Firm Resilience to Supply Chain Disruptions
Abstract
With increasing awareness about the destructive impacts of supply chain disruptions, many scholars have become interested in studying possible approaches to make firms more resilient against such disruptions. Consequently, different resilience strategies and tactics have been developed and recommended in the literature, such as maintaining a flexible supply base (Chopra and Sodhi 2004), establishing strategic stockpiles (DeCroix 2013), supporting supplier process improvement (Bakshi and Kleindorfer 2009). As discussed by Hendricks et al. (2009), however, there is little rigorous empirical evidence to support assessing the actual effectiveness of recommended resilience strategies and tactics such as these.
Part of this disconnect is due to a lack of established metrics for quantifying resilience. To address the need for such metrics, in this research effort, we build upon the disaster resilience literature to develop four different metrics for quantifying the resiliency of firms against supply chain disruptions: initial loss, maximum loss, length of time spent in a state of loss, and total resilience (which provides a combined measure of both loss and recovery). We define these resilience metrics with respect to the long-term operating performance of firms, rather than the one-day abnormal stock returns used in previous studies, and select them so that they represent both the robustness capabilities and the recoverability capabilities of firms. The metrics then can be employed to evaluate the effectiveness of different resilience strategies for improving the performance of firms after supply chain disruptions.
To demonstrate the applicability of the new resilience metrics, we use them to evaluate the effectiveness of three resilience strategies that were previously studied by Hendricks et al. (2009): operational slack, business diversification, and geographic diversification. Based on a review of the literature, we proposethe following three hypotheses:
Hypothesis 1. Firms with higher levels of operational slack are more resilient against supply chain disruptions.
Hypothesis 2. Firms with higher levels of business diversification are more resilient against supply chain disruptions.
Hypothesis 3. The level of geographical diversification has a non-zero association with the resilience of firms to supply chain disruptions.
We test these hypotheses using the resilience performance of around 200 firms that experienced a supply chain disruption during 2005 to 2013. The results indicate that firms that operate with higher level of supply chain slack experience less maximum loss and do better in terms of recovery after supply chain disruptions, but they do not experience less initial loss. The results also show that firms with higher supply chain slack are more resilient overall to supply chain disruptions. Furthermore, we found that business diversification decreases the maximum loss suffered and increases the total resilience of firms to supply chain disruptions, but it has no impact on the initial loss or on the length of time spent in a state of loss.
Contrary to recommendations given by many theoretical papers in the literature, our analysis also found that geographical diversification increases the initial loss of firms after a supply chain disruption, but it does not have an impact on the maximum loss, the length of time spent in a state of loss or the total resilience of firms. We also observed that firms with a higher number of employees experience less maximum loss and are more resilient to supply chain disruptions. These results can be used by practitioners in the field of supply chain risk management to make supply chains more resilient to supply chain disruptions.
References
Bakshi, N., and Kleindorfer, P. 2009. “Co-opetition and Investment for Supply-Chain Resilience,” Production and Operations Management (18:6), pp. 583–603 (doi: 10.1111/j.1937-5956.2009.01031.x).
Chopra, S., and Sodhi, M. 2004. “Managing risk to avoid supply-chain breakdown,” MIT Sloan Management Review (46:1), pp. 53–62.
DeCroix, G. A. 2013. “Inventory Management for an Assembly System Subject to Supply Disruptions,” Management Science (59:9), INFORMS, pp. 2079–2092 (doi: 10.1287/mnsc.1120.1660).
Hendricks, K. B., Singhal, V. R., and Zhang, R. 2009. “The effect of operational slack, diversification, and vertical relatedness on the stock market reaction to supply chain disruptions,” Journal of Operations Management (27:3), pp. 233–246 (doi: 10.1016/j.jom.2008.09.001).