Supply Chain, Transportation, and Spatial Risk

Abstract

In 2011, Japanese firms suffered severe losses as a result of the Great East Japan Earthquake and the Thailand floods. Firms incurred continual damage because they depended on spatially dispersed supply chains. The fragmentation of foreign and domestic trade proceeds as a dispersion force. As a result, secondary or tertiary subcontractors sometimes provide distinctive parts independently. However, such a structure has in fact caused contiguous damage to these firms. To capture the characteristics of supply chains over space and the cascade of spatial risks, we set up a two-level structure of circles in which firms can be categorized. The top circle is occupied by intermediate goods producers who provide differentiated inputs for the final goods producers in the second circle. We assume that scale economy works with respect to the variety of intermediate goods. Thus, final goods producers purchase inputs from intermediate goods producers in different locations, paying transport costs in the process. We then evaluate the two-level structure in terms of location-specific hazards such as earthquakes. A more dispersed supply chain corresponds to a greater likelihood that final goods producers would suffer losses from the spatial risk. Simulation results reveal that the expected damage may be less for intermediate goods producers with more dispersed locations. Conversely, final goods producers may be better served by being spatially concentrated.