Operational causes of bankruptcy propagation in supply chain

Abstract

With the increasing interdependence among supply chain members, bankruptcy of a supply chain member may be caused by operational decisions of other members. To investigate how bankruptcy occurs and propagates in supply chain networks, we build a multi-agent simulation model for a two-stage supply chain that consists of multiple upstream manufacturers and multiple downstream retailers. Based on the developed simulation model, we study impacts of various operational parameters and decisions, such as horizontal competition among retailers, order allocation strategies of retailers, wholesale price of manufacturers, characteristics of market demand and number of retailers, on bankruptcy propagation. Since many operational decisions of a firm are made under financial constraints, we also investigate the linkage between firm's operational risks and financial decisions (e.g., the maximal risk of cash flow that a member is willing to take, and the up-front payment proportion of retailers in a two-period payment policy). Experimental results reveal that operational interactions between supply chain members and operational decisions made by supply chain members are important causes of bankruptcy propagation, but impacts of these operational parameters and decisions depend on financial decisions. These observations indicate that supply chain members can moderately hedge their operational risk through financial decisions.