What is it about?
Production processes tend to get fragmented across multiple organizations, forming complex supply chains. We found that the more fragmented supply chains are, the fewer incentives firms have to maintain buffers. It results in increased propagation of risks in the economy.
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Why is it important?
A globalized and highly interconnected world offers multiple opportunities but creates threats. Our work uses a simple and very general model that shows that the more complex supply chains are, the less profitable it is for companies to maintain inventories. To mitigate this trend, we can prescribe inventory levels based on the position of firms in their supply chains.
Perspectives
Those results have practical implications. Firms operating in complex supply chains could better assess their position to adjust their buffer. Insurers may use such models to prescribe inventory levels as part of their contingent liability product. Policy-makers could consider those results for critical supply chains and trade policies.
Celian Colon
International Institute for Applied Systems Analysis
Read the Original
This page is a summary of: Fragmentation of production amplifies systemic risks from extreme events in supply-chain networks, PLoS ONE, December 2020, PLOS,
DOI: 10.1371/journal.pone.0244196.
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