Modeling Economic Consequences of Supply Chain Disruptions

Supply chains often experience significant economic disruptions, as in the case of facility breakdowns, transportation mishaps, natural calamities, and terrorist attacks. We collaborated in a study of such disruptive events as part of an initiative by Sandia National Laboratories. We conducted case studies of three electronics firms and their suppliers to explore underlying aspects of the supply chain structure and complexity, type and length of disruptions, and mitigation approaches currently in use. We identified three vital metrics (system inventory, system expediting, and service level at the final echelon in the supply chain) as drivers of performance. Simulation experiments we ran disclosed four key findings: (1) a cost function based on these vital metrics can be quite ill-behaved, warranting the use of metaheuristics capable of looking beyond local optima, (2) genetic search over inventory system parameters yields better solution quality than unimodal search, (3) variability induced by disruptions can amplify in a supply chain, and severely affect service levels and system inventory for long periods, and (4) order expediting, often used to mitigate disruptions, can also trigger bullwhip effects, and hurt rather than help overall performance. In sum, while there is merit in the popular notion that increased information and flexibility are generally desirable, our study discloses that these factors also have significant attendant dangers, making it easy to overreact.