A Dynamic Analysis of Supply Management and Supply Risk

Abstract

Supplier bankruptcies are among the most common causes of major supply chain disruptions. In this study, we analyze the effect of buyers' risk management and supply management practices on two outcomes: the supplier's bankruptcy risk and the buyer's financial bottom line. We specifically study the common supply management practice of buyer-imposed extended (delayed) payment terms on suppliers. By building a dynamic simulation model, we show that delayed payment terms increase supplier bankruptcy risk. As such, a comprehensive supply risk management program must account for the impact of this practice. We also show that commonly recommended supply chain risk management practices for buyer firms can sometimes backfire. For example, quick response to supplier disruptions may not always be optimal for the buyer. Finally, we show that a backup source not only provides the buyer with continuity of supply in the event of a supply disruption, but also helps the disrupted supplier recover, thereby reducing the supplier bankruptcy risk.