Hau L. Lee

Improving Confidence to mitigate Supply Chain Risks

Daniel Dumke — Mon, 04 Apr 2011 14:28:00 +0000

Yet another paper on risk mitigation strategies. This time: How to reduce risks by improving confidence. You can find the complete paper of today in the web.

Lack of Confidence

The authors theorize that especially demand risk (volatility) has increased during the last years. With several SC concepts which are aimed to reduce the slack in the supply chain during the same period, overall risks in the SC have increased dramatically.

This leads to a lack of confidence by the managers responsible for the SC in:

Order cycle time

Current order status

Demand forecasts given

Supplier’s capability to deliver

Manufacturing capabilities

Quality of the products

Transportation reliability

Services delivered

If you are still unsure if in your supply chain the lack of confidence prevails, have a look at this list.

Outcomes of the Lack of Confidence (Christopher and Lee, 2004)

Risk Spiral

The lack of confidence can help to increase risks even further. Since according to the risk spiral, lack of confidence may lead to a increase of buffers in the supply chain to make sure that the product can still be delivered.

This on the other hand leads to longer cycle times / pipelines, which reduces the visibility even further.

Risk Spiral (Christopher and Lee, 2004)

Solution

Instead of increasing buffers the authors recommend to improve visibility and control:

Visibility

The key to improved supply chain visibility is shared information among supply chain members. Traditionally companies have tended to subscribe to the view that ‘information is power’ and to interpret the phrase as meaning power is diminished if that information is shared. In fact in supply chains the reverse is true. If information between supply chain members is shared, its power increases significantly. This is because shared information reduces uncertainty and thus reduces the need for safety stock.

Control
The goal here is to improve flexibility over the supply and own processes. The time to react to the new information gained above has to be used well.

Conclusion

Visibility and control summarizes several existing strategies (like information exchange and reducing lead times) into a new concept for thinking about supply chain risk mitigation. It therefore has the potential to lead to new / better strategies to reduce risks. The table above can be used to analyzed if some supply chain is already affected by low confidence. From a scientific standpoint I am missing the grounds for this conclusions. Obviously, this paper is not proving / supporting any theory, since it does not contain any survey or other modeling method. But on the other hand it also does not contain any hint for the method used for theory creation.

Reference:

Christopher, M., & Lee, H. (2004). Mitigating supply chain risk through improved confidence International Journal of Physical Distribution & Logistics Management, 34 (5), 388-396 DOI: 10.1108/09600030410545436

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Information Sharing in Supply Chains

Daniel Dumke — Mon, 07 Mar 2011 13:25:00 +0000

Obstacles to Information Sharing

There are many obstacles to information sharing in a supply chain. Confidentiality is probably one of the biggest issues, but there are others not so obvious like antitrust regulations, the timeliness and accuracy of the provided information, differing technologies between the supply chain partners or a mismatch in the alignment of incentives. Therefore trust and cooperation become critical ingredients in a supply chain partnership.

Drivers of Information Sharing

Lee and Whang discuss those obstacles and present some common types of information sharing in their paper of 2000.
In their view supply chain management primarily implies a focus change from the business to the supply chain. Inter-firm communication gains importance. The goal should be to integrate material, information and money as the three supply chain flows. Drivers behind this development are globalization and the more cost effective IT. Nonetheless, information sharing is only an enabler for better coordination and planning of the supply chain.

Types of shared Information

There are several different categories of information shared between companies.
Inventory Level
Why:

Echelon-based inventory control is optimal under certain assumptions
A variation of the order-up-to policy based on the echelon inventory level would achieve near-optimum
Production rule will adjust the production rate at a stage according to the inventory levels at the downstream stages

Forms:

Continuos replenishment programs
Vendor managed inventory

Problem:

Information validity can be a huge problem

Sales Data
Why:

Orders from downstream serve as a critical source of information about future business
The variance of orders is often larger than the variance of sales
Mitigation of the Bullwhip effect. By having sales data, manufacturers would be in a much better position to differentiate real demands and the so-called “phantom” demands.

Order Status for Tracking/Tracing
Sales Forecast
Why:

Elimination of the Bullwhip effect and the associated inefficiencies.

Production/Delivery Schedule
Why:

Information about (raw) material availability helps the buyer to expand the planning horizon of his own production schedule
For the supplier knowledge about the manufacturers schedule can help to ensure reliable resupply

Other Information Sharing
Sharing of performance metrics or capacity can help to identify bottlenecks in the supply chain and improve the performance.

Models of Information Sharing

Lee and Whang explain three models of information sharing:
Information Transfer Model
In this model one partner takes the lead in the supply chain, the other partner(s) transfers their information to the other who maintains the database for decision making.
Third Party Model
The 3rd-party model involves a third party whose main function is to collect information and maintain it in a database for the supply chain.
Information Hub Model
The information hub model is similar to the 3rd-party model except that the third party is replaced by a system. In this case the information hub does not have to exist physically, individual functional modules may reside at scattered locations and be called and invoked only as needs arise. Thus, the information hub could exist only as a logical entity.

Conclusion

Lee and Whang show what information can be shared in a supply chain and how it can be accomplished. Nonetheless the obstacles remain and are an ongoing subject of research.

Reference:

Lee, H., & Whang, S. (2000). Information sharing in a supply chain International Journal of Manufacturing Technology and Management, 1 (1) DOI: 10.1504/IJMTM.2000.001329

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Dealing with Product Uncertainties in a Supply Chain

Daniel Dumke — Wed, 03 Mar 2010 17:59:00 +0000

The article “Aligning Supply Chain Strategies with Product Uncertainties” by Hau L. Lee is a good starting point for SCRM, since it combines a simple, business ready framework for two major supply chain risks.Furthermore it includes many examples to reinforce the theoretical framework.

All supply chain risks in this framework are built around the product in scope. From there two risks are assessed: Demand uncertainty and supply uncertainty.

Demand uncertainty

Lee tries to find demand patterns for different product categories, he therefore splits the products of a company into two categories: functional products and innovative products.
Functional products first of all have a stable demand, usually due to a long product life cycle. Usually the product variety is low and the volume per SKU high. The author correctly concludes: “Clearly, different supply chain strategies are required for functional versus innovative products.”

Supply uncertainty

As well as the demand side, the supply side risks are classified as well. Supply processes can be stable and evolving. Stable supply means: reliable suppliers, less process change and less quality problems. Evolving supply processes are those with still unreliable suppliers, eg. also limited supply sources.

Uncertainty framework

Building on these risks Lee derives the following risk matrix.

Uncertainty Framework (Lee, 2002)

After defining the risks of different product categories Lee explains what mitigation strategies should be used in each situation.

Matched Strategies (Lee, 2002)

Conclusion

This article can be perfect for consultants. The Uncertainty framework and the resulting strategies are described with easy to understand categories and graphics. But also for research it provides a basic framework for supply chain risks and the management. Possible extensions should include more risks. It would be interesting to see how this kind of framework scales with more risks and especially if it is possible to maintain the ease of use.

Reference:

Lee, H. (2003). Aligning supply chain strategies with product uncertainties IEEE Engineering Management Review, 31 (2), 26-26 DOI: 10.1109/EMR.2003.1207060

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