Systemic risk mitigation in supply chains through network rewiring

Abstract

Abstract The networked nature of supply chains makes them susceptible to systemic risk, where local firm failures can propagate through interdependencies and lead to cascading supply chain disruptions. The systemic risk of supply chains can be quantified and is closely related to the topology and dynamics of supply chain networks (SCN). However, how different network topologies contribute to this risk remains unclear. Here, we ask whether systemic risk can be significantly reduced by rewiring supplier-customer pairs. In doing so, we quantify the extent to which the observed systemic risk is a result of fundamental properties of the dynamical system. We minimize systemic risk by employing a method from statistical physics that respects firm-level constraints to production. Analyzing six specific subnetworks of the national SCNs of Ecuador and Hungary, we demonstrate that systemic risk can be considerably mitigated by 16-50% without reducing the production output of firms. A comparison of network properties before and after rewiring reveals that this risk reduction is achieved by changing the connectivity in non-trivial ways. These results suggest that actual SCN topologies carry unnecessarily high levels of systemic risk and that resilience can be substantially enhanced by targeted supplier changes comparable in scale to one year of natural network evolution.