Research Paper: Mitigating Upstream Disruptions

Taken From this article:

Mitigating upstream disruptions: Effects of extended inventories in first- and second-tier suppliers

Christian F. Durach, Yuri Peers, Yimin Wang, Tomas Repasky

https://onlinelibrary.wiley.com/doi/full/10.1002/joom.1332

In today’s unpredictable world, disruptions in the supply chain—from natural disasters to global pandemics—can have a significant impact on business performance. This peer-reviewed study, Mitigating upstream disruptions: Effects of extended inventories in first- and second-tier suppliers, investigates how holding inventory slack (excess inventory) at both the first-tier and second-tier suppliers can protect businesses from the negative effects of such disruptions.

The research examines data from companies affected by the 2011 Great East Japan Earthquake, analyzing how different levels of inventory held by their suppliers influenced post-disruption performance.

What is Inventory Slack?

Inventory slack refers to surplus stock held by a company beyond its immediate operational needs. While holding too much inventory can incur costs (storage, depreciation, etc.), it can also act as a buffer during crises, allowing companies to keep operating when their usual supply is disrupted.

In a supply chain, the first-tier suppliers are those who supply directly to a company, while second-tier suppliers are the ones who supply to the first-tier suppliers. The paper explores how inventory slack at both tiers impacts the buyer’s ability to weather supply chain disruptions.

Key Findings from the Study

1. Inventory slack helps maintain buyer performance after disruptions: The study shows that having inventory slack at both the first- and second-tier suppliers significantly improves the buyer’s ability to perform after a disruption.
2. First-tier supplier inventory is more impactful: While inventory slack at both levels is helpful, the buffer held by first-tier suppliers has a greater positive effect on the buyer’s performance. This is because the first-tier suppliers act as a critical bridge between the second-tier suppliers and the buyer, making it easier for buyers to access needed resources during a crisis.
3. Leaner buyers benefit more from supplier inventories: Buyers with lower inventory slack of their own benefit more from their suppliers’ inventory slack. Essentially, firms with leaner operations can rely more heavily on the stock held within their supply chain to compensate during a disruption.
4. Competition reduces the value of supplier slack: When more buyers are competing for a first-tier supplier’s inventory, the benefits of that inventory slack diminish. In these cases, acquisition costs increase, making it harder for any single buyer to fully leverage the available stock.

Practical Takeaways for Supply Chain Professionals

1. Assess inventory slack across your supply chain: Inventory slack is not just about your company’s stock—supply chain professionals should assess how much buffer inventory is being held by their first- and second-tier suppliers. Ensuring that your suppliers maintain adequate inventory levels can greatly reduce the risk of disruption for your business.
2. Prioritize first-tier suppliers with strong inventory practices: Since first-tier suppliers play a pivotal role in bridging second-tier resources to your operations, it’s crucial to select suppliers that maintain healthy levels of inventory slack. These suppliers will be more reliable during disruptions.
3. Leverage supply chain slack as part of lean operations: Companies with lean inventory practices can benefit from supplier inventories to a greater degree than those with their own surplus stock. By relying on extended supply chain buffers, businesses can maintain operational efficiency while still managing disruption risks.
4. Monitor competition for supplier resources: The more buyers competing for a supplier’s inventory slack, the less value your business can derive from it. Supply chain visibility is key—knowing how many other buyers your suppliers are serving will help in evaluating the reliability of those suppliers during a crisis.

Conclusion

This study underscores the importance of managing not only your own inventory levels but also understanding the inventory slack across your entire supply chain. Supplier selection should include assessments of both direct and indirect supply chain partners and their inventory practices. For supply chain professionals, these insights are crucial in building resilience against disruptions while maintaining operational efficiency.