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Researchers’ Perspectives on Supply Chain Risk Management

Daniel Dumke — Mon, 23 Jul 2012 12:36:48 +0000

The article on review today serves two distinct needs, by summarizing the current (2012) state of supply chain risk management.
The title of the article implies, that this is only a summary relevant for researchers. But this is not the case: of course there is also a short summary of current research and supply chain risk management, but a major part consists of two focus groups with practitioners and researchers, to define the current gaps in supply chain risk management.

The full length article can be found here.

Objective and methodology

There is a huge diversity in the topics, opinions, and research methodologies in the field of supply chain risk management. This is only natural, since research in supply chain risk management is still in a very early stage.

However it helps, once every couple of years, to summarize the current state-of-the-art and to categorize the most influential thoughts. These summaries help to focus research efforts and guide them within predefined bounds.

The goal of the authors is to examine the diversity in scope and research tools. For this the authors use three steps:

carry out direct observations of the researchers’ output (literature analysis);
gather evidence through surveys of focus groups of researchers aided by open- ended questionnaires; and
seek confirmation and additional information through a formal survey of a large group of researchers.

Results: diversity in scope and research tools

Figure 1 summarizes some of the most often used definitions for supply chain risk. The listing shows that there is still a large variety in definitions of risk.

Figure 1: Literature: Research Definitions for Supply Chain Risk (Sodhi, Son, Tang, 2012)

Figure 2 highlights different research methodologies which are employed in literature. As you can see a large proportion is focused on conceptual work.

Figure 2: Literature: Methods employed in Literature (Sodhi, Son, Tang, 2012)

Results: definition gap

The authors presented three open-ended questions to a practitioners’ focus group.
The first question was: what is supply chain risk management?
Figure 3 summarizes the results highlighting the fact, that most practitioners see supply chain risk management concerned mostly with the variations of supply and demand.

Figure 3: Practitioners: What is Supply Chain Risk Management? (Sodhi, Son, Tang, 2012)

The second question revolves around the classification of supply chain risk management in regards to other management areas. For most respondents SCRM is seen as a subset of supply chain management.

Figure 4: Practitioners: How does SCRM relate to SCM? (Sodhi, Son, Tang, 2012)

The answers to the last question shows that supply chain risk management is also seen as a subset of the enterprise risk management (ERM).

Figure 5: Practitioners: How does SCRM relate to Enterprise Risk Management? (Sodhi, Son, Tang, 2012)

Results: research survey

Building on the prior results, the authors conducted a small survey using seven questions/statements regarding the current state of supply chain risk research.
Figure 6 lists the questions.

Figure 6: Researchers Questionnaire (Sodhi, Son, Tang, 2012)

As you can see the questions are mostly normative, looking for answers on how things should be.

The results therefore are meant to close the gaps.
According to the survey supply chain risk should be concerned with dealing with unknown, disruptions/disasters/low probability, high-impact events (figure 7).

Figure 7: Researchers: Definition of Supply Chain Risk Management (Sodhi, Son, Tang, 2012)

There still is an agreement towards the process Gap, even though it is not as pronounced. The answers however are not very clear as well (better foundation of SCRM, closer industry collaboration and case-studies, better way to publish and share research).

Figure 8 collects the answers to the question on how the methodology gap should be remedied.

Figure 8: Researchers: How should the Methodology Gap be addressed? (Sodhi, Son, Tang, 2012)

The focus should still be on qualitative empirical work (case studies and similar methods) to gather more insights about supply chain risk management practices first.

Conclusion

Supply chain risk management has been around for about one decade now. Considering the complexities of the field it has had a good start up to now. It is only natural that there are still many missing pieces that have to be found and linked together to generate a comprehensive picture of supply chain risk in a descriptive and normative way.
Supply chain risk management is not always established as a distinct function/department in companies. So it seems that businesses do not agree on how to integrate supply chain risks into their decision-making processes. It shouldn’t come as a surprise that descriptive research in supply chain risk management leads to a huge variety of results.

If you want, you can learn more about Practitioner Views on Supply Chain Risk Management.

Reference:

Sodhi, M.S., Son, B-G., & Tang, C.S. (2012). Researchers’ Perspectives on Supply Chain Risk Management Production and Operations Management, 21 (1), 1-13

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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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Supply Chain Resilience: Development of a Conceptual Framework, an Assessment Tool and an Implementation Process

Daniel Dumke — Wed, 01 Jun 2011 12:54:00 +0000

This is the sixth contribution to my series on doctoral dissertations on supply chain risk management. An immense effort and dedication is spent on these works only to find the results hidden in the libraries. So the goal is raise interest in the research of my peers.

Author / Topic

This dissertation was written by Timothy J. Pettit and published as his doctoral thesis at The Ohio State University, Columbus, USA in 2008. It can be downloaded here.
I have already seen his presentation of the results in 2010 at the CSCMP conference in San Diego together with Joseph Fiskel. His current employer is still the US Airforce, now as Assistant Professor of Logistics and Supply Chain Management.

The title of his thesis is:
Supply Chain Resilience: Development of a Conceptual Framework, an Assessment Tool and an Implementation Process

Summary

In his dissertation Pettit develops a framework and processes to improve implementation of resilience into supply chains. His thesis is devided into three parts:

Development of a supply chain resilience framework, based on literature and focus group workshops. The building blocks “vulnerabilities” and “capabilities” emerge as main dimension (see figures below).
Building on this framework Pettit creates an assessment tool (SCRAM) and tests the tool with seven global manufacturing supply chains, by evaluating their current state.
In this part critical links between vulnerability and controllable capabilities are identified and analyzed.

I will not quote the whole dissertation here. But I want to show two graphics from his work highlighting the relationship between capabilities, vulnerabilities and resilience.
Figure 1 shows the first proposition and basically the operationalized definition of resilience: When vulnerabilities decrease and capabilities increase resilience increases.

Figure 1: Measuring Resilience using Capabilities and Vulnerabilities (Pettit, 2008)

Since capabilities are usually costly and vulnerabilities often fixed, figure 2 suggest that there is an optimum balance of capabilities and vulnerabilities in the Zone of Balanced Resilience.

Figure 2: Zone of Balanced Resilience (Pettit, 2008)

Finally, Figure 3 finally presents the combined framework.

Figure 3: Supply Chain Resilience Framework (click to enlarge; Pettit, 2008)

Conclusion

As with Tomlin’s thesis the dissertation is split into three separate parts which are cumulated into the thesis.

Resilience is a necessity if you agree that some risks are just not forecast-able and hedge-able by traditional means. Overall Pettit designed a great way to assess resilience, and this is definitely not just an academic discussion, for businesses it is equally important to measure resilience to, a) be up to date about improvement activities and b) being able to get these activities started in the first place by showing improvement potential:

Although further validation is required, managers should be encouraged to make the minimal investment required to determine their current state of resilience and compare their strategy with the resilience fitness space.

Reference:

Pettit, T.J. (2008). Supply Chain Resilience: Development of a Conceptual Framework, an Assessment Tool and an Implementation Process The Ohio State University, Dissertation

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Learning from the Military how to handle Disruptions

Daniel Dumke — Mon, 02 Aug 2010 08:45:00 +0000

Disruptions are a fact of life not only since the Supply Chain literature gained awareness of it. So some institutions in fact specialized on handling disruptions as their core competency.
The article “Responding to Disruptions in the Supply Network – from Dormant to Action” tries to transfer the knowledge and best practices present at the military and humanitarian organizations to Supply Chain Management.

Methodology

The authors (Kovács and Tatham) are using case research and a resource based view to find common patterns in military and humanitarian practices to efficiently and effectively act on disruptions.

Military vs. Humanitarian Organizations

The authors find three decision categories common to the two institutions: Physical Capital, Human Capital, Organizational Capital.

Capital	Military	Humanitarian Organizations
Physical Capital	Relative abundance of materials and equipment due to focus on preparation “just in case” Internal resources: importance of individual ownership Location in country of origin or at allies’ site	Lack of own materials External resources: focus on supplier relations (vendor managed inventory, capacity reservation systems), postponement of ownership Pooling of resources Location close to disaster-prone areas
Human Capital	Emphasis on own training of personnel Focus on the knowledge of the doctrine	Mapping potentially available personnel from other organisations In-sourcing personnel from external resources Focus on local knowledge
Organizational Capital	Command and control structure Focus on hierarchy Codified internal processes (doctrine) Limited interoperability	Case-based structure (disruption / programme based) Establishment of common standards Co-ordination with other actors

Results

The article identifies two states for the observed institutions: During times without disruptions they are dormant and only when a disruption occurs they come to action. Though preparation for the “action” phase is very important.
The Military and Humanitarian Organizations exhibit distinct approaches to it.

The Military uses a strong asset focus (acquisition of equipment, training personnel, abundance of internal resources) at the same time they keep a high inventory level and have a rigid command-and-control structure within their organization.

Humanitarian Organizations often specialize in a specific type of disaster, region or type of material. The “Human Capital” is seldomly trained extensively and most often only held in a loose connection to the organization. From the organizational point of view they focus on a strong local presence and, due to the limited resources, focus on postponement (decide on purchasing orders as late as possible), therefore Physical Capital is often local and low.

Conclusion

Supply Chain managers and researchers can learn from both cases alike. The major difference is the resource position from which one acts. Therefore the first step for a company must be to assess the resources available to act on disruptions as soon as they occur.

Reference:

Gyöngyi Kovács, & Peter Tatham (2009). Responding to Disruptions in the Supply Network from dormant to action Journal of Business Logistics, 30 (2), 215-229

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AMR announces Supply Chain Ranking 2010

Daniel Dumke — Fri, 04 Jun 2010 16:49:00 +0000

Gartner just announced the 2010 Supply Chain ranking conducted by AMR Research.
The ranking consists of the 25 companies with the best-ranked Supply Chains.

Ranking

This years Top 5 (extract):

Apple
Procter & Gamble
Cisco Systems
Wal-Mart Stores
Dell

Methodology

The following factors are included in the ranking and make up the overall score.

Peer Opinion / 154 voters (25%)
AMR Research Opinion / 27 voters (25%)
3-yr weighted ROA (25%)
Inventory Turns (15%)
3-yr weighted Revenue Growth (10%)

So there are three factor categories: subjective expert opinion, one supply chain number (inventory turns) and two primarily financial figures.

Methodology / Conclusion

There exists research supporting a correlation between supply chain performance and financial performance of a company, but up to now I have not found papers suggesting that the opposite is true as well. So I doubt that Revenue Growth and Weighted ROA are good indicators to appreciate supply chain performance.

Inventory turns on the other hand is probably very depend on the industry and product in focus and should be used with care.

The last factor is the expert opinion which contributes to the overall ranking. The expert ranking is split into the Peer Opinion and the AMR Research ranking. It is noteworthy, that the weights of both opinions are the same, even though there are five times more Peer Opinion experts than AMR experts indicating, that the AMR experts should be five times as knowledgeable than the other supply chain professionals.

From a business point of view the ranking show companies which have performed above average for a sustained period of time and their example could be used as a blueprint for Supply Chain Design.

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Dealing with Product Uncertainties in a Supply Chain

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

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

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

Demand uncertainty

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

Supply uncertainty

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

Uncertainty framework

Building on these risks Lee derives the following risk matrix.

Uncertainty Framework (Lee, 2002)

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

Matched Strategies (Lee, 2002)

Conclusion

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

Reference:

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

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Rethinking links in the supply chain

Daniel Dumke — Tue, 01 Dec 2009 18:16:00 +0000

The two page article (downloadable here) reflects upon the current economic crisis and the authors views on the implications for SC Management.

Sohdi argues that at the moment the enterprise should focus more on how to improve revenues and improve profit margins as a whole instead of only trying to drive down cost. They list a couple of examples within the following categories on how this can be achieved.

Lean and green
Pricing & supply chains
Shorten supply chains
Reassess partnerships

On first sight shortening the supply chain seems to be the only strategic option from the SCRM perspective.

Shorter supply chains mean more agility, more robustness against disruption, lower exchange rate risk and, in the long run lower cost.

But if you look at this from a financial / company angle it becomes obvious that all measures mentioned are suitable to tackle the overall risk position of the company, by improving the revenue position a company can likewise (to some extend) hedge against the (at least financial) effects of supply chain risks.

From my experiences as a management consultant I can fully support the views expressed in the article. Companies tend to spend very much effort on the short term cost improvements (e.g. working capital management) and loose sight for the bigger problems like customer satisfaction.

Reference:

MMS Sodhi, & CS Tang (2009). Rethinking links in the supply chain Financial Times

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