Supply Chain Inputs Diversification

There are undoubted efficiencies associated with sourcing from a single supplier (sole-source supplier), such as economies of scale, cost savings based on volumes, and streamlining logistics. However, a sole-source supplier renders an economy’s supply chain more sensitive to interruption.

Supply shocks in supply chains:
Evidence from the early lockdown in China∗
First draft, prepared for the 2021 Jacques Polak Annual Research Conference
Raphael Lafrogne-Joussier † Julien Martin‡ Isabelle Mejean§

How do firms in global value chains react to input shortages? We examine micro-level
adjustments to supply chain shocks, building on the COVID-19 pandemic as a case study.
French firms sourcing inputs from China just before the early lockdown in the country
experienced a drop in imports between February and April 2020 that is 7% larger than
firms sourcing their inputs from elsewhere. This shock on input purchases transmits to
the rest of the supply chain through exposed firms’ exports. Between February and April,
firms exposed to the Chinese early lockdown experienced a 5% drop in exports, in relative
terms. The drop in firm-level exports is driven by a reduction in the number of markets
served. Whereas the ex-ante geographic diversification of inputs does not seem to mitigate
the impact of the shock, inventory management strategies help firms weather such adverse
supply shock.