Disentangling diversification in supply chain networks

We propose a model for the quantification of business disruption risk in a global supply chain network. To calculate the loss distribution induced by supply chain disruptions for a focal firm, we apply a bottom-up modeling approach. On the firm level, we model production disruptions of various hazard events in reduced form. We incorporate the network structure explicitly and define the loss propagation between the firms. Via Monte Carlo simulation, we analyze the effects of different model specifications and network structures on the loss distribution of the focal firm. We show that diversification effects can lead to counterintuitive results when we consider the network structure and the correlations of hazard events. Our methodology and findings enable more informed and transparent decisions for supply chain design.