mitigation

Natural Disaster Management Planning

Daniel Dumke — Mon, 27 Feb 2012 14:44:45 +0000

After the 2004 tsunami, which heavily affected parts of Thailand and Indonesia, national and international disaster response was quick to support the affected regions.

Within several weeks of the disaster, approximately 400 international non government organizations (NGOs) were working in Indonesia alone providing basic assistance to the affected population.

Introduction to disaster relief

Several factors are necessary to improve response activities:

Preparedness in vulnerable regions, focussing on the “ability to respond quickly and appropriately”.

Local involvement. The local authorities and population directly involved in a disaster also are “in the best position to respond immediately” to a disruption.

Coordinated needs assessment, which also includes local groups ensures that support can be given on efficiently where required

Information sharing: “Emergency preparedness and response stages are driven by information”. Therefore sharing information between the disaster response parties is an important factor to improve overall outcome.

Logistics expertise and efficiency. Natural disasters often leave most critical infrastructure destroyed. To quickly support a large number of road access is of utmost importance. “Logisticians play an important role during the initial emergency period, they are often given limited authority to carry out their decisions. Frequently too, the assessment teams sent by humanitarian agencies to determine the needs of the affected population do not include logisticians. When logisticians are not included in the planning and decision-making process this causes delays in distributing relief.” Also local logistics expertise should be levered to further foster the speed of delivery.

Method

To build her disaster response model the author conducted several interviews with disaster relief managers involved in the 2004 tsunami. The goal was to assess the degree of execution of the above mentioned factors.

The interviews were carried out with of five NGO and government managers (figure 1).

Figure 1: Interviewee Sample Group (Perry, 2007)

The author summarized shortfalls in several key areas, including preparedness, local involvement and coordination (figure 2).

Figure 2: Disaster Response Shortfalls during the 2004 Tsunami (Perry, 2007)

Model

Drawing from the cumulative findings of the extensive pre- and post-tsunami literature analysis and the research findings, a hindsight model of effective natural disaster response management planning has been developed that is holistic and inclusive.

Figure 3 summarizes the relevant stakeholders and tasks.

Figure 3: Holistic Model for Effective Disaster Response (Perry, 2007)

Key elements include:

the rigorous monitoring and forecasting of natural disaster risk and mitigating the effects of an impending disaster, with risk reduction activity, natural hazard forecasting, adoption of viable early warning systems;

the building of awareness through high profile, broad-based disaster planning and awareness programs led by the local government and building networks and trust;

the addressing of demographic vulnerability, poverty and long-term, sustainable livelihoods;

the linking of all stages from forecasting, warning, mitigation, response and recovery to community development for resilience;

the incorporation of disaster management protocols, social policy, international support, training programs in logistics and response, simulation programs, empowerment of local communities and encouragement of improvisation in chaotic scenarios; and

assurances that there is adequate funding for all facets of natural disaster management and reducing risk, with suitable early warning systems and protocols, the development of a cadre of local expertise, particularly in the field of logistics as well as planning for a positive future for vulnerable communities.

Conclusion

I presented this model for two reasons. First, for its inclusion of the logistics aspects of humanitarian disaster relief efforts. Second, for the aspects which might be transferable a business situation.

The model especially highlights the need for quick information by extensive communication and local knowledge and capabilities to deal with disasters swiftly.

One caveat I would like to mention, even though the study and the model are backed extensively using related literature, I was missing a broader empirical foundation of the work. Five interviews (as in-depth as they may be) just are not enough to build a reliable model. Further testing is therefore required!

Reference:

Perry, M. (2007). Natural disaster management planning: A study of logistics managers responding to the tsunami International Journal of Physical Distribution & Logistics Management, 37 (5), 409-433 DOI: 10.1108/09600030710758455

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disaster

mitigation

process

preparedness

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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Improving Supply Chain Performance and Managing Risk Under Weather-Related Demand Uncertainty

Daniel Dumke — Wed, 09 Nov 2011 16:18:00 +0000

The demand of many products is connected to the weather patterns during and before the selling season. Ice cream can be best sold during warm summers, of course. But also other food products or clothes exhibit weather dependent demand pattern.

This article by Chen and Yano (2010) has a look at improving contracting between a manufacturer of a product with weather dependent demand and its retailer. One is for sure: uncertain demand causes negative effects for the whole supply chain, and should be handled as such. The full paper can be downloaded here.

Method

The author utilize the classic news vendor setting with one manufacturer (M) and one retailer (R) to focus on the analysis of their relationship.

M is set as the focal company. Due to several reasons (e.g. long lead times, seasonal products) M wants to offer weather related rebates for the retailers.

Model

The sales process is modeled in three steps:

M designs the contract and offers it to R

R decides on the ordering quantity

Depending on the weather and the quantity ordered, payouts are made from M to R

A weather rebate is an alternative to other supply contracts that manufacturers might use to induce retailers not just to order greater […] quantities, but also to order them well in advance of the selling season. Such inducements fall into two broad categories: (1) early-season incentives that reduce the retailer’s financial obligation for any given purchase or commitment level and (2) end-of-season concessions paid by manufacturers when demand is weak.

In this case the authors only have a look at the second type.

Without loss of generality, the authors focus on the temperature as weather index and design the payoff depicted in figure 1, where t is the measured temperature, t* is the “strike”-temperature and K is the payoff.

Figure 1: Suggested Contract for Weather Rebate (Chen and Yano, 2010)

Results

The results show how the effects of the demand risks for the manufacturer can be mitigated in such a setting:

Choice of strike temperature (t*) and rebate function
t* has an huge effect on the risk sharing between the two parties. So in combination with adjusting the payoffs K, it is possible to cater to different degrees of risk aversion between the manufacturer and the retailer

Additionally risks can be hedged by using weather derivatives
Tapping the growing market of derivative products on weather allows to offset the risks of such a contract by buying a corresponding weather certificate.

Conclusion

The authors suggest a very flexible contracting scheme to optimize the distribution of risks between a manufacturer and retailer.

[The authors also see] very significant side benefits that the weather rebate offers (e.g., no auditing of leftover inventory at the retailer that would be required in the case of buy-back contracts or markdown allowances).

But, on the other hand the authors admit that the difficulty of the negotiation process might be increased since many more parameters (rebate, weather indices,…) have to be agreed upon.

Reference:

Chen, F.Y., & Yano, C.A. (2010). Improving Supply Chain Performance and Managing Risk Under Weather-Related Demand Uncertainty Management Science, 56 (8), 1380-1397 DOI: 10.1287/mnsc.1100.1194

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The Power of Flexibility for Mitigating Supply Chain Risks

Daniel Dumke — Wed, 26 Oct 2011 13:31:00 +0000

This article sheds light on the question of how much flexibility is necessary to secure the supply chain against disruption risks.
The paper reviewed today takes a closer look at three supply chain risks: supply, process and demand risks (figure 1).

Figure 1: Selected Risks for further Analysis (Tang and Tomlin, 2008)

Strategies

The authors focus on the short term agility to reduce risk and chose five strategies, which are analyzed in depth (figure 2).

Figure 2: Strategies for risk reduction using Flexibility (Tang and Tomlin, 2008)

The strategies are backed by several case studies each.
For all five strategies the authors build a different model. First stands the description of the scenario, second is the development of the model which fits the scenario and is able to deploy the strategy. The last step is the description of the results.

Supply risks

Flexibility via multiple suppliers
Multiple alternative suppliers can reduce the supply cost risks, since the company gains the flexibility to purchase from the company with the lowest prices.
The first model is based on a case by Intercon Japan and Li and Fung. One ordering company is confronted with supply cost risk. The price of the identical goods is random and can vary between $5 and $15. The authors calculate the profit for the single up to a five (optional) supplier case and conclude that profits rise with increasing number of suppliers, whereas the marginal increase declines (figure 3).

Figure 3: Profit vs. Number of Supplier to reduce Supply Cost Risks (Tang and Tomlin, 2008)

Flexibility via a flexible supply contract
Flexible supply contracts allow the ordering firm to adjust its predetermined order at short notice usually within a limited quantity range.
This model is based on a case with Canon, HP and Best Buy. Demand is random, the purchasing contracts between buyer and seller are negotiated in the beginning of a period. But the actual ordered quantity can be adjusted between u% less or more than the originally agreed quantity. Calculating the profits for increasing flexibility u% gives the results shown in figure 4.

Figure 4: Profit vs. Contract Flexibility (Tang and Tomlin, 2008)

Process risks

Flexibility via flexible manufacturing processes
Flexible manufacturing requires a plant to be adaptable to produce a multitude of different products.
In this model process flexibility is modeled by the number of products (h) which can be produced by one plant. Different forms are shown in figure 5.

Figure 5: Different Flexibility Systems (Tang and Tomlin, 2008)

The calculations shows that increased process flexibility can also increase profits in an uncertain scenario (figure 6).

Figure 6: Profit vs. Degree of Process Flexibility (Tang and Tomlin, 2008)

Demand risks

Flexibility via postponement
Further flexibility is gained by postponing product differentiation decisions until the latest possible point during the production process.
In this model two products are sold at a market, demand for them is uncertain. Postponing product differentiation (shown in figure 7). Calculating profits for two different random processes (Independent and Identically Distributed (IID) and Random Walk (RW) Model), shows that also increase in postponement leads to increasing profits (figure 8).

Figure 7: Scheme for Product Postponement (Tang and Tomlin, 2008)

Figure 8: Profit vs. Postponement Flexibility (Tang and Tomlin, 2008)

Flexibility via responsive pricing
Case studies show the value of price adaptability to steer customer demand.
In this model the company is able to postpone the pricing decision for the selling season until the time t. Up to this point in time the company is therefore able to observe demand. Timing flexibility increases as t increases. From this it can also be shown that increasing flexibility leads to better profits with uncertain demand. Figure 9 has the results.

Figure 9: Profits vs. Pricing Flexibility (Tang and Tomlin, 2008)

Conclusion

The authors took some effort to generate five different models to analyze the flexibility cases. Nonetheless, I would judge the models to be quite specific for the cases, which is good for the research, but also poses the question: Will these results hold true in any case? For any company and supply chain?
There are other results (e.g. by Tomlin und Wang, 2005, which indicate that flexibility might not be the right choice for risk averse companies, which might be better of by choosing a dedicated strategy instead)

But if you keep this caveat in mind this work is a strong proponent of flexibility as a tool to increase resilience in an uncertain environment.

Reference:

Tang, C., & Tomlin, B. (2008). The power of flexibility for mitigating supply chain risks International Journal of Production Economics, 116 (1), 12-27 DOI: 10.1016/j.ijpe.2008.07.008

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Ways to guard against Disruptions

Daniel Dumke — Mon, 17 Oct 2011 17:49:00 +0000

Today I review an article called “18 Ways to Guard Against Disruption”. It was published in the Supply Chain Management Review in 2005 by Elkins et al.

Goal and method

The goal of this study was to assess the current state of supply chain risk management capabilities across multiple industries. The authors describe the results of several interviews with companies from multiple industries, which have been conducted by the Supply Chain Resource Consortium (SCRC, an university industry partnership for documenting supply chain management knowledge).

Results

Based on this study 18 best practices have been identified, which have been categorized according to their impact location (internal or external) and their time orientation (current business vs. future business).

External orientation / future business (“Strategic sourcing & advanced procurement”)

“Screen and regularly monitor current and potential suppliers for possible supply chain risks.
Require critical suppliers to produce a detailed disruption-awareness plan and/or business-continuity plan.
Include the expected costs of disruptions and operational problem resolution in the sourcing total-cost equation.
Require suppliers to be prepared to provide timely information and visibility of material flows that can be electronically shared with your organization.”

External orientation / current business (“Supply-base management”)

Conduct frequent teleconferences with critical suppliers to identify issues that may disrupt daily operations and discuss tactics to minimize these issues.
Seek security enhancements that comply with the Customs-Trade Partnership Against Terrorism (C-TPAT), Container Security Initiative (CSI), and similar initiatives.
Test and implement technologies to track containers.
Conduct a detailed incident report and analysis following a major disruption.
Create exception-detection/early-warning systems to discover critical logistics events that exceed normal planning parameters.
Gather supply chain intelligence and monitor critical supply-base locations.

Internal orientation / current business (“Real time operations management”)

Improve visibility of inventory buffers in domestic distribution channels at the part level.
Classify buffered material by its level of criticality.
Train key employees and groups to improve real-time decision-making capabilities.
Develop decision-support tools that enable the company to reconfigure the supply chain in real time.

Internal orientation / future business (“Strategic supply chain design”)

Develop predictive analysis systems that incorporate intelligent search agents and dynamic risk indices.
Construct damage-control plans for likely disruption scenarios.
Understand the cost trade-offs for different risk-mitigation strategies.
Enhance systemwide visibility and supply chain intelligence by using improved near-real-time databases.”

The authors note that none of the companies had implemented all of the identified measures at the same time and they suggest:

Companies may want to use the best-practices list as a thought-starter to help them prioritize which supply chain risk management elements to adopt. For example, companies could develop an internal survey, based on the best-practice list, which would assess their supply chain risk management capabilities.

Conclusion

This article closes a gap at the SCRM Blog of some early exploratory research on how supply chain risk management is done in practice. Even though the description of the methodology lacks several important facts, e.g. how many companies have been interviewed and how were the interviews conducted, the results still show an interesting direction.
The next obvious questions, which to my knowledge have not been pursued in an systematic manner, would be:

Which of the strategies is best used in what setting?
How should a company prioritize their efforts, if they wanted to invest in supply chain risk management?

Reference:

Elkins, D, Handfield, R.B., Blackhurst, J., & Craighead, C.W. (2005). 18 Ways to Guard Against Disruption Supply Chain Management Review

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disruptions

mitigation

risk management

Managing Supply Chain Disruptions in the Chemical Industry

Daniel Dumke — Wed, 14 Sep 2011 17:19:00 +0000

This is already my second article (click here for the first) about managing supply chain risks in the chemical industry. This time by Paul R. Kleindorfer and Germaine H. Saad from Wharton and the Widener University. But this industry is quite interesting since it has to withstand a multitude of risks, so let’s get right to business:

Goal

As the title indicates: the authors focus on risks from disruptions to normal activities and not the omnipresent risk of coordinating supply and demand.
The authors aim to achieve three goals:

Development of a conceptual framework for risk assessment and mitigation
Analyze accident history from the six years between 1995 and 2000
Derive implications for the design of management systems to cope with supply chain disruptions

Figure 1: Risk Management Process in the Extended Supply Chain (click to enlarge; Kleindorfer and Saad, 2005)

Literature analysis

The authors use the SAM method, where the goal is first to analyze the risk S ources, then A ssess the risks and find the right M itigation strategies.
The authors first investigate the SAM process using literature analysis and conclude with the process depicted in figure 1 and a four step process to manage disruption risks:

“Obtain senior management understanding and approval, and set up organizational responsibilities for managing the Disruption Risk Management process.”
“Identify key processes that are likely to be affected by disruptions and characterize the facilities, assets, and human populations that may be affected.”
“Traditional risk management is then undertaken for each key process to identify vulnerabilities, triggers for these vulnerabilities, likelihood of occurrence, and mitigation and risk transfer activities.”
“Reporting, periodic auditing, management, and legal reviews of implementation plans and on-going results (e.g., of near-miss management and other disruption risks) complete the business process for disruption risk management.”

Case study chemical industry

The further analysis of disruption risk management is done using a case study approach. The authors used a database with access to accident activities in the chemical industry during the time between 1995 and 2000. Sources were natural hazards, equipment or human failure and sabotage.

The framework depicted in figure 2 was used as a basis for the analysis.

Figure 2: Research Framework for the Analysis of the Chemical Industry (Kleindorfer and Saad, 2005)

Results

Kleindorfer and Saad conclude that, “two key dimensions emerge as fundamental in guiding management practice of disruption risk in supply chains:”

The first dimension consists of strategies and actions aiming at reducing the frequency and severity of risks faced, at both the firm level and across the supply chain. The second element focuses on increasing the capacity of supply chain participants (whether a separate firm or a subsidiary facility) to sustain/absorb more risk, without serious negative impacts, or major operational disruptions.

Furthermore in the chemical industry special care has to be taken to include the stakeholders, like regulators or the employees in mitigation activities.

Lastly, the authors state two conditions which have to be met to ensure effective implementation of risk management measures:

Condition C1. The approaches used to mitigate disruption risks must “fit” the characteristics and needs of the underlying decision environment. Different supply chain environments will give rise to different approaches to assessment and mitigation. Even within a given sector such as mass retailers with global supply chains, the approaches taken by different companies will be different, given their differences in corporate culture and their methods of managing their supply chains. In the business of disruption risk management, one size will definitely not fit all.

Condition C2. Trust, information and continuing profitability are the basic glue that makes supply chain partnerships a reality. Continuous coordination, cooperation, and collaboration among supply chain partners are needed for risk avoidance, reduction, and mitigation such that the value and benefits generated are maximized and shared fairly. Different contractual and incentive schemes are now emerging as practical means toward this end. Linking risk assessment and risk management to identify vulnerabilities and opportunities for cost-effective mitigation is the first step in providing a rational basis for individual and group action among supply chain partners. Random investments or shots in the dark that do not properly account for the interdependencies across the supply chain will ultimately waste resources and destroy trust.

Conclusion

The authors already admit that the data used for their case study is based on a facility level. These facilities are of course part of the supply chain, but one can pose the question if the results are really relevant for supply chain risk management.

Moreover, one has to differentiate between supply chain security and supply chain disruptions. At least from my practical experience especially in the chemical industry facility security has played a major role since many decades and is deeply rooted in the companies themselves. Supply chain risk management on the other hand is a new approach and very much separated from it. So for a paper on exactly this topic I am missing a discussion of the question how these aspects should be integrated.

Reference:

Kleindorfer, P.R., & Saad, G.H. (2005). Managing Disruption Risks in Supply Chains Production and Operations Management, 14 (1), 53-68

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Pricing in Times of Disruption

Daniel Dumke — Wed, 10 Aug 2011 16:13:00 +0000

Many articles, including my own research show, that companies tend to focus largely on risk mitigation measures concerning the supply side. Only little is done to include demand side risks or demand side measures into the mitigation of supply chain risks. The study “Pricing During Disruptions: A Cause of the Reverse Bullwhip Effect” focusses on optimal pricing measures during a disruption. And so it helps to close the gap a little bit.

You can download a preprint of today’s paper at SSRN.

Reverse Bullwhip Effect

During a disruptions demand can change quickly. Due to a real or felt shortage customers are likely to order more than they actually need. This effect can be described by the Reverse Bullwhip Effect:

Whenever there is a perceived shortage of supply, it amplifies as it propagates down the supply chain. In fact, forward and reverse bullwhip effects often act as a system. If you start with a sudden upturn in demand, it gets amplified as it goes upstream, which creates a perceived shortage that amplifies as it propagates downstream. This creates a panic and downstream consumers overstate their demand, which amplifies again as it goes upstream. In turn, a greater scarcity is felt, and so on. Each of these effects feeds the other.

Method

The authors establish a mathematical model of a two tier supply chain, containing a single manufacturer (M) and a single (aggregated) demand (C). The process is established as follows:

Before the interaction, the manufacturer is hit by a disruption with a decreasing effect on capacity. The recovery takes place slowly over the course of several periods. The following steps are executed in each period:

M realizes its current capacity

M sets a price

C orders a specific number of products according to its predetermined behavior

The manufacturer has three price setting strategies at its disposal:

Naive: The price is set only based on the capacity and the long term demand curve of the customer, any short term behavior of the customer is ignored
One Period Correction: The deviation between the long term demand and the actual order of the customer is taken into account for the pricing decision.
Regression pricing: A regression analysis between set price and customer orders is included into the decision making process of the manufacturer.

The customer’s order behavior also includes historical prices. Two demand curves are specified, a long term demand curve, where the demand is linear in price, and a short run demand curve where the price change is included as well (figure 1).

Figure 1: Short Term Demand Behavior (Rong et al. 2009)

Results

The results show that the one period correction strategy results in a more volatile customer ordering process and lower revenues than both the naive and regression pricing strategies. Also in these terms the regression pricing strategy performs

worse than the naive strategy. The Reverse Bullwhip Effect is shown to occur in the disruption setting and almost always leads to reduced revenues.

Conclusion

From my point of view the study emphasizes four things:

All strategies involve active price changes by the company. Even though the naive strategy sounds very “lazy” it still involves using the available knowledge to optimize the profits of the manufacturer, including adapting prices.

The limited knowledge of the manufacturer is the major obstacle in the reduction of the Reverse Bullwhip Effect and improved revenues.

As for the Bullwhip Effect itself, the effects might be even worse with longer supply chains

An open question for me would also be how a more realistic (i.e. slower) price setting algorithm would affect the strategies.

Reference:

Rong, Y., Shen, Z.-J. M., & Snyder, L V. (2011). Pricing During Disruptions: A Cause of the Reverse Bullwhip Effect SSRN

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Simplified Supply Chain Flows

Daniel Dumke — Mon, 25 Jul 2011 14:52:00 +0000

I have to distract myself a little bit from thinking about supply chain risks too much, so I thought why not use the chance to read a different article once in a while. Well, at least the authors are familiar: Paul Childerhouse and Denis R. Towill and their paper of 2003: “Simplified material flow holds the key to supply chain integration”

Pre-work

Childerhouse and Towill start with an historical analysis of applications of simplified material flows, starting in the 16th century with the progress made in the supply chain for war ships over to the description of the bullwhip effect all the historic examples are concerned with the simplification of the supply chain, where the…

…emphasis is on “clean” i.e. unbiased and noise-free information flows; time compression of all work processes; achievement of consistent lead times; choice of smallest possible planning period; adherence to the schedule i.e. elimination of pockets of “Just-in-Case” materials, selection by simulation of the “best” supply chain controls; and finally, matching the simulation model to the real work process via process flow and information analyses

In previous papers the authors already analyzed how supply chain simplification is possible and conclude with a list of simplification rules (Figure 1).

Figure 1: Twelve Rules to simplify the Flows within a Supply Chain (click to enlarge; Childerhouse and Towill, 2003)

Figure 2 shows symptoms of a supply chain, when the material flows are too complex.

Figure 2: Symptoms of overly complex Supply Chains (click to enlarge; Childerhouse and Towill, 2003)

Method

A case study with 23 value streams all across Europe have been analyzed and a degree of simplification has been calculated using a score for the above mentioned simplification rules.

Results

The authors present five hypothesis to test using this data:

The effectiveness of a supply chain can be measured by assessing the level of uncertainty for the four segments of supply, process, demand and control.
Conformance to the 12 simplicity rules reduces uncertainty and results in increased supply chain integration.
On average each of the 12 simplicity rules are adhered to equally.
The level of uncertainty in the supply chain can be determined from a set of dynamic behaviour, organisational, situational and process observations.
Companies that undertake major Business Process Re-engineering programmes via the application of the 12 simplicity rules reduce uncertainties in their supply chains.

The hypothesis one and two are supported by the data of the sample. Hypothesis three is rejected, since the authors find that in the sample some of the simplicity rules are implemented more often then others (figure 3).
The fourth and fifth hypothesis are validated as well.

Figure 3: Order of the implementation of the Simplicity Rules within the Sample (Childerhouse and Towill, 2003)

The authors conclude:

Practitioners are faced with a multitude of published alternative ideas and techniques to improve the performance of their supply chains. It can be seen that most of these proposals have their roots in simplified material flow.

Conclusion

So, what do I want to remember from this detour:

Uncertainty is a driving force behind supply chain inefficiencies and risk reduction therefore also a way to improve performance.
Supply chain simplification is according to the authors one of the most common, yet often renamed, ways to reduce uncertainty and improve performance

And I thought I would get rid of risks for now…

Reference:

Childerhouse, P. (2003). Simplified material flow holds the key to supply chain integration Omega, 31 (1), 17-27 DOI: 10.1016/S0305-0483(02)00062-2

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Recurrent versus Disruption Risk

Daniel Dumke — Mon, 18 Jul 2011 13:25:00 +0000

The distinction between disruptions and recurrent / continuous risks is commonly used by researchers and practitioners in supply chain management. But how should the differences be reflected in the supply chain planning process? Is it necessary to differentiate between the risk types here as well?

In 2007 Sunil Chopra et al. analyzed this question in depth.

Disruption vs. continuous risks

For simplicity sake the authors define a disruption as a supplier which does not deliver any product at all. Figure 1 shows an example delivery listing for 20 periods. In periods 4, 7 and 13 nothing has been delivered and so a disruption has happened.

As you can see the overall mean (including the disrupted periods) is 86 with a standard deviation of 39. But the third column highlights an important point: If you leave out the disrupted periods, the mean rises and the standard deviation drops to a third. As a result it should make a difference if a decision maker used one or the other mean / standard deviation to make his decision.

Figure 1: Exemplary Table containing Recurrent and Disruption Risks (Chopra et al., 2007)

Model

To test the effects of a differentiated versus a bundled view the authors develop a model. The focal company has two suppliers, one reliable and one unreliable (at risk of a disruption). The authors then analyze two cases: first, only recurrent risk and second, recurrent and disruption risks. Each with either a decision maker who views the risks bundled together or separately.
Figure 2 has a good graphic to show the implications of the different approaches with disruptions present. In a bundled view the excess order volume (y-axis, to prevent stock-outs) is increasing when the probability of the disruption increases. On the other hand, when the risks are decoupled the decision maker only focusses on the recurrent risk and the excess order even decreases with the probability of a disruption. The disruption risk is then mitigated by contingently using the more reliable supplier.

Figure 2: Comparison of Excess Orders for Decoupled and Non-Decoupled Risks (Chopra et al., 2007)

Implications

The authors conclude that:

Bundling of disruption and recurrent supply uncertainty results in an over (under) utilization of the low cost (reliable) supplier. The extent of over (under) utilization increases as the probability of disruption grows.

Furthermore:

Growth in supply risk from increased disruption probability is best mitigated by increased use of the reliable (though more expensive) supplier and decreased use of the cheaper but less reliable supplier. Growth in supply risk from increased recurrent uncertainty, however, is better served by increased use of the cheaper, though less reliable, supplier.

Conclusion

I liked the article a lot, since it focusses on one simple question: Is it bad to combine different types of risk. The conclusion: There will always be different risk sources or types which, as this article shows, have to be mitigated differently as well.

Reference:

Chopra, S., Reinhardt, G., & Mohan, U. (2007). The importance of decoupling recurrent and disruption risks in a supply chain Naval Research Logistics, 54 (5), 544-555 DOI: 10.1002/nav.20228

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Fears and Mitigation - This Week in Supply Chain Management (28 / 2011)

Daniel Dumke — Fri, 15 Jul 2011 11:19:00 +0000

The first week in Bangkok is nearly over. I met a lot of interesting people and had inspiring talks about culture, supply chains and simulation. But the world did not stop moving, so I present you the highlights of the week in SCM.

News

The Michigan State University reports the death of Donald Bowersox a pioneer supply chain researcher. I got to know him through his framework on supply chain strategies, mentioned in Analysis of Logistics Strategies from 1990 to 2008 (MSU)

Blogs

AtRisk reports a rising fear by executives of cyber attacks. (@Risk)
Yet another fear: husdal.com elaborates on the risks feared by Scandinavian companies, though supply chain risks are not up in the top. (husdal.com)
I can recommend you to read the article on Logistics Viewpoints on supply chain risks and different risk types and how to manage them. (Logistics Viewpoints)

Research

The Chartered Institute of Purchasing and Supply hints towards a global survey on supply chain resilience. Closing date will be September, 5th. (CIPS)

Education

Kinaxis just anounced a webinar on “Managing Uncertainty in Volatile Global Economic Times”, starts on Tuesday, July 26th, 2011 (11:00–12:00 (New York)) Caroline Dowling of Flextronics will be presenting. (Registration)

If you haven’t read my articles of this week, have a look at the following:

Monday: How can you plan for an highly unlikely event? Planning for the Catastrophe.
Wednesday: Analysis of the impact of different disaster types on the supply chain.

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Avoiding Supply Chain Breakdown

Daniel Dumke — Mon, 20 Jun 2011 14:00:00 +0000

This article presents a comprehensive practice oriented framework for managing supply chain disruptions by Sunil Chopra and ManMohan S. Sodhi. The article has been published in the MIT Sloan Management Review in 2004. The framework covers everything from risk analysis to the selection of the risk mitigation strategy.

Risk Categories

Chopra and Sodhi find nine categories for risk in the supply chain context. In figure 1 they contrast the risks with the corresponding risk drivers.

Figure 1: Risk Categories (Chopra and Sodhi, 2004)

Risk mitigation

The above mentioned risks have to be analyzed and if necessary mitigated. Risk mitigation as a process of managerial decision making can be quite cumbersome, since there is no catch-all strategy and some strategies can even increase other risks as a side effect. Figure 2 highlights the effect of selected mitigation strategies on the risk categories.

Figure 2: Effect of Risk Mitigation Strategies (Chopra and Sodhi, 2004)

Cost of risk mitigation

Very often risk mitigation not only comprises a laborious decision process, but also the resulting strategy implementation can mean a huge financial expenditure. Some strategies on the other hand are not only capable of reducing risks but can also increase profitability. Figure 3 highlights the dilemma. The goal should be to jump from the current position “X” to a higher risk-return curve (eg. “A”), instead of moving within the existing decision space.

Figure 3: Trade-off between Risk Reduction and Cost/Reward (Chopra and Sodhi, 2004)

What-if analysis

The authors suggest to use a what-if scenario analysis to assess a companies / supply chains propensity towards certain risks. In the matrix displayed in figure 4 the risk categories are further separated into supplier-related, internal and customer-related parts.

Figure 4: Exploring Scenarios using What-If Analysis (click to enlarge; Chopra and Sodhi, 2004)

Risk and reward

To balance risk versus reward the authors recall three essential relationships:

The cost of risk reduction increase with the level of risk (the higher the risk the higher the cost to mitigate)
Risk pooling reduces the cost to mitigate risks (eg. pooling demands of several customers reduces the cost to mitigate the risk)
The pooling effect is more pronounced when the pooled risks are very high

Depending on the level of risk and the cost of a mitigation reserve the authors suggest four generic strategic approaches to how to mitigate risks under different circumstances (figure 5).

Figure 5: Risk Mitigation Strategies depending on the Level of Risk and the Cost of Risk Mitigation (Chopra and Sodhi, 2004)

Tailored strategies

Finally the authors show examples of risk mitigation strategies and when to use them. The results are shown in figure 6.

Figure 6: Strategies for Risk Mitigation (Chopra and Sodhi, 2004)

Conclusion

I was surprised by the number of topics the authored covered in a single paper. They really tried to cover the whole risk mitigation process, and they succeeded.

Of course, most of the presented results are not really new and not covered in depth, but they make a excellent basis for strategic, business oriented discussions on supply chain risk management.

One drawback though: I did not really understand why exactly those risk categories (figure 1) were chosen. From my point of view the those are not very intuitive since the categories are not exclusive and thus overlap (eg. a disruption can also lead to a delay. Or why is a information infrastructure breakdown a systems risk and not a disruption?). This makes it harder to use the risk categories efficiently. But the categories could easily be replaced by another framework (eg. by Christopher and Peck, 2004)

Reference:

Chopra, S., & Sodhi, M.S. (2004). Managing Risk To Avoid Supply-Chain Breakdown MIT Sloan Management Review, 46 (1), 53-61

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Risk-based Classification of Supplier Relationships

Daniel Dumke — Wed, 08 Jun 2011 13:42:00 +0000

A large proportion of the efforts in supply chain risk management focus on the supply side, even though, using common definitions of supply chain management, the supply chain of course not only contains the suppliers but also the customers down to the end-customer.
Focussing on the supply side, Hallikas et al. 2005 studied the different classes of supplier relationships and what risk mitigation strategies might be effective with these classes. This classification can help both affected parties, in understanding the effects of risk on their relationship.

Methodology

The authors conducted a single-case study with a high-tech OEM from Finland. To analyze the company’s relationships with its first tier suppliers, 42 of them participated in a survey on relationship parameters and the risks involved.
The goal was to support or reject hypothesis regarding the collaborative learning (“H1: Collaborative learning in supplier relationships differs according to the type and extent of the risks involved.”) and risk management (“H2: Risk-management practices vary according to the type and extent of the risks involved in supplier relationships.”).

Risks and collaboration

The suppliers in the sample are described in figure 1. Most of the respondents were in CEO or Director positions.

Figure 1: Description of the Sample (Hallikas et al., 2005)

Four different generic, relationship risks were considered:

Hold-up risk
describes how specific the assets for this relationship are and if they could be used again outside of the relationship. Example: A computer would pose little hold-up risk, whereas a specific machine which only produces a product for a specific client would pose a high relationship risk.
Demand risk
is high, when demand fluctuations are rapid and significant.
Replaceability risk
is the chance of the OEM to being able to replace the supplier.
Value added
the importance of the supplier towards the end product.

Those risks were evaluated by the survey participants, if they are important for the specific relationship (see figure 2).

Further on the participants were asked about their collaboration efforts in the following categories:

Operational single-loop learning (SLL Operational)
refers to collaboration with the goal of small, incremental improvements.
Strategic double-loop learning (DLL Strategic)
aims at long term efforts with mutual investments to improve the capabilities.
Operational double-loop learning (DLL Operational)
refers to drastic operational improvements, which require close collaboration.

Six risk management measures have been part of the survey as well. Starting with measures which do not require intensive collaboration like “Measurement” of the relationship’s output, and “Fault management”. Further risk management measures are “Innovativeness”, “Prioritization”, “Protection of relationship related knowledge” and the amount of formal and informal “Communication”.

Figure 2 shows the results to the questions in each of the above mentioned categories and if they apply to the relationship at hand.

Figure 2: Survey Results (click to enlarge; Hallikas et al., 2005)

Findings

Cluster analysis shows that three groups can be distinguished. Relationships can be:

Non-strategic, where replaceablity is high and for both partners the hold up risk is relatively low.
Strategic, where both partners depend on each other.
Asymmetric, i.e. one of the of the partner’s is dependent on the other but not vice-versa.

Figure 3 shows the possible combinations and the clustering framework suggested by the authors.

Figure 3: Framework for the Classification of Supplier Relationships (Hallikas et al., 2005)

Figure 4 shows the results of the survey, when clustered.

Figure 4: Clustered Results (click to enlarge; Hallikas et al., 2005)

The authors conclude:

DLL Strategic (strategic double-loop learning) showed a significant difference across the clusters [and is highest with in the Strategic cluster]

Both the protection of relationship-related knowledge (RM 5) and the amount of communication (RM 6) were exploited most in the strategic relationships

[RM 1 and 3] (see figure 2) were widely used in strategic relationships and only moderately used in asymmetric and non-strategic relationships.

Our study indicates that the risks and risk-management activities that suppliers perceive in their relationships are predominantly mutual with the customer.

It could be concluded that the level of risk and dependency in supplier relationship has an effect on the exploitation of risk-management means.

Conclusion

To evaluate this paper one first has to analyze the methodology used. In this case a case study seems to be adequate for a topic where no further research exists, a reader of this article still has to keep in mind that the results are not representative for a population and, since only about 60% of the supplier’s of the OEM took part in the survey, the results may not even be representative for this company.

Furthermore I found there was too little overlap between the literature review and the survey. E.g. the risks discussed in the review were only partially reflected in the survey section.

On the other hand I think the framework can be used to distinguish and describe a large proportion of relationships and the findings above can be used as a guideline how to prioritize risk management efforts within each of these categories.

Reference:

Hallikas, J., Puumalainen, K., Vesterinen, T., & Virolainen, V. (2005). Risk-based classification of supplier relationships Journal of Purchasing and Supply Management, 11 (2-3), 72-82 DOI: 10.1016/j.pursup.2005.10.005

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Managing Supplier Sustainability Risks

Daniel Dumke — Mon, 30 May 2011 12:47:00 +0000

For many years sustainability risks have been largely neglected. Reputational damages caused by incidents like the Brent Spar platform can reach tens of millions of dollars. But in a supply chain context companies are not only held responsible for their own actions but also for the actions of their suppliers.

In their 2010 paper Foerstl et al. analyze supplier sustainability risk and develop and test a framework for its mitigation.

Research question

Scholars agree that sustainable supplier management (SSM) cannot only rely on a supplier’s compliance declaration. Nonetheless, there has also been consensus, that risk mitigation measures are costly and therefore have to be targeted towards the most risky suppliers. The authors address the following research questions:

How do firms configure sustainable supplier risk management processes in congruence with dynamically changing sustainability requirements?

How can supplier sustainability risk mitigation strategies and processes be a source of competitive advantage to the buying firm?

Research framework and methodology

The authors use the research framework in figure 1 as foundation for their further research. The framework describes the process within a company from the “supplier sustainability risk identification” to the related “performance outcomes”.

Figure 1: Extended Research Framework to Manage Supplier Sustainability Risks (click to enlarge; Foerstl et al., 2010)

Since the research on how firms account for sustainability-related risks are still in an exploratory / early stage the authors decided to use a case study design to build new hypothesis is this field.

The case study participants (5 overall) have been selected to be from the chemical industry, since

first, environmental protection has high strategic relevance in the chemical industry since its costs are among the highest of all industries. Second, the industry’s high profitability and a long history of incidents have led to close scrutiny by its stakeholders, emphasizing the relevance of responsible environmental and social behaviour.

Data analysis

The findings fit into the above mentioned framework and are denoted in figure 2 by P1 to P5.

Figure 2: Summary of Research Findings (click to enlarge; Foerstl et al., 2010)

Proposition 1
The initial development of sustainability risk assessment is based on the perceived stakeholder pressure, but the chosen risk assessment method is independent of the pursued sustainability dimension.

Proposition 2a
Supplier sustainability risk assessment enables an effective sustainability risk mitigation response.

Proposition 2b
The initial configuration and deployment of supplier sustainability risk management capabilities is valuable in building excess capacity, which enables firms to broaden the scope of their sustainability risk management processes.

Proposition 3a
The ability of sustainable supplier selection, development and phase-out strategies to mitigate sustainability risks depends on the rigor with which they are applied.

Proposition 3b
The ability of sustainable supplier assessment and development capabilities to mitigate sustainability risks depends on the astuteness with which they are created and applied.

Proposition 4a
Sustainability risk assessment capabilities allow for effective supplier selection, leading to risk reduction, which constitutes a source of competitive advantage.

Proposition 4b
Beyond the reduction of supplier sustainability risks, sustainable supplier development has a positive effect on operational performance and hence competitive advantage.

Additionally, the author discovered the issue of “external responsiveness”, which has not been part of the original model. It relates to the response time towards new social and environment standards. Two of the interviewed companies also directly approached Non Governmental Organizations (NGOs) to integrate these groups into their sustainability risk management processes.

Proposition 5
Under the presence of dynamic stakeholder stimulus, external responsiveness has a positive effect on sustainability risk identification, assessment and mitigation processes, which in turn affect sustainability risk performance outcomes.

Results

As a summary the authors conclude that

the earlier firms begin to assess their suppliers for sustainability, the greater the accumulation of sustainability-related risk management capabilities relative to their competitors will be.

sustainable supplier assessment and development has positive effects on the buying firm: 1) more profound mitigation of corporate reputational risk and 2) enhanced operational performance.

supplier assessment, selection, and development must be tightly interlocked to effectively manage the sustainability risk exposure caused by individual suppliers or the supply base as a whole

Conclusion

The authors did a great job presenting their results. I was positively surprised to see that they elaborated on three pages about the application of the case study methodology and the sample companies. The sample selection towards companies with great emphasis on sustainability overall (e.g. the companies have all been picked from major sustainability related stock indices) of course leads to a skewed sample which cannot be seen as a representative average, but more as a best practice example.

Reference:

Foerstl, K., Reuter, C., Hartmann, E., & Blome, C. (2010). Managing supplier sustainability risks in a dynamically changing environment—Sustainable supplier management in the chemical industry Journal of Purchasing and Supply Management, 16 (2), 118-130 DOI: 10.1016/j.pursup.2010.03.011

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Robust Strategies for Mitigating Disruptions

Daniel Dumke — Wed, 25 May 2011 14:51:00 +0000

There are several scientific research centers on supply chain risks in the US (as around the world): The east coast has several researcher on this topic e.g. with Yossi Sheffi from the MIT, in the center with Joseph Fiksel from the Center for Resilience at the Ohio State University and on the west coast Christopher Tang from the UCLA or Hau L. Lee from Stanford University.

I wanted to write about this article, by Christopher and Tang, for some time now.

History teaches us

After a major disruption there are many firms who severely suffer and take a long time to fully recover. On the other side of the spectrum there are a few companies that continue to satisfy their customers demand, and thus use these capabilities to retain and acquire new customers in the process.

Defining robust strategies

Tang defines “robust” strategies as those which fulfill two objectives at once:

Help reducing costs or improve customer satisfaction during times without a disruption,
Support the firm during and after a disruption in continuing operations.

The goal therefore is to create a win-win situation where the investment into the strategy can pay of no matter if a disruption occurs or not.

Cases

Tang lists three cases to highlight some of the few companies that achieved that goal:

Nokia vs. Ericsson
I wrote about this case before, where Nokia and Ericsson were affected by the same disruption at a micro chip plant of a common supplier. Nokia was able to quickly adapt the product design and find another supplier, while Ericsson suffered sever financial consequences leading to the Ericsson / Sony “merger”.
Li and Fung
changed its supply plan in a flash to meet customer demand during a currency crisis.
Dell’s adaptive pricing strategy
to accomodate to supply shortages and still guide and satisfy customer demand.

Robust strategies

Building on these case the author selects and describes nine supply chain strategies that fit above mentioned definition (figure 1).

Figure 1: Robust Supply Chain Strategies (click to enlarge; Tang, 2006)

There are however challenges which have to be considered before implementing the strategies:

Cost versus benefits
These strategies probably make it easier to justify the investments due to their positive effects with or without disruptions, nonetheless there is still a tradeoff which has to be analyzed. Tang suggest to think of the remaining cost surplus as insurance premium.
Strategic fit
Not every strategy may fit for every company. For example Dell’s pricing strategy might be adaptable for airline tickets but not for heavy machinery with a new quote every day.
Proactive execution
Proactive strategies (e.g. rerouting of shipments after a port strike) can be better than reactive strategies (e.g. increasing stocks).

Conclusion

I like this article due to the practice oriented approach taken. But I am missing some clearer description of the ways to generate these strategies. Also, there is no consideration of the completeness of this listing. So I have to assume that it is probably a good starting point. And to my knowledge there are already several studies building on this paper.

As a side note: Nokia also may be a mixed example for a company as role model for good strategies. I would argue that either Nokia was lucky or had a very in-homogenous state of strategy execution: The mentioned disruption happened in 2000, exactly the same time where they should have laid ground for the new smart phone generations which are commonplace now from many manufacturers, but not Nokia.

Reference:

Tang, C. (2006). Robust strategies for mitigating supply chain disruptions International Journal of Logistics Research and Applications, 9 (1), 33-45 DOI: 10.1080/13675560500405584

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Agile Supply Chains and Uncertainty

Daniel Dumke — Wed, 27 Apr 2011 12:49:00 +0000

There are many definitions of agility. A supply chain can be defined as agile, when it is flexible and responds quickly to customer needs. Agility can also be seen as a measure to mitigate supply chain risks, building on this thought Dani and Ranganathan (2008) developed a model to mitigate risks using the concept of agility .

Concept for Agile Risk Mitigation

The authors develop the model based on two premises: (1) scenario planning is used to identify supply chain risks and (2) the system is designed to react fast and flexible to mitigate the risk.
Figure 1 shows the resulting concept.

Figure 1: Concept for agile Supply Chain Risk Mitigation (Dani and Ranganathan, 2008)

Two general mitigation “arms” are necessary. One for the foreseen risks which can be mitigated proactively and unforeseen risks which have to be reduced reactively.

Model Validation

This model constitutes a theory build by the authors on recent literature and own experience. To raise the credibility a theory has to be validated. In this case the authors decide to use the Ericsson case (if you are interested, have a look at my review of the case here).
After a breakdown of a Philips semiconductor plant in 2000, Nokia and Ericsson were competing over the remaining capacity. Nokia reacted fast and acquired spare capacity by Philips and other suppliers. Ericsson reacted more slowly and failed to obtain the necessary component and lost about 400 million USD.

When applying the above mentioned model, it is clear that both companies had not thought about this scenario, however Nokia already beforehand had established a fast communication structure which permitted it to react in a fast manner.

Conclusion

The article also contains a extended literature section defining the terms used, building from uncertainty and risk, to risks in supply chains, scenario analysis and the agility concept. Building on that the concept presented on less then one page seems to be quite underweighted. The main statement of the article is that: (1) planning of future scenarios is important to anticipate and mitigate possible risks, (2) depending on the planning mitigation of disruptions happening can be done proactively or reactively. (3) Especially for reactive mitigation the agility of the company plays a major role in the success.

Reference:

Dani, S., & Ranganathan, R. (2008). Agility and supply chain uncertainty: a scenario planning perspective International Journal of Agile Systems and Management, 3 ¾, 178-191

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