Supply network drivers of risk and performance

This chapter reviews historical and contemporary research in economics, operations management, and finance that adopts a network perspective for modeling interactions between agents. It argues that incorporating extended network characteristics in the analysis can yield unique insights compared to the analysis done at the level of dyads or local neighborhoods. The chapter explains how new network-based models contribute to the academic debate and advance our understanding of supply network drivers of performance and risk. This includes a discussion on the structural configuration of a firm’s interconnected portfolio of upstream supplier and downstream customer relationships and its role in influencing financial and operational performance as well as its innovation.Accepted manuscrip

Systematic Risk and the Bullwhip Effect in Supply Chains ∗

The variance of demand can be divided into two components, a systematic risk component that occurs due to economic factors, and an idiosyncratic noise component. Operational hedging addresses the total variance of demand, whereas financial hedging is useful against systematic risk. We investigate the systematic risk component of demand uncertainty using industry-level data for the manufacturing, wholesale trade, and retail trade sectors of the U.S. economy, and applying sales as a proxy for demand. We show that the degree of systematic risk increases substantially from retailers to wholesalers to manufacturers. Investigating two potential sources of this phenomenon, amplification of production series as predicted by the bullwhip effect and aggregation of orders placed by downstream industries, we find evidence supporting the latter. Our result have implications for the relative values of different operational and financial hedging strategies chosen by a firm. It is particularly relevant to events such as the 2008-09 economic recession and the post-recession recovery