Demand Shocks in Supply Networks: Ripple Effects

This chapter explores the ripple effects of demand shocks in supply networks, focusing on the mechanisms that drive propagation of these shocks and the factors that can either amplify or mitigate their impact. The analysis is based on three key research areas: idiosyncratic shocks and the bullwhip effect, correlated shocks and systematic risks, and the role of community structure in shock propagation. Since the focus is on demand shock propagation, it is important to establish a measure of upstreamness for firms in the network from the most downstream to upstream. We call this measure layer and describe its construction and variations. We then proceed with the analysis of idiosyncratic shock propagation, where small fluctuations in consumer demand lead to increasingly large variations in order upstream in the supply chain. We find that in complex supply networks, the propagation of these idiosyncratic shocks is often mitigated by statistical aggregation and strategic customer base management. We then continue with the analysis of correlated shocks, such as those caused by economic downturns or global crises, which impact multiple nodes simultaneously, leading to systematic risks, and characterize conditions for upstream amplification of systematic shocks. Finally, we investigate how community structures within supply networks influence the propagation of shocks. We argue that tightly knit communities can localize demand or supply disruptions with implications for network resilience and preparedness for ripple effects.