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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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Simulation as a Tool for Supply Chain Optimization

Daniel Dumke — Wed, 27 Jul 2011 13:54:00 +0000

Sometimes I am really amazed by the research topics of others. Even though I already read much about simulation and its potential benefits, up to now I have never seen a analysis of supply chain simulation performance on a larger sample. So I would like to share those insights here.

Simulation method

In this paper the authors (Manzini et al.) used a visual interactive simulation (VSI) approach for five case studies. In this case VSI refers to a simulation model that can be directly manipulated by the user of the model during simulation. So for example the effects of a change in inventory levels could be viewed directly after the fact.

This approach therefore allows for quick testing of different scenarios and possible strategies for optimization of the supply chain.

Case example

The authors elaborate five different cases where they employed the above mentioned methodology. I will just highlight one case example here: A make-to-order producer of packaging systems for the pharmaceutical industry. The produced machines consist of a large number of different components, which are supplied by external suppliers. The authors build a model containing the 18 major suppliers, which supply overall 53 modules for the final product.

Figure 1: Case Study: Comparison of Module Lead Times (Manzini et al., 2005)

Based on the simulation model different measures have been developed to reduce lead times from the suppliers. Figure 1 shows the effects of those measures for each of the 53 components. The lead times could be reduced in nearly all areas.

Case analysis

As in any multi-case study after the description of the different examples a cross case analysis and synthesis is necessary to compare the results and draw further conclusions. In this case the author calculate five indicators for each case study which describes the effort for the simulation study and the resulting benefits:

General indicators of model complexity:

NE index is the number of entities used in the simulative model so as to describe the real situations that can occur; and

PT takes into account the programming time in terms of man-hours dedicated by the programmer to develop the model.

General indicators of model effectiveness:

SI is the saving index, defined as the ratio between savings forecast and costs of simulation approach; this is introduced to show the economic feasibility of the simulative model;

SCI, simulation costs index, is the ratio between simulation costs and plant modification costs required for the supply chain optimisation so it deals with the simulation’s economic weight in a complete project; and

RI, readiness index, is the ratio between the lead-time of the simulative approach and real project time extension; it measures the capability of the dynamic model to give rapid solutions to a problem.

Result

The above mentioned indices are then used to compare the different case studies concerning the effective and efficient use of the VSI simulation method within each of the settings.

Figure 2 shows the savings index of the companies which compares the savings the company could achieve using the selected measures versus the cost of the simulation (more is better).

Figure 2: Comparison of the Cases: Saving Index (Manzini et al., 2005)

Figure 3 shows the simulation cost index which refers to the cost of simulation versus the overall project costs for implementing the measures within the respective supply chain (less is better)

Figure 3: Comparison of the Cases: Simulation Cost Index (Manzini et al., 2005)

Figure 4 displays the readiness index. This describes the amount of time it took to execute the simulation versus the total project time necessary to make the changes (less is better).

Figure 4: Comparison of the Cases: Readiness Index (Manzini et al., 2005)

The authors conclude based on these results that the VSI method is very suited for deployment in a business setting.

Conclusion

The authors make a strong case for “their” simulation approach: visual interactive simulation and claim that it is especially useful from a cost / benefit point of view. Also the results in the cases are delivered quickly.

I would love to see another comparison including other simulation approaches, since at least from a theoretical point of view, the VSI is a very simplistic simulation method. There is no optimization selecting the best strategy from several alternatives, but the simulation modeler has to select and evaluate the “best” strategy by himself.

Nonetheless a simple approach has advantages from the complexity perspective. As always: Case studies are not representative, but should give a hint for further research, so go ahead and do some research!

Reference:

Manzini, R., Ferrari, E., Gamberi, M., Persona, A., & Regattieri, A. (2005). Simulation performance in the optimisation of the supply chain Journal of Manufacturing Technology Management, 16 (2), 127-144 DOI: 10.1108/17410380510576796

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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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Impact of Risks on Supply Chain Performance

Daniel Dumke — Mon, 25 Apr 2011 14:15:00 +0000

I am often astounded by the fact how many great articles I haven’t read yet. A good scientific paper contains an comprehensive description of the methodologies used, a theoretical foundation and literature review from which hypothesis are drawn, which are then confirmed or rejected in the course of the paper. And of course, it is always a plus to actually find some results in the course of the analysis.

From this category I would like to introduce an article by Wagner and Bode (2008) on an empirical examination of supply chain performance along several dimensions of risk. The complete article is defnitly worth a read and can be found here (free of charge).

Introduction & Hypothesis

The authors start by highlighting the major factors involved in the importance of supply chain risk management nowadays: There has been an upward trend in crisis and catastrophes, at least on the level of media coverage and awareness. Furthermore modern supply chains have been optimized for leanness in recent years, leaving them more exposed towards risks.
To decide on the the possible investments on mitigation strategies, a supply chain manager needs to know the probability of an adverse event and the effect of the disruption on supply chain performance.
Hendricks and Singhal (reviewed here 1, 2) already concluded, that SC risks can have severe consequences on performance and the stock price.The goal of this article was to establish a more direct link between what risks affect the performance most. The authors build their hypothesis building on contingency and strategic choice theory, arguing that the environment is a major determinant of business performance, nonetheless managers still can make “strategic choices” to improve performance. Of course this sounds like common knowledge, and it is, but it is essential from a scientific point of view to root his own ideas in a foundational theory.

Using a literature review the authors decide on the following risks to include into their research: (1) demand side; (2) supply side; (3) regulatory, legal and bureaucratic; (4) infrastructure; and (5) catastrophic.
From these risks five hypothesis emerge, following this structure:

H₁: The higher the demand side risk, the lower the supply chain performance. …

Methods

In contrast to Hendricks and Singhal, who analyzed the impact on the level of stock prices and public company performance data, Wagner and Bode conducted a survey with a final sample size of 790 supply chain professionals from companies located in Germany. Non-response bias has not been found. The questionnaire has been carefully designed, for each hypothesis multiple measures were included. E.g. demand side risk measures consisted of two items that capture the risk deriving from the interaction (or lack thereof) with customers and volatility of the market. The results were analyzed using correlation analysis and reliability evaluations

Results

The results show that in the view of the experts demand and supply risks have an impact on supply chain performance, whereas there is no significant relationship between regulatory, infrastructure and catastrophic risks and supply chain performance.

Results of Correlation Analysis (Wagner and Bode, 2008)

On first sight these results stand in contrast to the results of Hendricks and Singhal, where a huge impact of any disruption on performance has been encountered. This can be explained by the different focus of the analysis, where Wagner and Bode took a sample from all companies, which naturally only seldom experience severe disruptions whereas Hendricks and Singhal especially picked the larger (and worthy of a public announcement) disruptions. So a catastrophic event still has a negative impact on the sample group, but since the probability is so low it does not pose a significant impact on performance.

The managerial implications therefore are:

Importance of a supply chain risk management framework
Scarce resource should be deployed to mitigate the “every day” risks from supply and demand

Conclusion

This article also concludes as a text book example of “how to write a scientific paper”, it finishes with recommendations for the implementation of the results and further research gaps and still leaves something to say for critics like me:

It is very interesting to see the findings by Hendricks and Singhal in a new light, from the point of view of a supply chain professional.
But this study also points the perception of risks (have a look Part 1 and Part 2) as a major driving factor in these results.
Wagner and Bode also discuss the factual risk situation in the sample companies (all from Germany), which probably skews the results. All the risks mentioned might be (perceived or real) quite different in other countries.

Reference:

Wagner, S.M., & Bode, C. (2008). An empirical Examination of Supply Chain Performance along Several Dimensions of Risk Journal of Business Logistics, 29 (1), 307-325

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Risk, Information and Incentives in Telecom Supply Chains

Daniel Dumke — Wed, 09 Feb 2011 16:26:00 +0000

Supply chains risks can also be analyzed in a specific industry context and this is exactly what Agrell et al. (2004) did with telecom supply chains. They used a three tier SC (2nd tier supplier, EMS, OEM) to include the selection, coordination and motivation of independently operating suppliers in the model.

In terms of risk handling and sharing the telco industry is to some extent unique as well; there are several possible complications, like

differing business logic in the different stages,
individual relations between revenue and product life cycles
design of products and processes and
a lack of effective incentive structure to induce global supply chain optimization promotes the opportunistic and myopic behavior of the chain firms.

Figure 1: Historical Development within the Telco Industry (Agrell et al., 2004)

Telco Industry

The telco industry can be described using the following dimensions.

Figure 2: Diverging Business Logic in the Telco Industry (Agrell et al., 2004)

Demand uncertainty
- Level
- Timing
Changing Roles
- Outsourcing
- Unclear Interfaces
Growth vs. Consolidation
- Shifting power balance due to consolidation at supplier level
Heterogeneous Business Logic (see Figure 2)
- The cost and revenue functions are different

Model

The authors developed a three stage model with the 2nd tier supplier (for components), the EMS (Electronics Manufacturing Services Provider) and the OEM (Original Equipment Manufactur) in focus (gray box in Figure 3).

Figure 3: Base Supply Chain Model (Agrell et al., 2004)

The experiments with the model take place using a two period time horizon. The OEM tries to maximize the profit over this period.
Knowledge about the system is explicitly divided between the participants: Common knowledge: current demand, Supplier: its cost function and investment opportunities.
Information can be shared: The OEM can send a forecast to its suppliers and it sends order quantities for the first and second period to its suppliers.
The following alternative scenarios are then compared:

Centralized model
OEM coordinates with asymmetric information
Coordination by EMS

Results

The differences between the scenarios are quite low, nonetheless the following conclusions can be drawn:
The performance of the supply chain as a whole may be undermined by the shifting positions of bargaining strength (towards the suppliers).
And the model shows furthermore that simple price-quantity-only coordination (without long-term contracts) as some shortcomings which leads to reduced performance as well.

Conclusion

One question the article did not answer: Why specialize on the Telco industry? The above mentioned description of the industry might fit on others as well, so it would have been more straight forward to develop the model based on the abstract scenario description and use the telco industry as a case study.
Contrary to the description, the model is basically a four-tier model. Since also the customer of the OEM is taken into account as the final source of demand.
But in my view what stands out is not the number of tiers in the model, but the very explicit modeling of the knowledge distribution. Many papers only take a very brief detour on the knowledge that each participant has, or leave it out entirely. But not only for the quality of the model, but also its reproducibility it is important to take the information distribution into account.

Reference:

Agrell, P., Lindroth, R., & Norrman, A. (2004). Risk, information and incentives in telecom supply chains International Journal of Production Economics, 90 (1), 1-16 DOI: 10.1016/S0925-5273(02)00471-1

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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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Merger Success and Supply Chain Integration

Daniel Dumke — Mon, 17 Jan 2011 13:34:00 +0000

What are the major obstacles to a successful merger? Today I’ll have a look at the 2003 article by Langabeer and Seifert. The authors argue that supply chain integration plays a major role before, during and after the merger.

Why is the Supply Chain Key?

The authors start by making the case for the supply chain as one of the major drivers of financial performance in a company. After analyzing quantitative data from 400 mergers during a ten-year period, exploring relationships between mergers, finances, and supply chain performance, the authors conclude that

Finding 1: Supply chain effectiveness drives financial results.

Supply Chain Integration and Merger Success

Furthermore, their data shows that the faster the company is able to integrate the new infrastructure, processes, systems, and people into the supply chain organization, the faster it will stabilize and show better results.

Finding 2: Integration is essential to post-merger success

Using a case study of Unilever they find that the supply chain integration effort needs to focus on certain key activities. These include:

Focus on the customer and on execution
Identify the dominant supply chain leader and organization
Conduct a final assessment of the processes, systems, network, people, and strategy
Establish clear execution and performance targets
Establish and continuously monitor an integration timeline

Supply Chain Participation in the Merger

The case data also shows that the early integration of supply chain management in the merger process can improve the outcome of the merger.

Finding 3: Supply chain participation in the merger process is essential

They pose a number of strategic questions which have to be answered beforehand:

What is the overall strategy and operational characteristics for the merged supply chain?
Is demand for the products of the two companies similar in pattern and volume?
What is the available capacity in terms of manufacturing, transportation, and warehousing assets?
How do the supply chain performance measures align?

Conclusion

In the paper I was missing a better description of the methods used to acquire findings mentioned. Of course the methodology is not always the most interesting part of a scientific paper, but leaving it out significantly diminishes the credibility, let alone the reproducibility of the results.

But the tenor of the paper is very convincing: Supply chain management should be included in all steps within the merger process to improve the success rate.

Reference:

Langabeer, J., & Seifert, D. (2003). Supply Chain Integration: The Key to Merger Success Supply Chain Management Review

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Supply Chain Disruptions and Operating Performance

Daniel Dumke — Wed, 12 Jan 2011 09:39:00 +0000

I just realized, that up to now I have not written much about why Supply Chain Risk Management should be an important factor many more companies.

Hendricks and Singhal wanted to understand this as well and researched on what effect a missing supply chain risk management can have on a company’s performance. They therefore started a research series, the first article was on the “Effect of Supply Chain Glitches on Shareholder Wealth” (mentioned here). And today I have a look at their second article in this series: “Association between Supply Chain Glitches and Operating Performance”.

Introduction

The authors conducted an empirical study to learn more about the relationship between supply chain glitches (which are defined as supply exceeding or not meeting demand) and operating performance of the company.

Negative Impact of Glitches

First it is important to think about how supply chain glitches work and why the can have negative impacts on different parts of the company and its supply chain:

Demand Side
- short and long-term loss in sales
- market share
- lower sales price
- oportunity costs of unavailability of products
- customer service (dissatisfaction, lower loyalty)
- reputation / credibility
Cost Side
- expediting
- premium freight
- obsolete inventory
- additional marketing
- penalties paid
- increase public relation expenses
- capital cost
Assets
- productivity
- utilization of assets (over- or underutilization)

Methodology

A sample of public announcements is analyzed for supply chain glitches. 885 glitches are identified and on that basis the performance during a period before (4 quarters) and after the glitch (8 quarters) is assessed for effects of the glitch. A typical glitch announcement looks like this:

“Apple Computer Inc. Cuts 4th-period Forecast Citing Parts Shortages, Product Delays,” The Wall Street Journal, September 15, 1995.

Hypothesis and Results

The following hypothesis are then tested using available data:

Supply chain glitches will be associated with a decrease in profitability
Supply chain glitches will be associated with a decrease in net sales
Supply chain glitches will be associated with an increase in costs
Supply chain glitches will be associated with negative asset and inventory performance

Single firm performance is compared to a peer company before and after the glitch.
The analysis reveals that before the glitch operating income is down by 107%, return on sales is down 114% and return on assets down by 93%.
After a glitch the authors found that the changes in operating income, sales, total costs, and inventories are insignificantly different from zero.

Conclusion

Hendricks and Singhal also provide an interesting statistic on the responsibilities for the glitches, on the top: internal (then customers and suppliers). This might indicate a priority for supply chain risk management as well: a reduction in internal errors and disruptions can have a huge leverage on company performance.

Reference:

Hendricks, K.B., & 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

Hendricks, K., & Singhal, V. (2005). Association Between Supply Chain Glitches and Operating Performance Management Science, 51 (5), 695-711 DOI: 10.1287/mnsc.1040.0353

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Effective Performance Management

Daniel Dumke — Mon, 03 Jan 2011 15:05:00 +0000

Aviation and steering a company can be viewed as somehow alike. At least this is the starting point for the article by Srinivas (2009) reviewed today.

Aviation Analogy

But unlike companies a pilot has some advantages: a clear starting point, a given destination, he knows on which path to get there, he knows anytime if he is off course and he also knows how to get back on track.

Company as a staggering Airplane

On the other hand within a company you have a hard time defining those parameters:

Starting Point
There is a distorted view on the company, enhanced by a myopic financial view, financial reporting that draws a misleading picture and reward systems that drive people to overstate the current status

Destination
Often there are more goals than employees and the missing alignment of reward system with goals leads to further problems

Path to get there
The goals seldomly translate into a clear path that provides the employess with guidance to reach the destination safely, and most of all: nobobdy is expecting variation to the path!

Agile Course Correction
Is this difference because of poor strategy and planning or poor execution, furthermore there is usually a (unknown) delay between cause and effect

Solution

So the solution seems straightforward:

Starting Point
It is very important to understand the current reality, else you cannot know what direction to go
Destination
It is recommended, that you take current reality into account when setting the destination, keep a long term view and select appropriate indicators for evaluating the performance
Path
Set a clear path (or strategy), eg. deeper market penetration or extending market reach
Variations
Compare the performance over a longer time horizon, use the variation as a means to improve the underlying process/system and use them as an input for an agile course correction
Agile Course Corrections
Increase the frequency of tracking performance against plan and compare performance against the 5 to 7 year goal and not quarter to quarter or year-to-year as this tends to give a myopic view of performance. Furthermore, keep the focus on the few key performance indicators and integrate agile course correction into the organization’s culture.
Alignment
To align the goals of the company to the goals of the employees use the following strategies: Clarity, Communication, Resource Allocation, Reinforcement

Conclusion

Of course there is no easy solution for the problem of steering a company, but the Srinivas (2009) provides categories to analyze your own performance and make adjustments to arrive at your selected destination.

Reference:

Srinivas, S. (2009). Effective Performance Management Journal of Business Logistics, 30 (2), 85-100

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Leading by Design

Daniel Dumke — Mon, 06 Dec 2010 15:26:00 +0000

Is there consensus about the role of product design as the leading function in the supply chain? Not yet! This article introduces the topic of integrating decisions in product and supply chain design and gives a short glimpse on the “how to implement” part.

Case study

During the last weeks I conducted the following case study on the impact of product design on supply chains using literature and expert interviews, looking for an answer to the basic question: What are the advantages of integrating product design into your supply chain decisions?

European retailer for furniture

Supply chain management starts with the product design. They are using this integration to reduce cost but also carbon emissions. One example, the packaging they use is designed for the specific transportation requirements so that efficiency is raised.
Marks & Spencer, UK
Are using their product design as an integrated part of its overall risk management. Apparel design is also leading procurement decisions (see reference for more information).
Big European food company
Product design is lead my marketing function. Supply chain design is guided by those decisions.

Research

In the literature Khan et al. 2008 also take the view that product design and supply chain design should be integrated more to improve overall results. They first state that product design is usually neglected in corporate risk management. To minimize risks the authors recommend to establish “design led procurement” and “design-led risk management” to improve agility, relationships with suppliers, while on the other hand avoiding over dependence.

How To

Fixson (2005) introduces a framework for an integrated decision making of product, process and supply chain decisions. Decisions taken within those three domains depend on six different product characteristics:

Product modularity
Component complexity
Loosely coupled interfaces
Number of components
Product platforms
Component commonality

Product Characteristics Impacting (constraining and enabling) Design Decisions in Product, Process, and Supply Chain Domain (Fixson, 2005)

He argues that the more interfaces exist between product components the higher the complexity not only in the production processes but also within the supply chain design. This framework however can be used as,

a guideline to focus on design decisions critical for the product and company under consideration; [… it can help to] explore the advantages and limitations of various operational strategies for given product architectures [… and] to improve a company’s strategy planning capabilities over time.

Conclusion

From systems theory it should be obvious that integrating decision making should lead to better results than decisions in separate functions. But the mentioned examples are only a skewed sample to emphasize the point: Yes, it makes sense to integrate product development. But the implementation has to be thoroughly planned.

Reference:

Khan, O., Christopher, M., & Burnes, B. (2008). The impact of product design on supply chain risk: a case study International Journal of Physical Distribution & Logistics Management, 38 (5), 412-432 DOI: 10.1108/09600030810882834

Fixson, S. (2005). Product architecture assessment: a tool to link product, process, and supply chain design decisions Journal of Operations Management, 23 (3-4), 345-369 DOI: 10.1016/j.jom.2004.08.006

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Measuring Supply Chain Performance

Daniel Dumke — Mon, 22 Nov 2010 12:47:00 +0000

Last week I conducted another Interview for the empirical part of my research. And we also discussed how to measure performance within the SC. As it turns out, multiple measures, namely service, cost, working capital are used. Sadly in literature many authors still focus on a single measure only and I wanted to know more about it. So I read an article by B. Beamon (Measuring Supply Chain Performance) to get an overview over performance measures used and how to select the right one(s).

History of Supply Chain Performance Measures

Supply chains consist of many different companies and within those, various functions. So first measures have relied on characterizing individual systems like production, distribution, or inventory management. In literature the measures have often been categorized into aspects of quality, time, flexibility, and cost.

But most often cost is used as an only measure or cost and another measure for customer responsiveness is applied. Other more qualitative measures, like customer satisfaction or concerning risk management, are seldom used due to their restricted applicability in quantitative models.

Measures are generally thought of being effective if the following characteristics are fulfilled:

inclusiveness (measurement of all pertinent aspects)
universality (allow for comparison under various operating conditions)
measurability (data required are measurable) and
consistency (measures consistent with organization goals)

Performance Management System

The last bullet point highlights another topic: It is also important not only to focus on the measures used, but also to reflect on the performance measurement system as a whole. Especially, it is important to consider the effects of a specific corporate strategy on the performance measures used. Thus there are several caveats when evaluating options for performance measures:

If using only one performance measure make sure that it can adequately describe the performance of the system in focus.
When using cost as (only) measure, be careful to include all necessary costs in the calculation. Pitfalls include cost of obsolescence or rework due to engineering changes
Align performance measures with the strategic goals

Framework

Individual performance measures are usually non-inclusive so the goal for a performance management system should be to include more aspects. Beamon suggest to focus on measures for resources ®, output (O) and flexibility (F) (see figure 1 and 2).

Figure 1: Framework for Performance Measurement (Beamon 1999)

Figure 2: Framework Supply Chain Measurement System (Beamon 1999)

Examples for resource measures are: total cost, distribution cost, inventory cost.

Output can be measured quantitatively as number of items produced or number of on-time deliveries or profit; alternatively qualitative measures like customer satisfaction or quality can be used.

Flexibility is harder to measure, Beamon details on a quantitative approach for measuring it, focussing on volume, delivery, mix and new product flexibility.

Different Aspects of Flexibility (Beamon 1999)

Conclusion

The use of simple performance measures is tempting, since simple measures are more easily implemented into numerical models; however, by limiting the scope of the performance measurement, these models ignore important performance trade- offs.

So it is obviously important to focus on meaningful measures. While reading the article I didn’t quite understand the authors relation to profit as a performance measure. Return on Investment for example is listed under the category cost-measures, profit itself is listed under output. Neither is really correct if you define profit as revenue minus cost since, profit affects both sides, resources and output.

Reference:

Beamon, B. (1999). Measuring supply chain performance International Journal of Operations & Production Management, 19 (3), 275-292 DOI: 10.1108/01443579910249714

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Strategic Supply Chain Management @CSCMP 2010

Daniel Dumke — Mon, 27 Sep 2010 15:04:00 +0000

Yesterday I finished the “Strategic Supply Chain Issues” Pre-Conference Workshop “Where Tactical Functionality Meets the Big Picture”. The following key points were intensively discussed:

Fundamental SC Strategies: Operational Excelence (eg. Walmart), Customer Intimacy (like Zara) and Product Leadership (example: Apple)

A broad view on customers has been propagated, customers equal stakeholders
Lean SCM, premise: Thinking of inventory as being without (direct) value for the customer, a strong focus on flexibility and inventory reduction therefore is necessary
Introduction to the method of value stream mapping for Supply Chain Analysis as a Basis for Supply Chain Design
Supply Chain Design: The network should be checked permanently for necessity of change
As the subtitle of the workshop suggests the right communication of the strategy is of the utmost importance. The optimal balance between short term actions and long term strategy have to be sought (without being disaligned)
Importance and categorization of Collaborations (Vendor-Buyer, Focussed, Partnership, Alliance)
Planning (S&OP)
SCM Metrics
SCM Future

But of course there are many, many more things. A really new thing I learned about the definition of core competency:
It’s the “capability to kick their ass”.

Disclaimer: The experiences described here do not necessarily reflect the my views and I haven’t found a singled peer reviewed reference. But that’s business, isn’t it?

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