empirical research

How relevant are Business Sciences to managerial Practice?

Daniel Dumke — Wed, 16 Nov 2011 12:05:00 +0000

There are only very few studies, which investigate the impact of research in business has on the actual research field.

In other fields the impact is easily seen. Without research there would be no modern medicine, without research there would be no buildings rising 800m and more.

But where would business be without research in the business and economics sciences?

For the part of operations management (OM) research the authors de-Margerie and Jiang (2011; “How relevant is OM research to managerial practice?”) analyze the key factors of literature to be relevant for practitioners.

Method

Impact on business oriented problems is a major criterion for many leading OM journals. To analyze the factors the authors employed an expert panel, made up from senior practitioners with cross-functional experience in international operations. Each of them was assigned with the task of reading and assess the ten most downloaded papers of the Journal of Operations Management.

The selected papers are listed in figure 1.

Figure 1: Top ten downloaded Papers (Journal of Operations Management; from 2004 to 2007; de-Margerie and Jiang, 2011; click to enlarge)

The assessment was based on seven criteria and graded on a five point Likert scale.

Descriptive relevance (e.g. “this article’s findings represent the ‘real world’”)

Goal relevance (e.g. “the article produces definitive results for decision making”)

Non-obviousness (e.g. “this article’s findings are just common sense”)

Timeliness

Readability (e.g. “this article is too abstract or complicated to be understood”)

Topic (e.g. “this article has a guideline that connects the reader to the problem and solutions”)

Usefulness

Results

Based on the direct survey data from practice [in this study], this research empirically derived a much smaller number of dimensions as replacements for the original variables of relevance while still retaining their original character.

The first finding is represented by the three criteria which are used by the practitioners to evaluate OM research.

“whether academic research is applicable or implementable to the practice;”

“whether academic research provides novel insights or new perspectives to management; and”

“whether academic research helps practitioners recognize their situation (i.e. communicates in recognizable ways).”

Furthermore the authors show that the evaluated ten papers did achieve high score in the second and third criterion.

Since these papers were primarily downloaded by other OM researchers, these papers should be important or relevant to other OM scholars’ research. Therefore, we may conclude that the academia of OM shares the second and third criteria of relevance with the practice.

The authors explain the lower scoring of the first criterion with the “the conflict between academic research’s goal and executive’s expectations. Practitioners expect to obtain immediate resolutions of current problems in specific operational contexts. In contrast, scholarly researchers ‘are required to reflect on the implications of innovations in an effort to distill knowledge that will stand the test of time and be applicable over a wide array of situations’”

Conclusion

This again was a very nice article.

Methodically, all steps are explained in detail and the assumptions seem reasonable.

Formally, the article guides the reader through its content without loosing the red thread from the research question to the presentation of the results.

Content-wise, the article touches interesting new grounds. Of course research should never follow practice blindly, so a gap between research and practice is only natural. For me, another interesting question on a broader scale would be, to what degree business research is transferred to practice.

Reference:

de-Margerie, V., & Jiang, Bin (2011). How relevant is OM research to managerial practice? International Journal of Operations & Production Management, 31 (2), 124-147

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empirical research

Supply Risk Management from a Small Company's Perspective

Daniel Dumke — Mon, 14 Nov 2011 15:53:00 +0000

This study takes a closer look at supply risk management, but this time from the perspective of several small companies. This article tries to answer the questions what risks small company owners (SCOs) see and how SCOs mitigate those risks.

Method

A case study with eleven small companies was conducted. The companies had between 1 and 12 employees. Overall 26 interviews were conducted (90 minutes on average). In addition, two seminars were held, to present the preliminary results and discuss the findings. The seminars were also used to generate additional data and validate existing results.

Informants rarely used terms such as supply risk, risk management, probability reduction, supply chain or even purchasing. [… So] Instead of forcing risk management terminology upon informants, possibly provoking misunderstandings and incomplete accounts, the idea was to let the SCOs provide rich accounts of their purchasing and SCM practices in layman’s terms. In the dialogue information was sought out that allowed plausible interpretations of supply risk management practices.

Figure 1 summarizes some facts about the companies.

Figure 1: Facts on the Case Study Companies (Ellegaard, 2008; click to enlarge)

Risk mitigation approaches

From literature the author develops three types of supply risk management / mitigation activities, namely: increased knowledge, reduced probability and reduced impact (figure 2).

Figure 2: Risk Management Alternatives (Ellegaard, 2008)

Knowledge

Knowledge increasing practices were infrequent among the studied SCOs. They spend limited time and resources actively acquiring knowledge about suppliers and supply markets and therefore possessed limited information […]. Only one SCO interacted with suppliers often.

Probability reduction

Probability reduction had the highest priority in these companies. Elimination of severe risks formed the backbone of SCO practices. […] In order to eliminate certain severe risks, the SCOs sourced locally, exhibited source loyalty, and were careful not to reveal proprietary product knowledge to suppliers.

Effect reduction

None of the SCOs held reserve capacity and practiced mainly single sourcing, with the aim of tying up as few resources as possible. The very limited reserves left the SCOs quite vulnerable to certain types of risks. Any specific events with the potential to obstruct delivery capabilities of suppliers, such as a fire, take-over, bankruptcy, up-stream material shortages etc. could bring SCO production to a halt.

All results are summarized in figure 3.

Figure 3: Supply Risk Mitigation Approaches (Ellegaard, 2008; click to enlarge)

Lessons learned

Despite the autodidact and informal purchasing practices of

the studied SCOs, there may be much to learn from these practices, even for state-of-the-art purchasing/SCM departments. The SCOs specialised in a few supply risk management practices that seemed to complement each other well. The study suggests that effective supply risk management is not only about adopting a wide range of sophisticated risk reduction practices. The challenge may be more connected to finding the right mix of practices, which fits the available resources and is sufficient to secure against supply risks. Supply chain managers should realise that:

different supply risk management practices require different levels of expertise and resources;

only a limited number of potential supply risk management practices may be necessary; and

supply risk management means adopting the exact mix of practices that provides security.

Conclusion

This study provides some missing insights into risk management practices of small enterprises. As the author, I do think that there are still things even larger companies can learn from their mitigation strategies: Prioritization and focus of risk management activities which deem to be most effective with the given resources may be one of those.

Reference:

Ellegaard, C. (2008). Supply risk management in a small company perspective Supply Chain Management: An International Journal, 13 (6), 425-434 DOI: 10.1108/13598540810905688

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Supply Chain Flexibility in an uncertain Environment: exploratory Findings from Five Case Studies

Daniel Dumke — Mon, 07 Nov 2011 12:47:00 +0000

This is another look at flexibility strategies to reduce uncertainty in supply chains. This time from the point of view of five Chinese companies in the apparel industry.

Method

The authors use a case study to “illustrate and examine the different flexibility strategies adopted by supply chain participants as a result of different environmental uncertainties.”
The five companies cover different parts of the apparel supply chain. A garment and a fabric manufacturer (companies A and E, respectively), two trading companies (C and D) and a brand company (B). This diverse sample should enable the authors to make more general deductions from the generated data.
Figure 1 shows some relevant background information for the companies.

Figure 1: Case Study Companies (Yi et al., 2011; click to enlarge)

Results

The first questions revolved around the perceived uncertainties experienced by the participants. All companies mentioned that emergent orders, uncertainties about material cost and the aggressiveness of the competition are perceived as major uncertainties (figure 2).

Figure 2: Perceived Uncertainties by the Companies (Yi et al., 2011; click to enlarge)

Several different supply chain strategies were employed, a summary is displayed in figure 3.

Figure 3: Flexibility Strategies employed (Yi et al., 2011; click to enlarge)

The authors especially wanted to highlight the influence of different environmental aspects on the chosen strategies. No pattern emerged when analyzing which flexibility strategies are used for which uncertainties.
So next the authors examined the impact of the general level of uncertainty experienced by the companies and compared it with the supply chain flexibility level chosen.
The authors came up with a matrix (figure 4). Where they contrast SC uncertainty and flexibility. Companies D and B find themselves in the conservative corner while E, C and A employ a high level of flexibility to combat the uncertainties. From the interviews the authors also deducted the future positions of the companies A and B, which are indicated as A’ and B’.

Figure 4: Supply Chain Flexibility vs. Uncertainty (Yi et al., 2011)

Next the authors discuss their findings and reach four conclusions:

A low level of uncertainty in the supply chain leads to the adoption of a conservative flexibility strategy.
A high level of uncertainty in the supply chain leads to the adoption of an agile flexibility strategy.
An aggressive flexibility strategy can be proactively adopted through restructuring a firm’s operating system to reduce environmental uncertainties.
An aggressive flexibility strategy can be proactively adopted through creating new opportunities to improve a firm’s supply chain flexibility.

Conclusion

I like case study research, since usually you can gain some really genuine and new insights, in this case: What are other companies doing to contain uncertainty and how are they employing flexibility for that?

In this case I liked the paper a lot as well… up to the matrix. I don’t like matrices where the axes are not independent, because that’s not how you generate a matrix. Take the Growth-Share-Matrix, where you have the axis market growth and market share. The one is dependent on the market and the other on one company’s share in it. Relation to one another: Independent.
Here we have uncertainty on one axis and a strategy to reduce uncertainty on the other. So of course most companies would lie somewhere in the middle. So there is not much to learn from it. Of course there is not a one-to-one relationship, but anyway.

I had several more points to complain (number of interviews also only five, conclusions drawn are directly linked to their flawed matrix-framework and no quantitative measures to assess the flexibility and uncertainty levels).
But I still think the strategies mentioned from the interviews are still worth considering when choosing your own strategies.

Reference:

Yi, C.Y., Ngai, E.W.T., & Moon, K.-L. (2011). Supply chain flexibility in an uncertain environment: exploratory findings from five case studies Supply Chain Management: An International Journal, 16 (4), 271-283

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Matching Product Architecture with Supply Chain Design

Daniel Dumke — Wed, 19 Oct 2011 15:31:00 +0000

This review is about a preprint article which already has been accepted for publication by the “European Journal of Operational Research”. But since there is only a limited space for articles in each issue of the journal, final publication of the article is delayed.
One could now argue in a general note that this behavior also signifies a delay of the progress of supply chain research over all, with all its negative long term effects. Furthermore, in the days of the internet journals should not limit themselves to an artificial (article) limit, but see only the sky or in this case the number of quality publications as their limit.
But in this case I was able to gain access to an early copy.

Product design & supply chain management

I already wrote several times (1, 2, 3, 4) on how product architecture and supply chain design could be integrated, so this is not really a new topic. But it also touches a more integrative approach of supply chain management.

Building from the early models, where a supply chain could easily be defined by a handful of properties, supply chain models nowadays reach a new level of complexity. One of these extensions is the integration of supply chain activities into the product development process, which is supposed to yield (if we trust case studies like IKEA) enormous benefits in every performance aspect of the supply chain and ultimately the company.In the study reviewed Nepal, Monplaisir and Famuyiwa first develop a conceptual and mathematical model to integrate the supply chain design decisions into the product development process. In a second step this model is then tested using two case studies.

Model

The authors suggest an integrated three step process: 1) selection of product architecture, 2) evaluation of potential suppliers, and 3) optimal configuration of supply chain.

The first step includes the development of a generic bill of materials (GBOM) for every possible product architecture scenario. Figure 1 shows the GBOM for an example Product X.

Figure 1: Generic Bill of Materials for an exemplary product (Nepal et al., 2011)

This product design also leads to a similar generic supply chain structure which is shown in figure 2.

Figure 2: Corresponding Generic Supply Chain for Product X (Nepal et al., 2011)

The second step focusses on the identification and evaluation of available the supply chain participants. Necessary information, like production cost, lead-time and compatibility index has to be collected.
The compatibility index itself is developed by the authors as well and contains information on the compatibility of this potential supplier regarding the structural, managerial and financial dimension. Each of the dimensions is then weighted to generate the complete index. Since the compatibility of the future suppliers is hard to judge before the product is even designed, the authors employ fuzzy logic, allowing them to use ranges for each of the compatibility indices instead of fixed numbers.

The last step aims to find the optimal supply chain configuration. This is done for each product architecture scenario by using a linear goal programming model, where total supply chain cost are minimized while maximizing the compatibility between the partners.

Case studies

There are two case studies, one on bulldozer assembly and manufacturing and the other on an automotive climate control system. I will only talk about the first case since I found it more interesting.

For the case the authors exercise the three steps mentioned above. First they design two different product architectures (integral and modular architectures; figure 3) and the corresponding generic supply chain networks (figure 4).

Figure 3: Case Study: Generic Bill of Materials for Bulldozer Manufacturing (Nepal et al., 2011; click to enlarge)

Figure 4: Case Study: Generic Supply Chain Network for Bulldozer Manufacturing (Nepal et al., 2011; click to enlarge)

Lastly, the authors collect the necessary information of the potential suppliers regarding cost, lead-time and ranges for the compatibility index for two different process options:

Two alternatives are considered for each node. If the node is a procurement stage, the first alternative represents the standard supply option (that is, the existing procurement arrangement). The second option represents a consignment option where the supplier is responsible for providing immediate delivery to the bulldozer line. Similarly, for the assembly node, the first option represents the standard manufacturing method while the second option represents an expedited alternative that corresponds to a supplier who has invested in process improvement efforts in order to decrease its supply lead-time.

After solving the model in the next step, the authors conclude:

In the majority of the bulldozer supply chain stages for a modular architectural design, option two has been selected. While it is more expensive than option one, option two has a lower production lead-time and higher compatibility ratings for all stages because its modularity increases the degree of dependency, based on relative costs of inputs, between supply chain nodes.

Compared with base results, where only supply chain costs are considered, this model delivers a solution which performs (slightly) worse in cost (+0,36%), but on the other hand has the potential to deliver a much more balanced and robust solution considering also compatibility issues.

Conclusion

I found the paper to be a great read and I cannot add anything else to the issues the authors already detected and mentioned in their own conclusion:

Risk factors are missing in the model (e.g. random service times)
Additional factors like sustainability and flexibility should be considered
It is very obvious that this is again a supply oriented model, so it would be great to see how distribution network decisions behave when including product design decisions (since the customers might also change depending on the product design decisions)

Reference:

Nepal, B., Monplaisir, L., & Famuyiwa, O. (2011). Matching Product Architecture with Supply Chain Design European Journal of Operational Research : 10.1016/j.ejor.2011.07.041

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Research Critique: Determinants of Strategic Supply Chain Risk Management

Daniel Dumke — Wed, 17 Aug 2011 12:44:00 +0000

In 2010 Lassar et al. did a grounded theory study (see here for more information on techniques for theory creation) on the question of what the determinants of strategic supply chain risk management might be?

Methodology

The authors used a grounded theory approach to validate their theory. GT consists of a series of interviews where each subsequent interview may build on the last one with the goal of exploring a concept from different angles. In the case of Lasser et al. the focus was on high tech companies located in Mexico. As a first step the authors build their conceptual model for the determinants of strategic supply chain risk management based on literature. They hypothesis that supply chain risk management is built on resources available for the company (resource based view), the network and performance criteria.

Resources include organizational systems and processes, information, knowledge, capabilities, partners and alliances, and other assets.

Based on this theoretical background the researchers conducted 24 interviews within eight different companies.

Results

The interviews lead to a multitude of answers in five key areas:

How do firms conceptualize and define supply chain management?
What kind of processes and systems do supply chain participants utilize in their enterprises?
How committed is senior management to SCM?
What role does performance play in supply chain management?
What specific risk management actions do companies employ?

Our qualitative assessment of the sample firms – multinational buyers along with suppliers – confirms that a symbiotic triad of resources, networks, and performance are key determinants of strategic risk management in supply chains in one important emerging market – Mexico.

Critique

I seldom use a critique section for an article, since usually I only present articles which I deem well written, reliable and interesting.
This study sounds very interesting at first, so I included it on my reading list, but during the evaluation process I came to the conclusion that I found it unpresentable. I really struggled with myself, but then after I continued reading it, I started to realize that this is a great chance for showing you some of the things I dislike in a scientific paper.

The concept proves to be very vague
The authors build a concept for the influences on supply chain risk management from literature. The result: SCRM is based on resources, the network, and performance. The authors do discuss shortly what they subsume under these terms. But what is conspicuously missing is the reasoning for taking exactly these? Why not go with strategic choice and argue that SCRM is defined by the managers and their environment? Why is it the network and not the type of supply chain which defines the SCRM? As a result, already the first chapter leaves us with more questions than we had before.
No pictures
Even though I am a fan of nicely written paragraphs where a picture of what the author meant just pops into your mind, I also know that this writing-only method is not for everyone. So it is always a good idea to support a concept with a picture containing the key elements and their relations to each other and with their “environment”. For example the authors could have used a three column layout with SCRM on top and the determinants underneath? At least if its that what they meant.
Methodological discussion
Building on the definition of their framework the authors claim to use grounded theory to validate their concept. Sadly, there is no real description of the authors’ understanding of the methodology so I can only analyze the context.
To my understanding there are two different streams within grounded theory. One (my feeling is, that it’s the more popular one) particularly states, that grounded theory is based on the idea, that the theory has to develop itself during the interviews. This is done to prevent a very important thing: Bias. Every human interaction is somehow biased. So questions during an interview, not only contain the content of the question but also prejudice and believes of the sender of the question. And of course the interviewees not only respond to the content of the question but also the prejudice and biases. In this case the authors already had their completed framework in mind, and were supposedly steering the conversations towards their framework, of course confirming their preexisting believes. Interestingly I do not think you can find this bias easily in the results, but this does not mean it is not there.
Results
Even worse then a bias in the result, is the presentation of the results themselves. The goal of the interviews was to validate the preexisting believes of the authors (that’s is bad as explained above). But if I wanted to validate the concept, why not use this concept as a foundation for the outline of the discussion of the results. Why? I really have problems with seeing the correlation even between the headlines of their results (see above) and their concept? Some do correlate, but for example what does the “employment of risk management actions in a company” have to do with their concept of resources, network and performance. And in my point of view this gets worse the more you read the interpretations. So I am really asking myself: How could the authors really see their framework supported by the interviews?
Representativeness
Last and just a small addition: The authors rightfully state at the end that this study cannot be viewed as representative, since it only included a small sample of companies. So the authors imply that with a bigger sample (and the same method) it would be representative…? No! Grounded theory does not want to be representative, so this argument is just mute. The goal is instead to generate a valid (grounded) theory (not to validate a preexisting theory!), which can then be tested using other methods, like a survey.

Conclusion

I have to admit that I am not an expert on grounded theory either. So I may be wrong with the forcefulness with which I presented my opinion. But even if we abstract from the methodological aspects, the work can be summarized with two points:

Too little discussion of the methodologies and processes employed to generate these findings and
No obvious connection between their proposed concept and their own stated findings (or again too little elaboration).

The full study can be downloaded here.

Reference:

Lassar, W., Haar, J., Montalvo, R., & Hulser, L. (2010). Determinants of strategic risk Management in Emerging Markets supply Chains: the Case of Mexico Journal of Economics, Finance and Administrative Science, 15 (28), 125-140

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Supply Chain Risk Management in Financial Crises

Daniel Dumke — Wed, 03 Aug 2011 14:44:00 +0000

I am still abroad right now, but nonetheless I still want to keep the German share within the articles high. So I present to you the second article from German authors in just one week. On monday I already talked about Supply Chain Risk Management in the German Automotive Industry and so the second is today on how supply chain risk management is performed during a financial crisis.

The authors Constantin Blome and Tobias Schoenherr are both from the European Business School (EBS), one of only few privately owned German business schools. Their 2011 paper is on supply chain risk management during times of a financial crisis.

Methodology

The authors employ a case study design for two reasons:

Only little is known of the consequences of a economic crisis on supply chain risk management (and there are no other studies concerned with this topic).
Case study research is furthermore a good method to study complex phenomena.

The authors decided to focus on the procurement departments of eight participating companies, overall conducting 25 interviewees.

Results

From the interviews the authors inferred propositions in four categories:

Impact on SCRM

The effect of the financial crisis on SCRM process (risk identification, analysis, mitigation and monitoring) has been analyzed. The interviews indicate that the tasks within SCRM process are shifting towards a more comprehensive approach concerning all aspects.

A typical statement concerning the risk analysis is:

Before the financial crisis we didn’t have a very professional assessment of our suppliers’ financials; now we have a very good system working

Risk mitigation vs. acceptance

The authors differentiate two major strategic orientations: Risk acceptance and risk mitigation. They were able to identify two company classes: direct spend (most purchases are raw materials and input products; especially in manufacturing companies) and indirect spend (mostly service companies).
Based on this classification the authors found:

The current financial crisis fosters especially a risk acceptance (as opposed to mitigation) approach in direct spend firms. Indirect spend firms are already more focused on risk acceptance approaches and have not changed their behavior.

Service vs. manufacturing

Next the authors analyze the findings concerning the relationship between manufacturing and servicing companies and conclude:

Overall, we found that the emphasis on the four risk management processes was greater among firms procur- ing predominantly direct materials (manufacturing firms) than for firms producing primarily indirect items (service firms).

Enterprise risk management and SCRM

Finally the author analyzed the relationship between supply chain risk management and enterprise risk management and find that:

“The financial crisis has not influenced the relationship between ERM and SCRM.”
“The existence of an ERM system is a major antecedent for the implementation of a SCRM process.”

Conclusion

Case study research is meant to be the qualitative foundation for further in depth analysis using other methods like surveys, simulation or similar. Blome and Schoenherr deliver exactly this basis, by stating their results in the form of four propositions.

Reference:

Blome, C., & Schoenherr, T. (2011). Supply chain risk management in financial crises – A multiple case-study approach International Journal of Production Economics

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Supply Chain Risk Management in the German Automotive Industry

Daniel Dumke — Mon, 01 Aug 2011 10:01:00 +0000

While cleaning out some of my blog directories, I just found this article in my backup repository, I already wrote it over a year ago, but it still seems relevant. So without further ado: In their 2009 article Jörn-Henrik Thun and Daniel Hoenig from the Industrieseminar Mannheim (link only in German), present their research on Supply Chain Risk Management within the German automotive industry. Their goal was twofold: a) to identify supply chain risks and risk drivers, b) investigate measures for dealing with SC risks and their impact on SC performance.

Methodology

Therefore the authors conducted a survey with 67 companies from the automotive supply chains in Germany. Respondents were primarily managers in charge of supply chain management or logistics. The answers were measured using a five-point Likert scale (from “strongly disagree” to “strongly aggree”).

Results

Based on the results of the survey the following hypotheses could not be rejected and therefore can be seen as validated:

Supply chains are susceptible to supply chain risks

Complexity (eg. globalization) and efficiency (eg. outsourcing) of the supply chain are key drivers for supply chain risks

Internal supply chain risks have a higher likelihood to occur than external risks

Companies with a high degree of supply chain risk management show a higher performance than companies with a low degree

There is a difference between companies using preventive risk mitigation instruments contrary to those using reactive instruments in terms of supply chain performance

The most interesting finding in my view is that companies using preventive instruments show higher values in terms of increased flexibility, decreased stocks, reactivity, and cost reduction, whereas the group using reactive instruments shows higher average values concerning a reduction of the bullwhip effect and external disruptions resilience. And overall: companies implementing supply chain risk management strategies show higher performance values than others.

One of the hypothesis (“External SC risks have a greater impact on the SC than internal risks”) has been rejected. The authors explain this result as follows:

The […] result might be influenced by the fact that managers estimate the impact of incidents with a higher likelihood stronger since they implicitly reevaluate the impact based on its expectation value. However, the results indicate that most of the risks supply chains are confronted with arise from inside the supply chain. This indicates that managers are able to act on these risks directly.

Conclusion

Surveys are always subjective, so results from this survey might not be true for any other sample taken.

But the logic of the hypothesis might be skewed as well. The problem with correlations is that they work both ways. For example the hypothesis “Companies with a high degree of supply chain risk management show a higher performance than companies with a low degree” can also be interpreted the other way: Companies with high performance are more likely to implement risk management measures. And this is an especially interesting one, since to my knowledge it has not yet been analyzed.

Here is some more food for thought:

External risks in this sample of companies has been perceived as not more impactful than internal risks. So this might be true or it might be based on a skewed perception. What do you think? And if it’s true, does this hold true for all industries?

Performance gains are realized if we conduct supply chain risk management. What are the most effective strategies? What strategies are you following at the moment (reactive or preventive)?

Reference:

Thun, J., & Hoenig, D. (2009). An empirical analysis of supply chain risk management in the German automotive industry International Journal of Production Economics DOI: 10.1016/j.ijpe.2009.10.010

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Impact of Disasters on different Sectors

Daniel Dumke — Wed, 13 Jul 2011 11:04:00 +0000

I already wrote about different effect supply chain disruptions can have on a focal company and its stakeholders. Now I found another interesting article dealing with the impact of different disasters on different industries within the supply chain.

Method

The authors (Altay and Ramirez) use a exploratory empirical study to analyze the effect of over 3’500 historic natural disasters within over 150’000 firm-years.
From the literature analysis three hypothesis were generated:

H1: A firm’s financial leverage increases in response to a disaster.
H2: A firm’s TAT (Total Asset Turnover) will decrease in response to a disaster.
H3: A firm’s OCF (Operating Cash Flow) will increase in response to a disaster.

Two disaster databases were used to gather the relevant data about the disruptions. Three proxies for the overall effect of the disaster are used: ratio of damage over GDP, affected people by the disaster (per capita) and a composite measure based on the disaster count, affected population, the death toll and the damage.
These were then correlated with the financial leverage, the TAT and the OCF.

Results

Regarding their hypothesis the authors follow for all industries

“Results using our monetary proxy suggest a positive and time-persistent correlation between financial leverage and disaster damage for all sectors with the exception of extractive industries.”
“In general, firms become less efficient in managing their assets (lower sales as a percentage of assets) after a disaster.”
“When we turn to our composite measure, we see support for the negative impact of disasters on firm cash flows.”

The results are nonetheless not consistent over all proxies (damage, people affected and composite), so the authors follow rightly, that the correct proxy has to selected very carefully.

The authors go further in their data analysis and find that…

…damage by windstorms and floods seem to be dramatically different from that of an earthquake, providing evidence against the all-hazards approach.

furthermore:

We also show that the impact of floods on TAT of a firm is dependent on the firm’s position in the supply chain. We found that while upstream partners enjoy a positive impact, downstream partners have to plan for the opposite.

That last finding is quite interesting, since it shows that floods (and windstorms) seem to be disruptions which can be planned for and stock is accrued in advance and sold successfully.

Conclusion

The authors also take some effort to support the robustness of their results. The overall results remain unchanged after removing:

larger countries (with potentially more disruptions by which not all companies are affected equally),
G8 countries, and
countries with higher insurance consumption.

Overall I found this article kind of hard to read. Probably because the reading flow is disrupted by several multiple page tables which could have been moved to the appendix.
But still the article takes a new approach to evaluating the effect of supply chain risks on companies and industries and brings some interesting findings.

Reference:

Altay, N., & Ramirez, A. (2010). Impact of Disasters on Firms in Different Sectors: Implications for Supply Chains Journal of Supply Chain Management, 46 (4), 59-80

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Current Evolution of Supply Chain Management

Daniel Dumke — Mon, 02 May 2011 13:17:00 +0000

One very important part of supply chain management research is the historical analysis of supply chain practices and properties over time. Just recently I published an article on the development of supply chain strategies over the course of 20 years.
Today I want to highlight a more short term, nonetheless interesting analysis done using two surveys from 2003 and 2004 on the current state and evolution of supply chain management practices.

Surveys and Foundation

The results of the first survey were published in 2003. The 2004 study was meant as a follow up. Overall 209 participants mainly from North America and Europe from more than 20 different industries took part in the survey.
A major part of the survey consists of rating the performance in different areas of supply chain management (eg. purchasing, transportation, planning, inventory management…) based on a supply chain maturity model (figure 1). The differences between the results were then analyzed.

Figure 1: Supply Chain Maturity Model (Poirier and Quinn, 2004)

Results

There is some identifiable progress between the two years in terms of the maturity level. Figure 2 shows the results of the self assessment for 2004. The authors state that especially the high tech sector and retail show a high percentage of level 4 and 5 companies. Comparing 2003 with 2004 the results suggest a forward movement in all key areas except for the supply chain software and technology bit.

Figure 2: Results Maturity Level in Supply Chain Functions (Poirier and Quinn, 2004)

Another part of the surveys was the strategy development within the companies. The authors conclude that

overall strategy development continues to be a weak spot among the responding companies.

Especially due to a missing link between supply chain and business strategy. In 2004, over half of the companies reported to have no supply chain strategy. Only 25% agreed that their SC strategy is integrated into the business strategy. But still, the strategies are only shared with their entire supply chain by about 15%.
The authors infer that short term cost-reduction efforts still seam to be the major focus of supply chain management. This is also confirmed by a greater focus of the companies towards supply chain initiatives on reducing cost than increasing revenues.

The authors see the following hypothesis confirmed:

Companies and industries will vary widely in terms of their evolution agains the supply chain framework
Impacts of supply chain initiatives will be significant and well-documented, particularly with regard to cost savings and revenue improvements.
Companies will adopt technology solutions before improving their related processes, thereby foreclosing on the technology’s full benefits
Inter-enterprise collaboration will be a mark of the advanced firms
Customers will be the driving force behind many supply chain initiatives

Conclusion

Long term historical supply chain research can be a key in understanding the political drivers behind supply chain development within a company. And of course improving as a result. The research presented here is a good start in this direction but should be supported by a longer term continuity.
To be honest I was surprised that this short term view even spotted significant differences, since reaching another level in this maturity model usually would take more than one year (this then again shines back on the validity of the sample). And sadly I was not able to find a follow up article from one of the last years which repeated the study.

As always with questionnaire based surveys, especially those which have to be filled without guidance by one of the researchers, the results may heavily be biased by the interviewee and his environment.

From the deduction particularly the third hypothesis (“companies will adopt technology before changing processes”) seems to be hard to confirm in a survey alone and the presented evidence looks weaker than the others.

Reference:

Poirier, C.C., & Quinn, F.J. (2004). How are we doing – A Survey of Supply Chain Progress Supply Chain Management Review, 8 (8), 24-31

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Practitioner Views on Supply Chain Risk Management

Daniel Dumke — Mon, 18 Apr 2011 11:14:00 +0000

In 2005 Uta Jüttner was researcher at the Cranfield University, UK, especially renowned for several minds working on supply chain risk management, like Martin Christopher or Denis Towill.

Key in understanding this field of research is to make an inquiry into how supply chain risks are managed in business environments. Jüttner first laid grounds for this by some conceptual work, I introduced here a while ago

Methodology

Jüttner used an exploratory, quantitative survey. They selected 1700 members of the UK Chartered Institute for Logistics and Transport (CILT), with a response rate of 8% 137 managers replied to the survey request.

Furthermore six focus group discussions were held, with seven or eight members.

Those methods were used to answer the following questions:

How well are supply chain risks recognized across a network?

What is the current state of practice in SCRM?

What are the perceived critical issues of SCRM implementation?

Figure 1: Industry Position of the Participants (Jüttner 2005)

Participants

Figure 1 shows the industry of the participants, whereas figure 2 shows the position within the supply chain.

Figure 2: Position within the Supply Chain (Jüttner 2005)

Results

The participants in the focus groups emphasized the importance of the network effects of supply chain risk sources. This importance was also reflected in the survey, where there was a statistically significant correlation between the effects of specific risk sources (like the foot and mouth disease outbreak) and the effect on ones own organization, the suppliers and customers. So those risks are not only affecting one supply chain partner, but often the whole network.

The next analysis focusses on the current state of the practice in SCRM – tools an processes, depth of understanding and business continuity planning. Jüttner concludes:

The findings do not reveal whether this leaning towards less formalised processes and tools is caused by a lack of understanding and/or from a lack of time commitment and discipline emphasised in the following quote. […] The results also show that among the organisations surveyed, a joint approach to managing risks does not seem to be widespread.

The research also reveals some critical issues in supply chains, which can be found in figure 3.

Figure 3: Critical Issues in Supply Chain Risk Management (Jüttner 2005)

Conclusion

As in many other studies like this one by Zsidisin, Jüttner’s study shows that supply chain risk practices are mostly understood but not very often used. These issues are also reflected in the open research question, with which the article concludes:

What are the motivators or inhibitors for companies to share risk related information?

Which risks are accepted by companies as shared supply chain risks?

How can the risk performance trade-offs in supply chain strategies be analysed and minimised?

How can the implementation of SCRM processes be organised within and across companies?

Reference:

Jüttner, U. (2005). Supply chain risk management: Understanding the business requirements from a practitioner perspective The International Journal of Logistics Management, 16 (1), 120-141 DOI: 10.1108/09574090510617385

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Effects of Process Maturity and Uncertainty on SC Performance

Daniel Dumke — Mon, 31 Jan 2011 16:16:00 +0000

Process orientation may or may not be a very hip topic right now. Nevertheless effective processes are a foundation for company performance. Lockamy, Childerhouse, Disney, Towill and McCormack (2008), analyze and explain the impact of process maturity and uncertainty on supply chain performance, the full paper can be obtained here free of charge.

In close collaboration with several businesses they conducted an empirical study on this topic, which I present in the following.

Business Process Orientation and Quickscan

Business process orientation can be described using the dimensions process management, process jobs and process view.

Process management & measurement means that the company is using metrics on aspects of the process such as output quality, cycle time, process cost and variability, in contrast to traditional accounting measures.

Process jobs focus on processes as opposed to functions, and are cross-functional in responsibility.

Finally, process view is the cross-functional, horizontal picture of a business involving elements of structure, focus, measurement, ownership and customers.

Relationship between Process Capabilities and Maturity (Lockamy et al., 2008)

The authors used the Quick Scan methodology with over 20 different supply chains. It consists of the following four methods: questionnaire analysis, process mapping, semi-structured interviews, modelling from numerical data.

Each quick scan took about two weeks at the site of the client and resulted in: a current status of the organization and the supply chain, evaluation of the maturity of its practices and processes and its ability to meet current and future customer needs, furthermore details on the management of uncertainty and interfaces beteween these areas.

Supply Chain Maturity and Uncertainty

Supply chain maturity is described here using five cumulative levels:

Ad Hoc, marks an unstructured supply chain with badly defined processes. Typical are no process measures and few “process jobs”.

Defined, stands for a level where processes and the supply chain has been defined. Process performance is measured sometimes.

Linked, describes a level where supply chain management jobs have been established and performance measures are conjointly evaluated with clients and vendors.

Integrated, traditional functions beginn to disappear, supply chain measures and management is embedded into the organization. This leads to reduced SC cost.

Extended, collaboration is routine, competition is based on a multi-firm supply chain.

Supply Chain Management Maturity Model (Lockamy et al., 2008)

Supply chain uncertainty is defined similar to Christopher and Peck (2004) and devided into process, control, supply, demand uncertainty. Based on other empirical study it can be stated that:

Supply chain uncertainty significantly contributes to poor customer service levels, excess inventory, long lead times, increased quality inspections, and bureaucratic decision-making processes.

Results

After collecting all data during the quick scan on the process maturity and experienced supply chain uncertainty levels the author drew the following conclusions:

Reductions in supply chain uncertainty can be achieved by increasing the maturity levels of processes employed within the supply chains

By increasing supply chain maturity levels and by correspondingly reducing uncertainty, firms can improve overall supply chain performance

Levels of maturity in the area of process structure and jobs can significantly reduce the level of control uncertainty within supply chains

Reductions in demand and control uncertainty can be achieved by increasing the maturity levels of process measures utilised within supply chains

Process Maturity vs. Supply Chain Performance (Lockamy et al., 2008)

Conclusion

One would think that better processes lead to better supply chain performance. But it is hard to objectively measure the maturity of a specific process. How do you grade them. For example maybe a process is documented, but to which level of detail and how are current is it? There are processes that work perfectly without having a process chart available which documents the exact interfaces.

So evaluating processes is always an extremely subjective task. I trust the reputation of the participating author that they used all due diligence necessary. Nevertheless it would have been great to see more details on how the evaluation has been conducted.

Reference:

Lockamy, A., Childerhouse, P., Disney, S., Towill, D., & McCormack, K. (2008). The impact of process maturity and uncertainty on supply chain performance: an empirical study International Journal of Manufacturing Technology and Management, 15 (1) DOI: 10.1504/IJMTM.2008.018237

Christopher, M., & Peck, H. (2004). Building the Resilient Supply Chain The International Journal of Logistics Management, 15 (2), 1-14 DOI: 10.1108/09574090410700275

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Supply Chain Disruptions and Shareholder Wealth

Daniel Dumke — Wed, 19 Jan 2011 12:34:00 +0000

In last weeks article (Hendricks and Singhal, 2005) I described the effects of supply chain glitches on supply chain performance. This week should be viewed an update to that.

Already in 2003 Hendricks and Singhal showed in an article the devastating effects supply chain glitches can have on the shareholder value. Up to that time a strong correlation between excellence in supply chain management and shareholder value has always been presumed. Many have alluded to the compelling bottom-line benefits and tremendous payoffs that accrue to firms from developing effective supply chains, but hard evidence to support this has been very limited.

Metrics

Supply chain glitches are found by browsing through press releases in search for announcements of a demand / supply mismatch.
Increases or decreases in the shareholder value are assessed using the stock price of the company.

Results

The analysis of the empirical data results in the following conclusions:

Glitch announcements decrease shareholder value on average by 10.82%
For larger firms, the negative stock market reaction is less pronounced
The higher the growth prospects, the more negative is the stock market reaction.
Finally, irrespective of who is responsible for the glitch or what caused the glitch, shareholders of firms that experience glitches pay dearly

Implications

The evidence clearly indicates that ignoring the possibility of supply chain glitches can have severe negative economic consequences, the goal therefore must be to prevent glitches as much as possible. This can be done by improving forecasting and developing the ability to predict glitches.
Furthermore the elapsed time between the occurrence and detection of glitches should be reduced and of cause reduce the time it takes to resolve glitches.

Conclusion

A loss in shareholder value of over 10% is huge. The fact that it seems to be irrelevant who is responsible for the disruptions further aggravates the need for a supply chain risk management, which comprises not only the on company and the internal chain but also the means to monitor and control supply and demand side risks.

Reference:

Hendricks, K., & Singhal, V.R. (2003). The effect of supply chain glitches on shareholder wealth Journal of Operations Management, 21 (5), 501-522 DOI: 10.1016/j.jom.2003.02.003

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Case Study Research for Theory Creation

Daniel Dumke — Mon, 20 Dec 2010 11:52:00 +0000

How is new knowledge generated in the social sciences? One method is case study research.

Case Study

A case study is an in-depth investigation of a specific question regarding an individual research object, it can be differentiated using the following criteria:

Number of objects investigated: single / multiple cases

Number of levels of analysis: embedded design

Data collection: used data collection methods (eg. interviews, written files,…)

Kind of data ascertained: qualitative / quantitative

Purpose of the study: provide description / test theory / generate theory

Theory development

Theories are usually developed using observations (Newton’s Apple), using grounded theory, or by analyzing qualitative data. This article shows how case research can be used for the development of theories as well.

Process of Building Theory from Case Study Research

Process of Building Theory from Case Study Research (Eisenhardt, 1989)

According to Eisenhardt (1989), the process shown in the figure above should be used. I would like to highlight the following important steps:

Selecting cases
Instead of random sampling used in surveys, where statistical significance is important, cases should be selected using theoretical sampling, to focus efforts on useful cases

Data collection
Triangulation is used here to analyzing the object from different angles, eg. using data from interviews, company presentations and publicly available data.

Data analysis
The analysis of the data should happen as soon as possible, in contrast to surveys where the questionnaire does not change during execution, case research should adapt to the results of previous findings.

Eisenhardt (1989) further lists the following advantages / factors when to use case research.

Strength:

Higher likelihood of generating novel theory

Emergent theory is likely to be testable with constructs that can be readily measured and hypotheses that can be proven false

Resultant theory is likely to be empirically valid

Weakness:

Empirical evidence can yield theory which is overly complex

The result may be a narrow and idiosyncratic theory

Applicability:

When little is known about a phenomenon

Current perspectives seem inadequate

Current opinion conflict with each other or common sense

Conclusion

Case studies cannot support a theory with statistical relevant findings, but case studies are turned into theories by finding common patterns within the gathered data. After this step further support will be needed to establish the validity of the theory, which can be using modeling approaches or statistically significant surveys.

Reference:

Eisenhardt, K. (1989). Building Theories from Case Study Research The Academy of Management Review, 14 (4) DOI: 10.2307/258557

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Survey on Risk Handling in the Manufacturing Industry

Daniel Dumke — Mon, 08 Nov 2010 14:38:00 +0000

A current report by KPMG shows that international manufacturers are increasingly considering effects of supplier selection on cost and potential risks. Nearly 200 companies participated globally in the survey. The full report can be downloaded here at KPMG, I just summarized the major findings.

Results

Reintegration: Every third manufacturer has reintegrated formerly outsourced processes into his own organization again. Furthermore about 40% are considering reintegration to lower cost and risks.
Single Sourcing: About 40% of the companies want to reduce the number of suppliers in the next two years. About the same number stated that they are planning to design their contracts with longer time horizonts
Disruptions: Companies are increasing their activities on contingency planning in case supply is disrupted.
Risk Aversion: The authors conclude that manufacturers may be avoiding many risks completely thereby reducing their chances as well.

Conclusion

From a research point of view these results can be viewed as the basis for further in depth analysis. In a footnote I found an interesting remark, that the complete study has been conducted by an external contractor: the Economist Intelligence Unit. I am not really sure if this increases or decreases the credibility and validity of the results.

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The Impact of Supply Chain Strategy on Shareholder Value

Daniel Dumke — Tue, 19 Oct 2010 08:39:00 +0000

I had this article marked for some time now and I finally got to read it. It describes the connection between Shareholder Value and the concept of Value Based Management (VBM) and Supply Chain Strategy.

Shareholder Value

The emergence of the Shareholder Value demands lead to the Value Based Management approach to operationalize the concept. The goal of both is to enable companies to generate real value, with a clear focus on the shareholders of the company in focus. Real value is created when a company can not only compensate investors for the total costs involved in the investment, but also provide a premium which compensates for the additional risk (in comparison to a risk free investment) incurred.

Shareholder Value can be seen and measured from an internal and external view point. Internally usually the Economic Value Added (EVA®) is used. It is calculated using the Operating Profit and the true cost of capital. Alternatively, if measured from outside a measure based on the market capitalization is used.

Driver of Shareholder Value

Revenue growth, operating cost reduction, working capital efficiency, and fixed capital efficiency are the drivers of Shareholder Value.

It is obvious that Supply Chain strategy directly or indirectly affects all these drivers.

A very important notion of VBM for the Supply Chain strategy is the focus on discounted cash flows (DCF) as the basis for the profits of multi-period models.

To increase discounted cash flows one has two options: increase / decrease revenues / cost or accelerate revenues / decelerate cost.

Supply Chain Strategies

The following strategies therefore can improve the Shareholder Value:

Decrease end to end pipeline times (especially focus on the cash to cash cycle)
Partner with the suppliers to reduce the lead times of all (!) incoming products
Slash internal lead times, by integrating and optimizing processes
Improve information flow from the demand side
Reduce risks to decrease capital costs associated with the company

Conclusion

Current research focusses very much on working capital as a driver for better Shareholder Value. Supply Chain Management can be the key in achieving the necessary reductions in receiveables, debt and inventory. You can find related links in the section below.

Reference:

Christopher, M., & Ryals, L. (1999). Supply Chain Strategy: Its Impact on Shareholder Value The International Journal of Logistics Management, 10 (1), 1-10 DOI: 10.1108/09574099910805897

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