risk mitigation

The organizational Antecedents of a Firm's Supply Chain Agility

Daniel Dumke — Wed, 24 Aug 2011 12:54:00 +0000

This time I’d like to have a look at supply chain risk management from a strategic point of view: What are the prerequisites in the design and culture of an organization to mitigate supply chain risks? The title of the article I review today is: “The organizational antecedents of a firm’s supply chain agility for risk mitigation and response”.

Method

The authors use structural equation modeling technique to establish the relations within their model (figure 1).

Figure 1: Relationship Model (Braunscheidel and Suresh, 2009)

The model proposes a linkage between the organizational orientation of a company related to the market and continuous learning. Those design factors should lead towards internal and external integration of the company and its supply chain as well as external flexibility as practices within the organization. This in turn should lead to agility, which is defined as

the capability of the firm, internally, and in conjunction with its key suppliers and customers, to adapt or respond in a speedy manner to a changing marketplace, contributing to agility of the extended supply chain.

Agility is measured by the proxies: joint planning, demand response, increased visibility and customer responsiveness.
The authors augment their model by several proposed relationships / hypothesis shown in figure 2.

Figure 2: Augmented Model with proposed Relationships (click to enlarge; Braunscheidel and Suresh, 2009)

As the method of choice to validate or reject the established hypothesis a survey was created and validated by a panel of ten experts from research and business. Of a sample size (email addresses) of 2955, 218 usable responses were received.

Results

The final results for each hypothesis is shown in figure 3. The hypothesis regarding the relationship between learning orientation and internal and external orientation were not supported as were the hypothesis on the relationship between internal and external integration and internal and external flexibility.

Figure 3: Results (Braunscheidel and Suresh, 2009)

Nonetheless the authors can conclude:

All three organizational practices of internal integra tion, external integration and adoption of external flexible practices were found to be direct antecedents of a firm’s supply chain agility, explaining a significant portion of the variance in the FSCA construct. Among these three antecedents, external integration with key suppliers and customers was seen to be the strongest predictor of a firm’s supply chain agility.

Also the cultural antecedents are shown to have an impact on the organizational practices.

Of the cultural drivers, market orientation was seen to directly affect both types of integration. […] Learning orientation was shown to have a strong and significant influence on internal integration.

Conclusion

I think the article highlights several important aspects. Coming from the supply chain strategy it summarized different organizational practices / tactics which have to be implemented to create a agile company in the supply chain context. The authors do a good job in operationalizing these different states / activities and therefore define quite precisely what they mean by the cultural antecedents, practices and agility.

On the other hand after reading the title (”… agility for risk mitigation and response”) I was expecting some more research on the connection between a companies agility and the reduction of risk, but it seems that the impact of the firm’s supply chain agility was not part of the main survey but “only” elaborated in the literature review.

Reference:

Braunscheidel, M., & Suresh, N. (2009). The organizational antecedents of a firm’s supply chain agility for risk mitigation and response Journal of Operations Management, 27 (2), 119-140 DOI: 10.1016/j.jom.2008.09.006

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agility

culture

design

risk mitigation

supply chain

sc design / strategy

Single or Dual Sourcing

Daniel Dumke — Mon, 04 Jul 2011 14:10:00 +0000

Today there is only one simple question: Single or dual sourcing, what strategy should be used when faced with disruption risks.

Definitions

There are four different approaches to sourcing sole, single, dual and multiple sourcing. Sole sourcing refers to a scenario where there is only one supplier in the supplier base, whereas single sourcing refers to the conscious decision to select one, single supplier out of a choice of suppliers. The dual sourcing model indicates that two suppliers are used (not necessarily at a comparable share). As the name says with multiple sourcing, multiple suppliers are selected, depending on the price or another criteria. The paper presented here focusses on single and dual sourcing only.

Model

The authors (Yu, Zeng and Zhao) make use of a mathematical model which contains a two echelon supply chain with two suppliers. One of the suppliers (main supplier) is located offshore (long lead times) and prone to disruptions, but on the other hand less expensive. The second supplier is located locally, but more expensive. Therefore there are three different sourcing alternatives: single sourcing of the main or the secondary supplier or alternatively dual sourcing with both suppliers.

Demand in the model is correlated with the price and stochastic.

Results

For each of the sourcing strategies the authors prepare and compare the profit equations. As a result the authors conclude that there are two critical disruption probabilities at the main supplier: p₁^c and p₂^c (p₁^c2^c) which build a frame for three different cases:

Case 1: the disruption probability of the main supplier is less than p₁^c then it is optimal to only source from the offshore main supplier.
Case 2: p₁^cdisruption 2^c, then it is optimal to source from both sources
Case 3: the disruption probability is larger than p₂^c, then it is optimal only to source from the reliable, local supplier.

Figure 1 shows the three cases.

Figure 1: Profit vs. Disruption Probabilities (Yu et al., 2009)

Conclusion

Of course the formulas in the model could be used to calculate the above mentioned probabilities and then compare them to the current disruption probability to decide on the optimal strategy. But this would probably lead to wrong results, since the model contains many assumptions that are probably not met in your case study. But the intension of the model is clear: To highlight that depending on the probability of a disruption it, not only can be optimal to have dual sourcing but also to completely switch to a more reliable supplier to optimize profits.

Reference:

Yu, H., Zeng, A., & Zhao, L. (2009). Single or dual sourcing: decision-making in the presence of supply chain disruption risks Omega, 37 (4), 788-800 DOI: 10.1016/j.omega.2008.05.006

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Model for Optimal Regulation for Risk Reduction

Daniel Dumke — Mon, 06 Jun 2011 13:54:00 +0000

As in several of my former posts (1, 2, 3, 4, 5, 6) sometimes I deviate a little from the extreme focus on supply chain risk management, to think about related topics, like today, where I want to highlight the effects of regulation to minimize risks. This article was already written in 1984 by Steven Shavell and it can be downloaded at Harvard University.

Study background

The author, Steven M. Shavell, is a law professor at Harvard law school and associated with the theory of Welfarism.

In his 1984 paper with the title “A model of the optimal use of liability and safety regulation”, he elaborates on the question of how a society should optimally enact legislation to reduce risks on a societal level.

Liability or safety regulation

The model considers accident risks. The two means for reducing this risk, which can be used by legislators, are to a) establish binding safety regulation (e.g. safety standards) or b) establish penalties for liabilities apart from the safety regulation.

Model

Shavell disproves the term “judex non calculat” (judges don’t do math), and establishes a mathematical model with the parameters

level of care (x),

probability of an accident (p(x)) and

the magnitude of harm contingent on the accident happening (h)

Results

The author shows that the level of care with only liability as a measure is in general restricted by the assets of the company and lower then the optimal care (see figure 1).

Figure 1: Level of Care when using only Liability as Risk Mitigation Strategy (Shavell, 1984)

The resulting care under optimal regulation is on the other hand restricted by the likelihood of being caught of non-compliance and the assigned penalties. The comparison of the two measured is displayed in figure 2.

Figure 2: Level of Care when using only Safety Regulation as Risk Mitigation Strategy (Shavell, 1984)

Since both measures do not show optimal results Shavell suggests a combination of both strategies to mitigate the risk and shows that this solution is superior to a single strategy approach in all cases (see figure 3).

Figure 2: Level of Care when using a combination of Safety Regulation and Liability as Risk Mitigation Strategies (Shavell, 1984)

Conclusion

What we see in most societies that there already exists a combination of both measure to reduce the risk of accidents. In most companies liability is still upheld even if current security standards are met. The paper therefore puts emphasis on the point of that both measure should be considered as basis for new legislation.

The paper can also be used to analyze the current state of the art in accident prevention in different legislation systems or industries and deduce findings for further legislation.

Two examples:

Germany has a huge emphasis on setting security standards, whereas on the other hand corporate liabilities compared to many other countries is fairly minimal.

Due to their high impact of nuclear catastrophes the nuclear power industry has a risk of high liabilities. This risk on the other hand is restricted by the fact that, if an accident happens the cost often outweigh the assets of the company leading to a default. Therefore sole reliance on the liability mitigation probably does not have a huge effect on the security level. As a result legislation has to emphasis the security standards to achieve an adequate level of care.

Reference:

Shavell, S. (1984). A Model of the Optimal Use of Liability and Safety Regulation The RAND Journal of Economics, 15 (2) DOI: 10.2307/2555680

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risk mitigation

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