A Model of Stratified Production Process and Spatial Risk

In 2011, Japanese firms suffered severe losses as a result of the Great East Japan Earthquake and the Thailand floods. The firms incurred damage continually because they depended on spatially dispersed supply chains. Final goods producers are essentially attracted to outsourcing because of the prevailing scale economy in modern machinery industries. In addition, certain firms have dispersed their plants to different locations to avoid risks from powerful earthquakes that are expected near most of the developed metropolitan areas in the region. Such a strategy, however, has ironically caused contiguous damage to these firms. To capture the characteristics of supply chain over space and the cascade of spatial risks, we set up a two-level structure of circles where 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 located in different places, while 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. On the contrary, final goods producers may be better served being spatially concentrated. Copyright Springer Science+Business Media New York 2015