mitigation strategies

The Supply Chain Uncertainty Circle

Daniel Dumke — Wed, 27 Oct 2010 16:17:00 +0000

How to shrink the “Uncertainty Circle” is the topic of a paper I read today. It has been written by Rachel Mason-Jones and Denis R. Towill and can be downloaded here free of charge.

This article from 1998 focusses on how to shrink the uncertainty within a supply chain and therefore improve performance, since

we believe that those companies which cope best with

uncertainty, are most likely to produce internationally

competitive bottom-line performance.

This hypothesis is also backed by several other authors like, Craighead et al. (2009) or Hendricks and Singhal (2005).

Within the product delivery process for a single company, the authors find four causes of uncertainty: supply side, manufacturing processes, control systems and demand side (see figure 1).

Causes of Supply Chain Uncertainty (Mason-Jones and Towill 1998)

The Circle

With the Uncertainty Circle it is now possible to visualize to effect of shrinking one of the risks without the other: Overall risk is only reduced by a (comparatively) small amount. This furthermore implies the goal for supply chain risk managers: Reduction of risk on all frontiers!

Uncertainty Circle and Risk Reduction Process (Mason-Jones and Towill 1998)

This of course does not have to happen at the same time. Companies usually start with improvements in their own manufacturing processes and establish lean thinking to improve lead times and quality. As a next step this concept may be enlarged to the companies suppliers as well to reduce supply side risks.

The authors then argue that much potential is left untouched on the reduction of demand side uncertainties and control systems.

Demand side risks can be reduced by improving the information flow from the end-customer throughout the supply chain and companies can tackle control risks by improving their ability to act on this new information with a adequate Decision Support System.

Supply Chain Design Strategies

The authors then simulate a given supply chain and test strategies to improve (in figure 3) “Information pipeline time compression only”, “Material flow pipeline compression only”, “Total Cycle Time compression”.

Rating Risk Mitigation Strategies (click to enlarge; Mason-Jones and Towill 1998)

Conclusion

Even though the article has been published twelve years ago the concept of the Uncertainty Circle can still be used as a framework to reduce risks within a supply chain. The comparison table shows the effects of different risk mitigation strategies clearly and should adapted and used by more companies.

Reference:

Mason-Jones, Rachel, & Towill, Denis R. (1998). Shrinking the Supply Chain Uncertainty Circle IOM Control, 24 (7), 17-22

Craighead, C., Hult, G., & Ketchen Jr., D. (2009). The effects of innovation–cost strategy, knowledge, and action in the supply chain on firm performance Journal of Operations Management, 27 (5), 405-421 DOI: 10.1016/j.jom.2009.01.002

Hendricks, K., & Singhal, V. (2005). An empirical analysis of the effect of supply chain disruptions on long-run stock price performance and equity risk of the firm Production and Operations Managment, 14 (1), 35-52

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bullwhip effect

demand uncertainty

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mitigation strategies

network design

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Disruption-Management Strategies for Short Life-Cycle Products

Daniel Dumke — Sat, 10 Jul 2010 07:05:00 +0000

In his 2009 paper Brian Tomlin analyzes strategies to mitigate disruption risks in a three echelon supply chain.

Setting

Focus in his research is a single company, with its suppliers and customers. The objective is to maximize expected utility, while demand and supply are uncertain. There are two products available which can be used as substitutes. The time horizon for the decision maker is one season where the products can be sold.

Three different sourcing structures are considered.

Different sourcing structures (Source: Tomlin 2009)

Variables / Attributes of the SC

The following attributes in the supply chain are used as free variables and can therefore be modified:

Suppliers
- Supplier reliability
- Correlation between supplier failures
- Proportion of order cost charged in the event of a failure
- Relative cost of emergency supplier
Products
- Contribution margin
- Demand uncertainty
- Demand correlation
- Substitutability
Firm
- Risk aversion of the decision maker

Strategies

The effects of three major adaption strategies on the risk exposure / expected profit are tested:

Supplier diversification
adding another supplier to lower the overall risk for failure
Contingent sourcing
adding a supplier which is only used in case the main supplier fails to deliver
Demand switching
shifting customer demand to a different product

There is also the possibility not to engage in any activity and accept the risks.

Results

It is shown that contingent sourcing is the preferred strategy to supplier diversification for the firm, if the failure probability of the supplier increases. Furthermore, demand switching is an effective strategy for controlling demand risk and therefore is the preferred strategy with low supply risk.

Higher levels of risk aversion lead to a preference for contingent sourcing over the other strategies.

Conclusion

Tomlin shows viable and effective strategies to increase profit (utility) in supply chain settings with disruption risk. He therefore calculates the expected profits in different situations and uses the results to give suggestion for situational optimal strategies to mitigate these risks.

Reference:

Tomlin, B. (2009). Disruption-management strategies for short life-cycle products Naval Research Logistics, 56 (4), 318-347 DOI: 10.1002/nav.20344

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demand uncertainty

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Risks in Supply Chains for Small and Medium Sized Companies

Daniel Dumke — Sat, 19 Jun 2010 14:23:00 +0000

Large Cooperations often employ staff for supply chain planning and sometimes additional staff for supply chain risk management.

Small / medium enterprises usually have more limited resources and therefore have to focus more. For this reason M.N. Faisal developed a prioritization of supply chain risks.

Basis

The prioritization is based on a literature review (for the basic population) and expert opinion. The expert opinion is extracted by using a fuzzy AHP (Analytical Hierarchy Process). The basic procedure is for each expert to evaluate / compare pairs of risks on a 0 to 9 scale. This method is adjusted to include the fuzzy character of most decision processes.

Results

Faisal adapts the standard supply chain components (product-, financial-, information-flow) to categorize the risks. He also adds a relational category.

Enclosed you find the top three risks in each category: