Lean inventories double supply chain losses from river floods
A Bank of Canada working paper reveals that lean inventory systems accelerate the propagation of river flood shocks through global supply chains, pushing output losses up to 7.5 percent compared to 4.0 percent under abundant inventories across 244 simulated flood scenarios.
Inventories determine the speed of global disruption
The study by researchers from the Bank of Canada, Bank of Greece, and Bank of Portugal models 244 river flood scenarios across 74,500 companies and 230,000 trade links.
In lean-inventory supply chains, flood shocks trigger high-contagion regimes within two months, causing output losses of up to 7.5 percent, with 87 percent of scenarios failing to recover.
By contrast, abundant inventories delay contagion onset beyond one year and cap output losses at 4.0 percent.
The authors find that flood events originating in Asia propagate fastest and generate the highest aggregate production losses globally.
Additionally, the average maximum out-criticality of affected firms peaks 13 days before rapid contagion begins in lean networks, functioning as an early warning signal.
From hydro basins to balance sheets
The framework integrates 1-in-100-year flood hazard maps from the Joint Research Centre with HydroBASINS sub-basin boundaries, FEMA restoration curves, and continent-specific depth-damage functions.
Using an agent-based epidemiological model with a composite Leontief production function, the simulation tracks downstream cascades when supplier disruptions exhaust customer inventory buffers.
Firm-level vulnerability increases with the number of direct suppliers and decreases with sector size.
Efficiency has become a systemic hazard
Just-in-time logistics strip global supply chains of the resilience needed against localized physical climate shocks.
Even if the assumption of fixed trade links overstates medium-term rigidities, short-run bottlenecks remain severe.
Regulators should view corporate inventory buffers as macroprudential defenses rather than private cost choices.