Project Syndicate: Supply-Shock Therapy

The world has recently experienced a cascade of supply-chain disruptions, and further disruptions are likely to impact consumers this Christmas, with widespread shortages emerging around the world.

Research by Professor Carvalho and co-authors originally proposed a framework to estimate the economy-wide impact of supply chain disruptions. They subsequently offered a case study, detailing the impact of supply chain disruptions that occurred after the Great East Japan Earthquake. It provides crucial evidence that is informing current policy debates. Among other things it shows how supply chains amplify and propagate local shocks. Professor Carvalho's long-run research agenda on the economy as a complex production network is quoted in the feature, and forms the basis for a rapidly expanding literature in this area.

Professor Matt Elliott’s working paper on Supply Network Formation and Fragility is also quoted in a different article in the same feature. This paper models complex supply networks in which firms need to source multiple essential inputs through relationships with other firms. Although firms have multiple suppliers for these inputs, and invest in the strength of their supply relationships, supply chains are found to be very fragile with respect to certain types of shocks. These are shocks that slightly reduce the chance many suppliers are able to deliver the goods they promised on time. A good example is a shortage of HGV drivers. In the article the University of Cambridge’s Diane Coyle relates this work to disruptions in the markets for gas, carbon dioxide, toys, ready-to-assemble furniture, iPhones, and computer chips.

Links

Research indicates how supply chain disruptions led to a wide economic impact of 2011 Japan earthquake, Faculty of Economics news feature

Supply Network Formation and Fragility, Elliott, M., Golub, B. and Leduc, M. V.

Supply-Shock Therapy, Project Syndicate