. By studying the limiting distribution of the corresponding Markov chain, we numerically illustrate the impact of these drivers on the risk of upper echelons as well as the interactions between order and payment variability. We provide a number of insights and propose measures for risk management.