Wednesday, October 28, 2015

Recovering from Disruptions: The Role of Sourcing Strategy

Read the working paper
INSEAD Working Paper 2015/85/TOM

Fast recovery from supply chain disruptions is a key objective of supply chain and business continuity professionals. This paper provides the first rigorous and large-scale empirical evidence that relates the use of different supply chain strategies– supplier diversification and the use of long-term relationships–with the ability of a supply chain to recover from disruptions. We develop an estimator of a supply-chain’s recovery rate that can be constructed using the limited available data— only the time series of firms’ actual sourcing behavior. We extract firms’ component-level sourcing transactions from more than two million import manifests and then use these data to estimate recovery rates of the firm-component supply chains of publicly traded US firms. We find that supplier diversification is associated with slower recovery from disruptions, while the use of long-term relationships is associated with faster recovery. A one standard deviation decrease in the former is associated with a 16% faster recovery, and a like increase in the latter is associated with a 20% faster recovery.