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Research - This Week in Supply Chain Management (32 / 2012)

Daniel Dumke — Fri, 10 Aug 2012 10:45:36 +0000

Today the focus is all on the research.

Research

And a lot of new research came out this week.

“When Supply-Chain Disruptions Matter” was published by Ananth Raman of the Harvard Business School. (HBS Working Knowledge)

Supply-chain disruptions have a material effect on company value, but this impact can vary considerably. Thus, it is important for managers and investors to recognize the types of disruptions and the organizational factors that lead to the worst outcomes. Prior research remains unsettled as to whether improvements to firm operational efficiency aggravate or alleviate the impact of disruptions. Improved operational efficiency may leave firms more exposed when a disruption occurs, or it may improve firms’ agility and allow them to respond more effectively to a disruption. We hypothesize that the impact of improved operational efficiency depends on whether the disruption is due to factors that are internal versus external to the firm and its supply chain. We use a sample of over 500 disruptions collected from company press releases and find empirical evidence that a higher rate of improvement in operating performance aggravates the impact of internal disruptions but not external disruptions. By taking advantage of an exogenous policy shock regarding corporate disclosure rules, we also find that managers show systematic bias in the disruptions they choose to announce, and we control for this effect in our model specifications.

Also have a look at a new PhD dissertation by Leah J. Bovell “Joint Resolution of Supply Chain Risks: The Role of Risk Characteristics and Problem Solving Approach”. (Georgia State University)

The purpose of this study is to examine the disruption risk resolution process in supply chains; specifically, to assess how risk attributes impact the approach firms select to resolve risks and the associated final outcomes.
We propose that high magnitude risks are positively associated with mutually beneficial problem resolution; on the other hand, low likelihood risks have the opposite effect, they are negatively associated with mutually beneficial resolution. Our conceptual contribution lies in our articulation of the mechanisms though which risk magnitude and risk likelihood impact mutual problem resolution. We posit that high magnitude risks and low likelihood (uncommon) risks mobilize the social network of actors, triggering vigilant monitoring for risks, communication among actors and across firm boundaries, and resource sharing and coordination which facilitate collaborative problem solving and mutual resolutions. These mobilization mechanisms help supply chain partners to overcome the challenges of complexity and allow for information and resource flows among actors and between firms.
Our statistical analysis demonstrates that the impact of risk attributes on mutual problem solutions is fully mediated by timely problem identification and collaborative problem solving.
Accenture has published a white paper on “Managing Supply Chain Risk Better”. (Accenture)

Enjoy your weekend.

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Currency Risks - This Week in Supply Chain Management (26+27 / 2012)

Daniel Dumke — Fri, 06 Jul 2012 13:38:11 +0000

I used the last two weeks to do a short bike trip, visiting my in-laws. From northern Germany (Bremen) to the middle (Fulda): 455km in three and a half days. My route contained virtually no ascents (beside the last 10km), but the distance was still quite demanding.
So last weekend was mostly about recovery and I have the pleasure to read through all the articles from the last two weeks. The best of which are listed below.

Articles

Industry Week shares views on managing currency risk in the the supply chain. (Industry Week)
Steve Baker from Logistics Viewpoints questions Apple’s status as the company with the best supply chain in the world. He concludes that too much focus on the supply chain rather than product development might prohibit long term success. (Logistics Viewpoints)
KPMG sees the silo mentality within companies as a major factor contributing to supply chain risks. (inaudit)
Several sources related to a recent study by Zurich Financial on the impact of supply chain risks on mid-size companies, UK tech firms, wholesalers and manufacturers. (original report “The Weakest Link: UK Plc’s Supply Chain” is not available online)

Enjoy the weekend!

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Conceptual and Analytical Framework for SCRM

Daniel Dumke — Mon, 12 Mar 2012 18:18:16 +0000

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:

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.

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.

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.

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.

Reference:

Gaonkar, R., & Viswanadham, N. (2005). A Conceptual and Analytical Framework for the Management of Risk in Supply Chains Robotics and Automation, 3, 2699-2704

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Psychological Foundations of Supply Chain Risk Management

Daniel Dumke — Mon, 16 Jan 2012 15:44:09 +0000

Psychological research shows that risk is never a objective matter (1, 2). This is made even more obvious by the fact that demographics play a huge role in the decisions made by supply chain risk managers.

But how could one integrate these findings into a more general framework?

Problem

In business uncertainty is a problem of perception. As the name “uncertainty” implies there is no certainty about a business or in this case supply chain performance property. So the amount of uncertainty has to be estimated or guessed and since most of the estimation is done by mangers, guessing is a matter of how the problem is perceived by them.

In the process of analyzing a supply chain problem (well, any problem indeed) there are several psychological effects working mostly against a rational decision.
The process within the mind could be modeled as two competing thought processes:

The first branch of thought processes initially addresses the problem with a quick intuitive answer, and the second branch monitors and adjusts the proposed answers.

The authors admits that even though he supplies a long list of psychological biases, there are still many more so these points should be seen as what they are – an excerpt:

One of the heuristics we use to simplify decision making is to assume that “one thing is like something else”.
“Among the problems that have been observed based upon representativeness is the misrepresentation of the role of chance in events.”
The frequency of the presentation of an issue and the manner in which it is presented influences the way we think about it, so “in the supply risk realm, major disasters are likely to color managerial perceptions of the frequency of major disruptions.”
“Overconfidence […] is typical in assessment of uncertain quantities. In the context of supply risk management such overconfidence is likely to arise when a particular manager who has substantial experience infers (e.g., makes an intuitive judgment) about the probability of some event, such as the probability of supply disruptions associated with various suppliers, without collecting and utilizing performance data.”

Example case: The issue of having multiple suppliers

After the attacks on the World Trade Center in September 2001 there was an increase in the average number of suppliers deployed and similar effects can be noticed in other large disruptions, especially if the media coverage is large.

Thus, unless we actually collect the data and calculate the frequencies, the odds are good that we will confound the two terms in our algebra of the supply risk associated with major events, since as a short cut to understanding the risk, we substitute the extent of damage for how representative such an event is of daily experience.

First, there are rational reasons to increase the supply base to reduce / diversify the risks across multiple (hopefully, independent) suppliers.
So, after an event like this we think of the decision problem in a certain way, and decide to do a risk benefit analysis and
bq. we might decide that the seemingly small risk of more relationship issues is more than offset by the benefits as we add more suppliers. Note that this is a risk versus benefit comparison. By contrasting risk compared with benefits, we have framed the decision in one way.

But one could also reframe the problem to a risk-risk-analysis comparing on the one hand the risk of being subject to disruptions and on the other hand risks of inadequate coordination, due to too many suppliers.

This example should show two things. First, we generally add suppliers to reduce risk, but we trade reductions of risk that is relatively rarely experienced (but catastrophic when it is observed) for risk that is relatively frequently experienced. Second, there is tremendous value to actually knowing how your suppliers are performing in the form of how frequently you experience disruptions that require intervention, because this is the only way that you can really understand what you are trading off.

Management implications

Smith draws several management implications from his analysis:

“The first step in addressing any potential challenge is awareness”, not only an objectified view of the risks around us, but especially of the decision processes which lead to certain decisions for or against lean supply chains or backup suppliers.
Group decisions might be a way to improve this decision making, if common problems with it (e.g. group think are prohibited.
“We have already seen that statistical thinking and training can be valuable in overcoming the shortcuts that we can end up taking in the face of difficult decisions. In supply risk management it is important that the probability of potentially negative events be determined as accurately as reasonably possible, so that both the extent of the risks, and the potential for avoiding the negative consequences of the realized risk can be soundly assessed.”
“Finally, as was illustrated here, reframing represents a valuable approach to overcoming some of the biases associated with decision making under uncertainty.”

Conclusion

Smith highlights an often neglected aspect when talking about supply chain risk management. But this aspect is not only neglected by researchers, but also managers alike.
Psychological issues like those mentioned above have been discussed for decades, but only few businesses employ them or even think about employing them.
So on the one hand side one should ask: Do we need more risk mitigation measures to ensure sustainable profits?
But, also: How do our cost reduction measures affect our risk-exposure?

Reference:

Smith, M.E. (2009). Psychological Foundations of Supply Chain Risk Management Supply chain risk - A Handbook of Assessment, Management, and Performance, 219-233 DOI: 10.1007/978-0-387-79934-6_14

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