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Assessing Vulnerability of a Supply Chain

Daniel Dumke — Mon, 10 Oct 2011 14:42:00 +0000

At this year’s HICL conference in Hamburg, I was able to present some of my own research. In the follow-up discussions several points were highlighted, especially focussing on the viability of supply chain wide cooperation and collaboration efforts and on the difficulties of doing a realistic quantification of supply chain risks.

I already read a great paper on this topic some time ago: “Assessing the vulnerability of supply chains using graph theory” by Stephan M. Wagner and Nikrouz Neshat (2010), which I present you today.

Disruptions and vulnerabilities

Several authors argue that several factors help increase the vulnerabilities of today’s supply chains. When supply chain complexity increases (e.g. supply chain length, higher division of labor, …), the vulnerabilities also rise. Furthermore there is evidence that natural and man-made disasters are on the rise as well (figure 1).

Figure 1: History of Disasters (Wagner and Neshat, 2010)

Figure 2 shows the links between supply chain vulnerability drivers and disruptions.
So, since natural- and man-made-disaster most often cannot be influenced directly, the authors argue that the focus has to be on reducing the vulnerabilities themselves.

Figure 2: Connections between Vulnerabilities, Disruptions and Risks (Wagner and Neshat, 2010)

Assessment of vulnerabilities

Wagner and Neshat suggest a four step algorithm based on graph theory, which is used to calculate a Supply Chain Vulnerability Index (SCVI). The algorithm is based on graph theory (which has been part of another study here). Key to the understanding of the SCVI is the risk driver mentioned above. Figure 3 shows an abstract example with three vulnerability drivers (D1 to D3) and their links.

Figure 3: Vulnerability Drivers and their Links with the corresponding Matrix (Wagner and Neshat, 2010)

To calculate the SCVI the supply chain risk manager has to create a map / graph of the current risk drivers (step 1), find the corresponding relations between the risk drivers (step 2), calculate the “influence matrix” (step 3) and deduce the SCVI. As a forth step SCVIs of different companies can be compared to gain further insights for optimization and risk reduction.

Figure 4 shows the main drivers of supply chain vulnerability.

Figure 4: Selection of Vulnerability Drivers in Structure, Demand and Supply (Wagner and Neshat, 2010)

Using graph theory makes it possible for the risk manager to get an overview of the influencing factors of supply chain risks. It also enables him to act on this knowledge. Figure 5 shows a possible simplification / vulnerability reduction.

Figure 5: Reduction of Supply Chain Vulnerability Drivers leads to a Simplification of the respective Graphs (Wagner and Neshat, 2010)

D3 in figure 5 “is called a ‘sink’ – which means that D3 can only be influenced by three other drivers and cannot influence others. Considering the graph nodes and edges, supply chain managers can apply risk management methods and implement mitigation strategies to omit or alleviate some of the vulnerability drivers. Figure 5 shows the graph after D3 has been omitted. As one can see, the resulting graph contains less vulnerability than it did prior to implementing the measures.”

Empirical data for the SCVI

The authors also conduct a survey with over 700 participants from different industries. Based on their feedback the authors assess the Supply Chain Vulnerability Index for eight different industries. The results are summarized in figure 5. And give support to the hypothesis that the automotive industry has one of the highest risk levels.

Figure 6: Supply Chain Vulnerability within several Industries compared (Wagner and Neshat, 2010)

Conclusion

I really like the graph approach to assessing supply chain vulnerabilities. And I think it is a great method to support the understanding of a complex system like the supply chain. The article combines two very interesting aspects of it: the practical implementation and the assessment of supply chain vulnerability and a survey to compare different vulnerability levels across industries. The complete article, where you find more details on the survey results and the algorithm for calculating the index, can be downloaded here.
From a business and research point of view this article should direct the supply chain risk management efforts especially in the industries with the highest risk levels, Automotive and ICT.

Reference:

Wagner, S.M., & Neshat, N. (2010). Assessing the vulnerability of supply chains using graph theory International Journal of Production Economics, 126, 121-129

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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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Practitioner Views on Supply Chain Risk Management

Daniel Dumke — Mon, 18 Apr 2011 11:14:00 +0000

In 2005 Uta Jüttner was researcher at the Cranfield University, UK, especially renowned for several minds working on supply chain risk management, like Martin Christopher or Denis Towill.

Key in understanding this field of research is to make an inquiry into how supply chain risks are managed in business environments. Jüttner first laid grounds for this by some conceptual work, I introduced here a while ago

Methodology

Jüttner used an exploratory, quantitative survey. They selected 1700 members of the UK Chartered Institute for Logistics and Transport (CILT), with a response rate of 8% 137 managers replied to the survey request.

Furthermore six focus group discussions were held, with seven or eight members.

Those methods were used to answer the following questions:

How well are supply chain risks recognized across a network?

What is the current state of practice in SCRM?

What are the perceived critical issues of SCRM implementation?

Figure 1: Industry Position of the Participants (Jüttner 2005)

Participants

Figure 1 shows the industry of the participants, whereas figure 2 shows the position within the supply chain.

Figure 2: Position within the Supply Chain (Jüttner 2005)

Results

The participants in the focus groups emphasized the importance of the network effects of supply chain risk sources. This importance was also reflected in the survey, where there was a statistically significant correlation between the effects of specific risk sources (like the foot and mouth disease outbreak) and the effect on ones own organization, the suppliers and customers. So those risks are not only affecting one supply chain partner, but often the whole network.

The next analysis focusses on the current state of the practice in SCRM – tools an processes, depth of understanding and business continuity planning. Jüttner concludes:

The findings do not reveal whether this leaning towards less formalised processes and tools is caused by a lack of understanding and/or from a lack of time commitment and discipline emphasised in the following quote. […] The results also show that among the organisations surveyed, a joint approach to managing risks does not seem to be widespread.

The research also reveals some critical issues in supply chains, which can be found in figure 3.

Figure 3: Critical Issues in Supply Chain Risk Management (Jüttner 2005)

Conclusion

As in many other studies like this one by Zsidisin, Jüttner’s study shows that supply chain risk practices are mostly understood but not very often used. These issues are also reflected in the open research question, with which the article concludes:

What are the motivators or inhibitors for companies to share risk related information?

Which risks are accepted by companies as shared supply chain risks?

How can the risk performance trade-offs in supply chain strategies be analysed and minimised?

How can the implementation of SCRM processes be organised within and across companies?

Reference:

Jüttner, U. (2005). Supply chain risk management: Understanding the business requirements from a practitioner perspective The International Journal of Logistics Management, 16 (1), 120-141 DOI: 10.1108/09574090510617385

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Supply Chain Risk Management Thesis (Impact of demographics on supply chain risk management practices)

Daniel Dumke — Sun, 13 Mar 2011 12:22:00 +0000

This is somewhat of the fifth contribution to my series on doctoral dissertations, apart from not being a doctoral thesis but a master thesis on Supply Chain Risk Management. Nonetheless, 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 thesis was written by Kenneth Kanyagui in 2010 as his master thesis at the Massachusetts Institute of Technology, Cambridge, USA. It can be downloaded here directly at the MITs web site. It has been supervised by Bruce Arntzen of the Center for Transportation & Logistics. The title is:
Impact of demographics on supply chain risk management practices.

Summary

In his thesis the author explores an interesting question: How do demographic factors affect supply chain risk management practices by supply chain professionals? Eg. are some demographic factors in managers hint for more elaborate SCRM practices?
Kanyagui used a survey to gather the data needed. Overall 1461 people from 15 countries completed the survey. The following factors influence the inclantaion of a company to have a risk manager:

Size of a firm in term of number of workers
Length of a time spent at a firm (by the respondent / supply chain manager)
South Africa and Switzerland are likely to establish risk managers

The particular sector / industry did not matter much for predicting responses to the risk manager question.

Additionally, there are several factors that affect if companies are working with suppliers on supply chain risk management.

The size of a firm, especially in terms of number of workers
Geography, especially for those coming from Mexico and South Africa
Educational background of the respondent, especially those who studied teaching or the liberal arts

Impact of Company Size on the Inclination to work with Suppliers (Kanyagui 2010)

Conclusion

There are some interesting findings from this survey and the scientific rigor seems to be held high at the MIT. Eg. using a survey review board (Committee on Use of Human Experimental Subjects) which sets certain standards for the execution of surveys.
From the overall possible factors only few seem to have an effect on the supply chain risk management employed. Nonetheless, those that have an effect are an interesting topic for further analysis.

Reference:

Kanyagui, K. (2010). Impact of Demographics on Supply Chain Risk Management Practice Massachusetts Institute of Technology, Master Thesis

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Supply Chain Integration as major Value Driver

Daniel Dumke — Mon, 11 Oct 2010 08:27:00 +0000

“Arcs of integration” is a concept developed by Frohlich and Westrook (2001) which describes the degree of integration of suppliers and customers within a Supply Chain.

Arcs of Supply Chain Integration (Frohlich and Westrook, 2001)

Methodology

This concept was developed within the scope of an international study on supply chain strategies. In this survey the authors used the mail survey research method to collect over responses form over 700 companies from all over the world (Asia/Pacific: 26%, Europe: 50%, North America: 14%, South America: 10%). Data was gathered not only on the supply chain integration of each respondent (eg. shared access to planning systems, shared production planning, knowledge of inventory levels), but also on performance parameters on each company (eg. market share, profitability, return on investment).

Strategies

There are two major tactics for supply chain integration:

coordination and integration of the forward physical flow of deliveries between suppliers, manufacturers and customers
backward coordination of information technologies and the low of data from the customer to the suppliers

The authors distilled five different strategies from the answers from the survey:

Inward-facing
for companies without much up- or downstream integration
Periphery-facing
only little integration in both directions (compared with other companies from the sample)
Supplier-facing
higher integration on the supply side, low integration on the customer side
Customer-facing
vis-versa to 3
Outward-facing
strong integration on the supply and customer side

Results

The results show that those companies applying an outward-facing strategy clearly recorded greater rates of performance compared to all other strategies.

Comparison of different Strategies for Supply Chain Integration (Frohlich and Westrook, 2001)

The authors draw the following conclusions from the data:

The outward-facing supply chain strategy is associated with the largest rates of significant performance improvements.
Manufacturers may be seriously jeopardizing performance by continuing to follow the inward-facing strategy.
Results for the supplier- and customer-facing strategies suggested that focusing on only the inbound or the outbound sides of the supply chain gained little more for manufacturers than adopting the periphery- or inward-facing strategies.
Over 40% of the sample was in the periphery-facing group. This suggests that periphery-facing may be the supply chain’s natural “equilibrium point” in terms of integration.

Conclusion

I can really recommend this article as a read and the first article I know which shows the connection between the degree of supply chain integration and performance levels.

Reference:

Frohlich, M., & Westbrook, R. (2001). Arcs of integration: an international study of supply chain strategies Journal of Operations Management, 19 (2), 185-200 DOI: 10.1016/S0272-6963(00)00055-3

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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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Research Issues for Managing Supply Chain Disruptions

Daniel Dumke — Thu, 06 May 2010 06:37:00 +0000

What do professionals in the domain of supply chain management think about disruptions? How do they prepare for them, how do they act when a disruption occurs?

Blackhurst et al. (2005) answer these questions in their work about “An empirically derived agenda of critical research issues for managing supply-chain disruptions”.The authors are using three different empirical methods to achieve this goal empirically: Case study, surveys and focus groups.

Disruptions

As you would expect from a theoretical article they start with the question: What are disruptions anyway? They can show themselves in different forms: eg. transportation delays, natural disasters, part shortages, quality issues. The common theme is, that disruptions are costly and can trigger stock-outs, which leads to the inability to meet customer needs.

Other authors like Hendricks and Singhal (2003) show that supply chain disruptions can cause huge cost.

And disruptions are on the rise due to global sourcing, which increases the potential for disruptions and the movement towards increased responsiveness, higher levels of agility and lower inventories.

Results

The empirical study results in the following three steps to master supply chain disruptions.

Disruption discovery
Visibility and predictive analysis are most important to discover disruptions, the update of risk measures therefore has to be more dynamic (up to real-time) to be useable.
Disruption recovery
Recovery starts with damage control, it should be build on a model to understand hwo disruptions will affect the supply chain
Supply chain redesign
The goal for redesign is to include all relevant (hidden?) costs of a global supply chain and to aim for a flexible and robust supply chain optimization

Conclusion

The article builds a framework to think about disruptions within a supply chain. As the title already suggests this article only points at the issues researchers are/should be working at the moment. And there is still a lot of work to do.

Reference:

Blackhurst, J., Craighead, C., Elkins, D., & Handfield, R. (2005). An empirically derived agenda of critical research issues for managing supply-chain disruptions International Journal of Production Research, 43 (19), 4067-4081 DOI: 10.1080/00207540500151549

Hendricks, K., & Singhal, Vinod (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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Supply Chain Collaboration and Performance Effects

Daniel Dumke — Tue, 06 Apr 2010 06:47:00 +0000

Today I have been reading the paper by Zacharia, Nix and Lusch on Supply Chain Collaboration. The goal of the paper was to assess firm-level business performance outcomes of collaboration projects. This was done using a survey of nearly 500 supply chain professionals.

Model
Zacharia, Nix, Lusch (2009)

The authors suggest the following hypothesis:

H1: The greater the interdependence of knowledge and process, the higher the level of collaboration among the firms.
H2: The greater the level of supply chain partner insight, the higher the level of collaboration among the firms.
H3: The higher the level of collaboration, the better the operational outcomes.
H4: The higher the level of collaboration, the better the relational outcomes (trust, credibility and relationship effectiveness) between the collaborating firms.
H5: The better the operational outcomes, the better the relational outcomes between the collaborating firms.
H6: The better the operational outcomes, the better the performance at the firm level (organizational performance, asset utilization, competitive position, and profit).
H7: The better the relational outcomes, the better the performance at the firm level (organizational performance, asset utilization, competitive position, and profit).

Implications

After conducting the survey all hypothesis are accepted (0,001 and 0,01 levels). These results imply that a) collaboration can lead to more effective solutions by joining forces (resource based view), furthermore, b) understanding of the collaboration partner is key to a successful collaboration. c) Collaboration projects can be challenging and firms are sometimes not willing to set aside the necessary resources. d) Improvements of operational and relational outcomes of a collaboration project lead to better business performance.

Conclusion

The paper closes a gap which it desires to address: how does collaboration affect the individual firm? But it also leaves some for further research. Before reading I would have expected a greater focus on the quantitative evaluation of the business performance side. The study clearly supports the view that collaboration is good for the business performance of the individual firm, but the method used is too qualitative and subjective to derive the key influence factors for improving business performance by collaboration.

Reference:

Zacharia, Z., Nix, N. W., & Lusch, R. F. (2009). An Analysis of Supply Chain Collaborations and their Effect on Performance Outcomes Journal of Business Logistics, 30 (2), 101-123

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Distribution Centers in Agile Supply Chain Design

Daniel Dumke — Sun, 21 Mar 2010 15:54:00 +0000

Today I want to have a look at “Design and operation of distribution centres within agile Supply Chains” by Peter Baker (2008; Cranfield University).
The main part of the article describes the results of a survey conducted with nine business units to assess challenges and measures for supply chain agility.

Agility

is defined as “management concept centered around responsiveness to dynamic and turbulent markets and customer demand”. But it also involves exploiting these changing markets to take advantage from it.

Supply chain design

According to Stevens (1989) the supply chain system can be divided into three parts: external, internal and functional. Distribution centers fall into the functional level, since they connect different parts of the supply chain. To design the supply chain therefore also includes decisions on the number, size and location of distribution centers as well as formal aspects like the ownership.

The distribution centers are the focal issue of the survey conducted.

Challanges

Achieving an agile supply chain can be challenging. The major issues are:

Variance in volume (especially due to growth, seasonality, promotions and demand fluctuations)
Time variance (adjustments of manufacturing / delivery times)
Quantity variance (fluctuations in order quantities)
Inbound variance (volume and time)
Presentation of goods (added by participants of the survey)
Handling of returns

Measures

The following measures have been taken by the participants to achieve agile supply chains despite these challenges (extract):

Flexible usage of space used within shared-user 3PL warehouses (for smaller operations)
Routing of flows through the network in line with changing circumstances
Design buildings and equipment for growth and flexibility
Adopt flexible staffing arrangements (for own and temporary staff)

Conclusion: Risk and agility

The article did not focus on the risk side of the suggested measures.
But there are connections. On the one hand an agile supply chain can reduce risks by designing for flexibility (eg. hiring practice or flexible contracts with 3PL provideres).

Can agile supply chains also increase risk exposure of a company or supply chain?

Reference:

Baker, P. (2008). The design and operation of distribution centres within agile supply chains International Journal of Production Economics, 111 (1), 27-41 DOI: 10.1016/j.ijpe.2006.09.019

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Assessing Vulnerability of a Supply Chain

Disruptions and vulnerabilities

Assessment of vulnerabilities

Empirical data for the SCVI

Conclusion

Supply Chain Risk Management in the German Automotive Industry

Methodology

Results

Conclusion

Practitioner Views on Supply Chain Risk Management

Methodology

Participants

Results

Conclusion

Supply Chain Risk Management Thesis (Impact of demographics on supply chain risk management practices)

Author / Topic

Summary

Conclusion

Supply Chain Integration as major Value Driver

Methodology

Strategies

Results

Conclusion

AMR announces Supply Chain Ranking 2010

Ranking

Methodology

Methodology / Conclusion

Research Issues for Managing Supply Chain Disruptions

Disruptions

Results

Conclusion

Supply Chain Collaboration and Performance Effects

Model Zacharia, Nix, Lusch (2009)

Implications

Conclusion

Distribution Centers in Agile Supply Chain Design

Agility

Supply chain design

Challanges

Measures

Conclusion: Risk and agility

Model
Zacharia, Nix, Lusch (2009)