U-M study explores flow of goods amid disruptions, offers advice: Think globally, supply locally
A global economy is a modern fact of life, but supply chain networks must become more regionalized to weather human-made and natural disasters, according to new research.
That conclusion calls into question prevailing industry wisdom and belief in the superiority of a diverse supply chain and a globalized network’s ability to withstand shocks, such as pandemics, wars and severe weather.
Researchers from University of Michigan and Texas A&M University examined data and ran computer simulations on three major automakers: General Motors, Volkswagen and SAIC. They found the corporations’ vast supply chain networks aren’t particularly robust—referring specifically to their “capacity to sustain an uninterrupted flow of goods and materials through the supply network in the face of significant disruptions.”
They were motivated to examine the strength and stability of supply chains as they watched the COVID-19 pandemic force the shutdown of many manufacturing plants and impede shipping routes between them. In March 2020, the scholars note, more than 90% of all U.S. auto production was offline. However, some manufacturers with flexible supply chains fared far better.
Afterward, the auto industry and others drastically cut production due to the worldwide shortage of computer chips. For instance, GM recently experienced a roughly 40% drop in quarterly profits amid supply chain disruptions.
The researchers, whose study was published in the California Management Review, combined analysis of archival data on supply chain networks of the global auto industry with computational modeling that included hundreds of simulated “shocks” to those networks in the form of multistage shutdowns of parts suppliers. They found that practices in which buyers choose geographically closer suppliers reduced vulnerability to adverse events and minimized the effects from even major disruptions.
The authors expected before embarking on the study that globalizing supplier selection would strengthen supply chains—and regionalizing them would, in turn, weaken them. Still, they also recognized some downsides of a diversified supply chain: The pandemic revealed vulnerabilities of being exposed to a larger number of disruptions, something also evidenced by the ripple effects of Russia’s invasion of Ukraine.
“Collaborative relationships among organizations enable the flow of promising ideas, practices and knowledge throughout such systems, thus spurring innovation,” said Maxim Sytch, professor of management and organizations at U-M’s Ross School of Business who co-authored the study with fellow Ross professor Scott Page and Yong Kim, an assistant professor of management at Texas A&M.
“And yet, the interconnectivity of these collaborative systems can also be a significant source of vulnerability. Pandemics, natural disasters, military conflicts, financial crises, changes in nations’ immigration policies, terrorist acts and social and political unrest can bring the activities of multiple organizations to a halt or affect how they interact with one another.”
Sytch and his colleagues recommend that corporations do the following: Adopt contingency plans that can developed through simulation training to deal with disruptions; engage in stress-testing, as banks often do, to create a framework or process for measuring the “robustness” of their networks; and include the regional value of suppliers when making choices.
Researchers acknowledge challenges, such as the complexity and multi-tiered nature of supply chain networks and corporations’ limited authority or ability to control the entire stream of suppliers. Still, the obstacles aren’t insurmountable—major players can encourage buyers to invest in and develop their local communities with an eye toward “building socially sustainable business operations that are also robust to a range of major disruptions.”
Even a small shift toward including more regional suppliers in networks can make a difference toward boosting durability, they add.
“The war in Ukraine and the political sanctions that followed created very much similar disruptions,” Sytch said. “The importance of our work lies in understanding how these collaborative systems can withstand shocks that instantaneously disable multiple network participants or relationships among them, and how then such collaborative systems can recover from these shocks by figuring out new patterns of connectivity.”