Modeling Supply Networks and Business Cycles as Unstable Transport Phenomena

TL;DR

This paper applies physical models of traffic flow instabilities to supply networks, revealing how small consumption variations can cause large production oscillations, potentially explaining business cycles.

Contribution

It generalizes traffic flow instability concepts to supply chains, linking microeconomic fluctuations to macroeconomic business cycles and establishing connections to queuing theory.

Findings

Small consumption variations cause large production oscillations.

Supply chain instabilities have characteristic low frequencies.

Possible explanation for business cycles through supply network dynamics.

Abstract

Physical concepts developed to describe instabilities in traffic flows can be generalized in a way that allows one to understand the well-known instability of supply chains (the so-called ``bullwhip effect''). That is, small variations in the consumption rate can cause large variations in the production rate of companies generating the requested product. Interestingly, the resulting oscillations have characteristic frequencies which are considerably lower than the variations in the consumption rate. This suggests that instabilities of supply chains may be the reason for the existence of business cycles. At the same time, we establish some link to queuing theory and between micro- and macroeconomics.