Reverse Stress Testing for Supply Chain Resilience

TL;DR

This paper introduces a reverse stress testing methodology for supply chain resilience, enabling prediction of key vulnerabilities that could cause significant disruptions, demonstrated through a case study on copper wire imports into the USA.

Contribution

It develops the first reverse stress testing approach for complex supply chains, identifying critical sources of disruptions with probabilistic certainty.

Findings

Canada, Chile, and Mexico are key sources of disruptions.

Papua New Guinea may cause small disruptions.

Chile could lead to catastrophic losses.

Abstract

Supply chains' increasing globalization and complexity have recently produced unpredictable disruptions, ripple effects, and cascading resulting failures. Proposed practices for managing these concerns include the advanced field of forward stress testing, where threats and predicted impacts to the supply chain are evaluated to harden the system against the most damaging scenarios. Such approaches are limited by the almost endless number of potential threat scenarios and cannot capture residual risk. In contrast to forward stress testing, this paper develops a reverse stress testing (RST) methodology that allows to predict which changes, with probabilistic certainty, across the supply chain network are most likely to cause a specified level of disruption at a specific entity in the network. The methodology was applied to the case of copper wire imports into the USA, a simple good which may have significant implications for national security. Results show that Canada, Chile, and Mexico are predicted to consistently be sources of disruptions at multiple loss levels. Other countries (e.g., Papua New Guinea) may contribute to small disruptions but be less important for the catastrophic losses of concern for decision makers. Other countries' disruptions would be catastrophic (e.g., Chile). The proposed methodology is the first case of reverse stress testing application in complex multilayered supply chains and can be used to address both risk and resilience.