Cost and Risk: Firm Resilience within Digital Supply Chains

Cyber-attacks. Hardware failure. Network failure. Software failure. There are many forms that disruption of digital supply chains can take. From individual firm information and communications technology (ICT) ecosystems to coordinated digital services received by firms, digital supply chains are omnipresent in firm operations. Interruption of these services poses consequences that can cascade through multiple firms and even impact entire industries. 

Dr. Lisa Yeo, Assistant Professor, Management of Complex Systems in the School of Engineering, at UC Merced. explains,

“Disruptions in digital supply chains can spread instantaneously, offering no time to react or learn from competitors' experiences. Unlike physical supply chains, having a backup or secondary supplier to switch to is far more challenging in the digital context.”

While firms take many pre-emptive security measures to protect themselves, it’s not always possible to mitigate disruptions from an ICT provider. 

Depending on how many other firms within a digital supply chain are using that same provider, impacts can also vary. Yeo and co-authors, including Haskayne BTMA faculty members^[1], study this unique problem in their most recent publication accepted at ACM Transactions on Management Information Systems journal, “IT Service Disruptions and Provider Choice”.^[2]

“An overlooked factor in deciding a firm’s ICT provider is the demand effects of using common or separate providers. This is a mechanism by which supply chain decisions are impacted, and one which had not been explored before—that is, whether to use common or separate providers based on disruption risks and downstream substitutions or complementarities.” says co-author Dr. Hooman Hidaji, Assistant Professor of Business Technology Management at Haskayne School of Business.

Findings show that downstream firm competition and ICT provider concentration in a digital supply chain can impact industry operations along with consumer demand during disruption,

“Generally, disruptions at a particular firm cause decreases in demand. However, their impact on the industry is more nuanced. In some cases where only one firm is impacted while others are operational, consumers may simply switch to non-disrupted firms. On the other hand, more significant disruptions and outages that impact an industry may cause lower trust and demand in that industry in general.”

“Broadly, in competitive markets, using the same provider as the competitors reduces losses when provider disruptions inevitably occur, and are therefore preferred. On the other hand, it is disadvantageous for firms with complementary products to share the same provider, as this multiplies the negative effects of a provider disruption.”

To understand their problem better, the research team engaged directly with firms impacted by ICT disruptions including start-ups and established companies, gaining insight into the risks of shared suppliers, disruption risks and competitor dynamics.

“These discussions informed our approach by emphasizing the practical relevance of ICT disruption synchronization risks and the nuanced decision-making processes firms employ. They also highlighted the strategic importance of competitor considerations in supplier selection, reinforcing the paper’s focus on shared upstream providers and their implications for business resilience,” says Yeo.

As an example, the team cites the 2019 AeroData incident which grounded flights for over 100 airlines, including United, Southwest, and Delta, but left Alaska Airlines unaffected because they had chosen a different flight planning provider.

“These incidents also underscore the risks to critical infrastructure when there is too much supplier concentration in the ICT space, highlighting the need for diversification strategies to ensure resilience against systemic vulnerabilities,” says Yeo.

Building upon these findings, Yeo and Hidaji are now investigating aspects of market share of the supplier and other features that may have an impact on the firm decisions, as well as how consumer welfare may be incorporated in their model. Yeo elaborates on the latter,

“Optimizing for both profits and value for the consumer may lead to different supplier recommendations. Having tried this in other work, it complicates the model significantly but would be necessary if we wanted to make policy recommendations.”

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_{[1] Business Technology Management faculty at University of Calgary co-authors are Hooman Hidaji, Assistant Professor; Barrie R. Nault, Distinguished Research Professor; and Raymond A. Patterson, Professor. Other co-authors are Erik Rolland, Professor Emeritus and former Dean of the College of Business at Cal Poly Pomona; and Bora Kolfal, Associate Professor, Department of Accounting and Business Analytics, University of Alberta School of Business.}

_{[2] Yeo, M. L., Hidaji, H., Rolland, E., Patterson, R. A., Nault, B., & Kolfal, B. (2024). IT Service Disruptions and Provider Choice. ACM Transactions on Management Information Systems. https://doi.org/10.1145/3701040}