Risk propagation and mitigation mechanisms of disruption and trade risks for a global production network

Abstract

Owing to the uncertainties of international trade and economic environment, the supply chain risks of global production networks have substantially increased in recent years. In this study, we investigate the supply disruption and international trade risks of an offshoring-based global production network using system dynamics simulation and game theory. The production network is formed by two contract manufacturers (CMs) and one original equipment manufacturer (OEM) located in different countries. First, a system dynamics simulation model considering supply disruption risk is established to evaluate the impacts of different supply disruption modes on the profit of OEM. To counteract the supply disruption risk, dynamic and static penalty mechanisms are proposed. By applying game analysis, we theoretically and numerically demonstrate why and how the dynamic penalty mechanism is superior to the static penalty mechanism. Second, we apply system dynamics and game theory to analyze the international trade risks (tariffs and exchange rates) for the offshoring-based global production network, and a cost-sharing mechanism for mitigating the trade risks is proposed. Finally, based on the study, we summarize some important managerial implications that may be helpful for practitioners.