Conceptual and Analytical Framework for SCRM

A supply chain risk management framework should help to define the cornerstones of risk related supply chain problems and give hints on how to take actions to mitigate impending disruptions.

Today’s full paper has been published in 2004 and in it the authors (Gaonkar and Viswanadham) deal with this problem.

Core definitions

At the core of their framework the authors define the risk/supply chain related terms.

First, risks can be seen from an organizational-, supply chain- or industry-level.

Network- related risk sources represent the second category of risk sources, which are the primary focus of this paper. These risks are of two broad kinds:

1. Firms are vulnerable not only to attacks on their own assets, but also to attacks on their suppliers, customers, transportation providers, communication lines, and other elements in their eco-system.
2. Firms are also vulnerable to irregular behavior of their network partners such as a supplier sharing sensitive product design with a competitor manufacturer.
   

Second, there are different classes of risk problems:

• Deviations: “A deviation is said to have occurred when one or more parameters, such as cost, demand, lead-time, etc., within the supply chain system stray from their expected or mean value, without any changes to the underlying supply chain structure.”
• Disruptions: “A disruption occurs when the structure of the supply chain system is radically transformed, through the non-availability of certain production, warehousing and distribution facilities or transportation options due to unexpected events caused by human or natural factors.”
• Disasters: “A disaster is defined as a temporary irrecoverable shut-down of the supply chain network due to unforeseen catastrophic system-wide disruptions.”

This classification also contains an implicit rating of the risk impact and while it is possible to create a robust supply chain which can withstand deviations and disruptions “it is impossible to design a supply chain network that is robust enough to react to disasters. This arises from the constraints of any system design, which is limited by its operational specification.”

The authors require the supply chains to be robust at three levels: the strategic, tactical and operational level. So each of these levels has to be prepared for deviations, disruptions and disasters.

For example, at the operational level, companies require decision support systems that can act on information from various partners regarding various deviations and disruptions to reschedule activities so that the business processes are synchronized and deliveries are undertaken within customer delivery windows and cost limitations. At the tactical level, plans need to have redundancies in terms of human and machine resources and also logistics and supply organizations. At the strategic level, more reliable partners with intrinsic capabilities in deviation and disruption handling, and the skills and ability to adapt to changing market conditions will be preferred and selected.

There are two distinct ways to supply chain risk mitigation:

• “The first approach involves the time tested “just in case” way of maintaining inventories all along the chain, employing dual or multi-sourcing and manufacturing at multiple sites. This is a highly inefficient option.”
• “A better option would be to first design a sourcing strategy taking into account the disruption costs for the most relevant failure modes and then putting in place contingency plans for each disruption that include both description of the procedures to follow and a definition of roles and responsibilities.”

The authors distinguish three analytical approaches to risk management:

• Mathematical planning models,
• Adaptive control, and
• Rule-based control.
  And they continue to explain their preventive and interceptive approaches to risk management. Some of which can be found summarized in this article in the blog.

Results

Based on their framework of supply chain risks the authors develop two strategic level (mathematical) models which include risk considerations.

1. Strategic-level Deviation Management Model: Given the expected costs and variability (deviation) of costs for all suppliers, the first problem relates to the selection of an optimal group of suppliers such that the expected cost of operating the entire supply chain and the risk of variations in total supply chain costs is minimized.
2. Strategic-level Disruption Management Model: Given the expected probabilities for various supplier disruption scenarios and the supply shortfalls under each of these scenarios the objective for the manufacturer is to choose a set of suppliers that minimize the expected shortfall during the operation of the supply chain.
   

With the models numerical example case studies are executed and the authors conclude:

Robustness is build into our supply chain design by selecting a portfolio of suppliers that minimize the variability of supply chain performance in terms of cost and output. The models we develop are preventive in nature and employ mathematical programming tools.

Conclusion

This article is a double publication, the models and their results have already been discussed here. Even though this is questionable behavior from a scientific point I did include this article due to the good and aggregated summary of the terms and definitions used in the field of supply chain risk management.
Using those as a minimum to analyze supply chains can already help a great deal in finding fitting mitigation strategies.