risk management

The Power of Flexibility for Mitigating Supply Chain Risks

Daniel Dumke — Wed, 26 Oct 2011 13:31:00 +0000

This article sheds light on the question of how much flexibility is necessary to secure the supply chain against disruption risks.
The paper reviewed today takes a closer look at three supply chain risks: supply, process and demand risks (figure 1).

Figure 1: Selected Risks for further Analysis (Tang and Tomlin, 2008)

Strategies

The authors focus on the short term agility to reduce risk and chose five strategies, which are analyzed in depth (figure 2).

Figure 2: Strategies for risk reduction using Flexibility (Tang and Tomlin, 2008)

The strategies are backed by several case studies each.
For all five strategies the authors build a different model. First stands the description of the scenario, second is the development of the model which fits the scenario and is able to deploy the strategy. The last step is the description of the results.

Supply risks

Flexibility via multiple suppliers
Multiple alternative suppliers can reduce the supply cost risks, since the company gains the flexibility to purchase from the company with the lowest prices.
The first model is based on a case by Intercon Japan and Li and Fung. One ordering company is confronted with supply cost risk. The price of the identical goods is random and can vary between $5 and $15. The authors calculate the profit for the single up to a five (optional) supplier case and conclude that profits rise with increasing number of suppliers, whereas the marginal increase declines (figure 3).

Figure 3: Profit vs. Number of Supplier to reduce Supply Cost Risks (Tang and Tomlin, 2008)

Flexibility via a flexible supply contract
Flexible supply contracts allow the ordering firm to adjust its predetermined order at short notice usually within a limited quantity range.
This model is based on a case with Canon, HP and Best Buy. Demand is random, the purchasing contracts between buyer and seller are negotiated in the beginning of a period. But the actual ordered quantity can be adjusted between u% less or more than the originally agreed quantity. Calculating the profits for increasing flexibility u% gives the results shown in figure 4.

Figure 4: Profit vs. Contract Flexibility (Tang and Tomlin, 2008)

Process risks

Flexibility via flexible manufacturing processes
Flexible manufacturing requires a plant to be adaptable to produce a multitude of different products.
In this model process flexibility is modeled by the number of products (h) which can be produced by one plant. Different forms are shown in figure 5.

Figure 5: Different Flexibility Systems (Tang and Tomlin, 2008)

The calculations shows that increased process flexibility can also increase profits in an uncertain scenario (figure 6).

Figure 6: Profit vs. Degree of Process Flexibility (Tang and Tomlin, 2008)

Demand risks

Flexibility via postponement
Further flexibility is gained by postponing product differentiation decisions until the latest possible point during the production process.
In this model two products are sold at a market, demand for them is uncertain. Postponing product differentiation (shown in figure 7). Calculating profits for two different random processes (Independent and Identically Distributed (IID) and Random Walk (RW) Model), shows that also increase in postponement leads to increasing profits (figure 8).

Figure 7: Scheme for Product Postponement (Tang and Tomlin, 2008)

Figure 8: Profit vs. Postponement Flexibility (Tang and Tomlin, 2008)

Flexibility via responsive pricing
Case studies show the value of price adaptability to steer customer demand.
In this model the company is able to postpone the pricing decision for the selling season until the time t. Up to this point in time the company is therefore able to observe demand. Timing flexibility increases as t increases. From this it can also be shown that increasing flexibility leads to better profits with uncertain demand. Figure 9 has the results.

Figure 9: Profits vs. Pricing Flexibility (Tang and Tomlin, 2008)

Conclusion

The authors took some effort to generate five different models to analyze the flexibility cases. Nonetheless, I would judge the models to be quite specific for the cases, which is good for the research, but also poses the question: Will these results hold true in any case? For any company and supply chain?
There are other results (e.g. by Tomlin und Wang, 2005, which indicate that flexibility might not be the right choice for risk averse companies, which might be better of by choosing a dedicated strategy instead)

But if you keep this caveat in mind this work is a strong proponent of flexibility as a tool to increase resilience in an uncertain environment.

Reference:

Tang, C., & Tomlin, B. (2008). The power of flexibility for mitigating supply chain risks International Journal of Production Economics, 116 (1), 12-27 DOI: 10.1016/j.ijpe.2008.07.008

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Ways to guard against Disruptions

Daniel Dumke — Mon, 17 Oct 2011 17:49:00 +0000

Today I review an article called “18 Ways to Guard Against Disruption”. It was published in the Supply Chain Management Review in 2005 by Elkins et al.

Goal and method

The goal of this study was to assess the current state of supply chain risk management capabilities across multiple industries. The authors describe the results of several interviews with companies from multiple industries, which have been conducted by the Supply Chain Resource Consortium (SCRC, an university industry partnership for documenting supply chain management knowledge).

Results

Based on this study 18 best practices have been identified, which have been categorized according to their impact location (internal or external) and their time orientation (current business vs. future business).

External orientation / future business (“Strategic sourcing & advanced procurement”)

“Screen and regularly monitor current and potential suppliers for possible supply chain risks.
Require critical suppliers to produce a detailed disruption-awareness plan and/or business-continuity plan.
Include the expected costs of disruptions and operational problem resolution in the sourcing total-cost equation.
Require suppliers to be prepared to provide timely information and visibility of material flows that can be electronically shared with your organization.”

External orientation / current business (“Supply-base management”)

Conduct frequent teleconferences with critical suppliers to identify issues that may disrupt daily operations and discuss tactics to minimize these issues.
Seek security enhancements that comply with the Customs-Trade Partnership Against Terrorism (C-TPAT), Container Security Initiative (CSI), and similar initiatives.
Test and implement technologies to track containers.
Conduct a detailed incident report and analysis following a major disruption.
Create exception-detection/early-warning systems to discover critical logistics events that exceed normal planning parameters.
Gather supply chain intelligence and monitor critical supply-base locations.

Internal orientation / current business (“Real time operations management”)

Improve visibility of inventory buffers in domestic distribution channels at the part level.
Classify buffered material by its level of criticality.
Train key employees and groups to improve real-time decision-making capabilities.
Develop decision-support tools that enable the company to reconfigure the supply chain in real time.

Internal orientation / future business (“Strategic supply chain design”)

Develop predictive analysis systems that incorporate intelligent search agents and dynamic risk indices.
Construct damage-control plans for likely disruption scenarios.
Understand the cost trade-offs for different risk-mitigation strategies.
Enhance systemwide visibility and supply chain intelligence by using improved near-real-time databases.”

The authors note that none of the companies had implemented all of the identified measures at the same time and they suggest:

Companies may want to use the best-practices list as a thought-starter to help them prioritize which supply chain risk management elements to adopt. For example, companies could develop an internal survey, based on the best-practice list, which would assess their supply chain risk management capabilities.

Conclusion

This article closes a gap at the SCRM Blog of some early exploratory research on how supply chain risk management is done in practice. Even though the description of the methodology lacks several important facts, e.g. how many companies have been interviewed and how were the interviews conducted, the results still show an interesting direction.
The next obvious questions, which to my knowledge have not been pursued in an systematic manner, would be:

Which of the strategies is best used in what setting?
How should a company prioritize their efforts, if they wanted to invest in supply chain risk management?

Reference:

Elkins, D, Handfield, R.B., Blackhurst, J., & Craighead, C.W. (2005). 18 Ways to Guard Against Disruption Supply Chain Management Review

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Introduction to Risk Management in Supply Chains

Daniel Dumke — Wed, 21 Sep 2011 13:09:00 +0000

This is another introductory article (book chapter) to supply chain risk management. I included it, since it is an early (2003) view on supply chain risk management from another perspective. Many other articles I reviewed up to now are following the “Cranfield School Approach” with (Christopher, Jüttner, …) and this one by Peter Kajüter (Münster University, Germany) shows a different approach developed in parallel.

Basis and literature

Risk is defined as

a future development or event that might adversely impact the achievement of corporate goals.

Kajüter argues that risk management is a entrepreneurial need, which should be established by any company. Most developed countries also “support” this need by further regulation requiring risk management systems to contain the risk on a company level. But there seems to be no regulation demanding risk management which covers the supply chain and

consequently, companies are free to extend the scope of risk management beyond the company level and develop inter-organizational approaches to managing risk.

The literature review shows that two streams regarding risks in supply chains can be distinguished:

Investigation of mathematical models to analyze risk sharing instruments.
Focus on conceptual issues in supply chain risk management based on exploratory case studies.

Figure 1: Stages of Supply Chain Risk Management Implementation (Kajüter, 2003)

Corporate and supply chain risk management

Based on the review of the conceptual literature, Kajüter identifies three approaches in supply chain risk management (figure 1).

Depending on the integration stage of the supply chain network and the intensity of collaboration.

Corporate risk management is characterized by individual risk handling of a single company. Supply chain related risks are considered by purchasing risk assessments which are part of the overall risk management.

If buyers and suppliers start to cooperate in managing risks, supply chain risk assessments can be observed. They are characterized by a rather informal communication of risks among the supply chain members and joint efforts to handle them.

Supply chain risk management finally constitutes a structured and formal approach to managing risks by collaboration of supply chain partners. A specific risk management process for the supply chain is established.

So supply chain risk management can be defined as:

Supply chain risk management is a collaborative and structured approach to risk management, embedded in the planning and control processes of the supply chain,
to handle risks that might adversely affect the achievement of supply chain goals.

Risk strategy

The author next proposes the elements of the risk strategy in a supply chain risk management framework: basic principles of risk management, defined risk limits and responsibilities.
The risk management principles are shown in figure 2. Risk limits refer to the levels of maximum damage which can be tolerated and have to be set for each individual company and the overall supply chain.
Lastly the responsibilities have to be defined for the identified risks within the chain. Kajüter suggests establishing a risk owner for each risk and a cross-functional, cross-company risk management committee.

Figure 2: Principles of Supply Chain Risk Management (Kajüter, 2003)

Risk management process

Kajüter suggest a three step process to manage supply chain risks.
The first step includes the risk analysis which has to be conducted on a supply chain level. Figure 3 shows an example.
Step two refers to the risk control, where risk management strategies are employed to mitigate risks, those include: risk avoidance, reduction, transfer and acceptance.
The last step includes risk monitoring and reporting, where processes continuous monitoring of identified risks have to be found.

Figure 3: Risk Assessment Portfolio (Kajüter, 2003)

The author concludes:

An interorganizational approach to risk management in supply chains facilitates risk management at the single firms and offers opportunities to improve supply chain performance. It requires a high level of trust and mutual respect among the individual companies, though.

Conclusion

Kajüter delivers answers for three basic questions in supply chain risk management.

What are the stages of supply chain risk management and how is it different from corporate risk management?
What are the three major parts of supply chain risk management?
How can the process of supply chain risk management be employed in a supply chain and company?

Of course, this 16 page chapter can only give hints on the implementation side, but not cover every aspect. I did not like the risk categorization very much, or at least the wording (mathematical models for risk sharing or conceptual works) leaves out much quantitative literature which just investigate risk mitigation strategies.

But all in all the article makes a great starting point for supply chain risk management endeavors in business and research.

Reference:

Kajüter, P. (2003). Risk Management in Supply Chains Strategy and Organization in Supply Chains, 321-336

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Knowledge-based Supply Chain Risk Management

Daniel Dumke — Mon, 19 Sep 2011 11:26:00 +0000

I just recently had a discussion with a professor at Mahidol University (Bangkok), where I was staying for a research exchange, on how knowledge can be used to mitigate risks within a supply chain. If you search here on the blog for “knowledge” there are already several articles covering parts of how knowledge can be used as a strategy (Internet Induced Risks for global Supply Chains) or the benefits of information sharing (Information Sharing in Supply Chains).

But there is no review on a common framework which contains all / many aspects of the use of knowledge in SCRM. So I looked in my personal library and found the following article, which presents a comprehensive framework for SCRM based on knowledge.

Key aspects in knowledge based SCRM

The author sees several key elements to improve SCRM by using available knowledge within the chain.

Usage and sharing of the knowledge about supply chain risks: In supply chain risk management it is necessary not only to know about the company’s own risks but also include the knowledge about the risks of other supply chain participants
This knowledge sharing should be supported by information technology.
A dynamic knowledge alliance should build the organizational foundation, members are dynamically selected due to their importance in the chain
Positive effects of the knowledge based SCRM do not come instantly so, long term cooperation will be needed

Framework

The author developed the following framework (figure 1), which contains every aspect form identification and assessment of the sources of risk knowledge, the knowledge generation, storage and application.

Figure 1: Knowledge Based Supply Chain Risk Management (Guo, 2011)

The author recommends to base the implementation on a) the accumulation of risk knowledge, emphasizing the importance of building the database and filling it with relevant data and furthermore b) developing a dynamic knowledge alliance. Primarily this alliance also signifies an organizational shift towards a more open exchange between companies, for this processes for risk gathering, storage, etc. have to be standardized across companies.

Conclusion

I present this framework as food for thought primarily from a business perspective. I really liked some of the ideas and conclusions, nonetheless I have to point out some scientific flaws that make me wonder how the paper could be published in a journal.

The paper is much too short; up to now I was under the impression that I had a very brief writing style, but 6 pages are just not even enough to define all the different terms the author used.
The shortness is also reflected in the missing arguments, there is no discussion of either current literature nor other results
The author did not mention any method which he used as a foundation for his findings. So I have to assume that he just thought it up by himself. This actually does count as scientific evidence as well, but it’s very low on the validity scale. This is also the reason why I still would suggest it as a discussion base for a business setting, but I would definitely not start redesigning my organization according to the views mentioned in the paper
There is no discussion of the terms knowledge versus information and as far as I understand these terms he might actually be talking about information management here.
I was happy to see some hints on the implementation, nonetheless there is also no discussion of how the tacit knowledge can be included into this information sharing framework.

But still, I liked the idea of the dynamic knowledge sharing organization, as a virtual frame where companies share information on risk management. Because that’s for sure, not many companies are sharing enough information on the supply chain risks they see.

The full article can be downloaded here.

Reference:

Guo, Y. (2011). Research on Knowledge-Oriented Supply Chain Risk Management System Model Journal of Management and Strategy, 2 (2), 72-77

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How Risky is your Company?

Daniel Dumke — Mon, 05 Sep 2011 14:36:00 +0000

Today I picked a special article on corporate risks. “How Risky is your Company?” by Robert Simons of the Harvard Business School. Its a more business oriented view on how companies should handle risks, internally. But since internal risk management can be seen as a part of supply chain risk management, I also include it here.

Risk exposure

This article is about how risky one company is. About the internal risk. And by these risks, the author does not so much refer to the production processes, but the softer risks of managing a company.

The key contribution of Simons is the Risk Exposure Calculator. Of course not all risks are unintended. Most people would argue that risk is part of doing business, so a good risk calculator would only include the unwanted and unrecognized risks.

It is also not the goal to find one specific number to pinpoint the risks of a company, but to give hints for improvement.

Risk Exposure Calculator

The key elements of Simons calculator are three internal pressures: due to growth, culture and information management. A version of the calculator can be found in figure 1.

Figure 1: Tool to Calculate the Risk Exposure of a Company (Simons, 1999)

There are three pressure points in each category:

Growth

Pressure for performance
Setting challenging goals can have stimulating effects on employees, but also increase risks when employees try everything to achieve those goals: “They may, for example, accept customers with poor credit ratings or cut quality to accelerate operations.”

Rate of expansion in operation
If companies are expanding at a faster rate than the knowledge of their employees, it can also lead to additional risks: “Managers should ask themselves: Are operations expanding faster than our capacity to invest in more people and technology?”

Inexperience of key employees
This can also be a problem in times of growth, when key managers are employed without sufficient training.

Culture

Entrepreneurial risk taking
Risk taking is part of daily business and also a reason why a profit can be reaped from those deals. But of course, the more risk a company takes the more it has to take care of.

Bad news
This point measures how information, especially the bad news, travel upwards to the management. So the questions to ask here are: “How much bad news do I actually hear? Have I surrounded myself with ‘yes men’?”

Internal competition
For some conglomerates this last cultural pressure point is just the way of making business. But internal competition can also have negative effects like decreased information sharing within the whole company, and thus increasing risks.

Information Management

Transaction complexity and velocity
“To determine the score on this point, managers should do a rough calculation in their heads. What were the complexity, volume, and velocity of information a year ago? Have they risen, and by how much?”

Diagnostic performance measures
Simons argues that performance measures are often neglected in times of growth. This point should have a high score, if there is: “a feeling of frustration – a sense that it’s hard to get the right data at the right time. When there are gaps in diagnostic performance measures, managers end up getting the information they need by making phone calls and walking around. In short, they spend a lot of time doing the work a computer system should be doing.”

Decentralized decision making
The last point here is decentralized decision making, which can be used to improve motivation and performance. But also local managers often do not fully follow the guidelines set by the company and also information flow might be disturbed.

Overall the risk index can be calculated by adding up the individual scores. But the insights you gain are by answering the questions and not by the resulting number alone.

Controlling internal risks

Simons suggests ways to manage the above mentioned risk by focussing on five questions (figure 2).

Figure 1: Ways to improve Control and Reduce Risks within a Company (Simons, 1999)

Conclusion

This article after all was more inward facing than I thought, but nonetheless operational risks are an important part of every-day business and of course strategic management. Operational risks as described here probably became a little outdated due to some unpopular initiatives as the Sarbanes-Oxley Act (USA) or BilMoG (Germany), but there is a lot of potential for improvement and Simons describes several good cases supporting his points.

The major conclusion from his research is the contradiction between risks in times of high growth. All the risks Simons presented are usually growing during the “good times” when the business is growing. And many cases show that those risks can be the reason why those companies went out of business after the growth period was over.

This research can give you clues where improvements are necessary and also shows levers to improve control within the company again.

Reference:

Simons, R. (1999). How Risky is your Company? Harvard Business Review, 85-94

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Let me help you with... Time-Based Risk Management

Daniel Dumke — Wed, 31 Aug 2011 13:56:00 +0000

Today I present you only one chapter of a great book by Wu and Blackhurst: “Managing Supply Chain Risk and Vulnerability” (which can be bought on amazon.com here).

I especially like the third chapter by Professors Sodhi and Tang on a new approach to managing disruptions: Time-based Risk Management.
The whole book features a more practitioner oriented approach so don’t expect too much focus on the methodological parts.

Reason for risk management

Supply chain disruptions should have arrived at the board rooms due to

“short-term effects (negative publicity, low consumer confidence, market share loss, etc.) and
long-term effects (stock prices and equity risk).”

So there should be enough drive to pay for even some of the more expensive risk management initiatives. Nonetheless a really robust supply chain strategy has to mitigate supply chain risks and increase profits at the same time.

Time-based risk management

The time-based risk management approach aims to travel on this thin line and deliver a strategy to mitigate disruption risk without compromising profits.
It consists of three time frames which should be in focus of the risk manager:

time to detect a disruption (D1),
time to design a solution (D2),
time to deploy (D3),
time to response is set to the sum of D1 to D3 (R1), and
time to recover (R2)

The authors argue, that prior work has pretty much focussed on the generation and selection of recovery plans, but only after the event has occurred.
The time-based risk management now tries to reduce the time needed for the other elements, since “just as 80% of the total cost of a product is determined during the product design phase, the activities that take place for designing response can have significant effect on the overall impact of a disruption.”

Argumentation

Furthermore, based on three case studies (e.g. the Nokia / Ericsson Case) the authors argue that a longer response time can also lead to hugely increased recovery times. “This is mainly because the magnitude of the problem triggered by the event escalated exponential over time.”

This argument is illustrated in figure 1 using a exponential epidemic model.

Figure 1: Effects of Response Time Reduction (Sodhi and Tang, 2009)

Activities to reduce response time

The authors name five time-based disruption management strategies to reduce the response time (R1) and therefore also the recovery time (R2).

Work with suppliers and customers to map risks
Define roles and responsibilities
Develop monitoring/advance warning systems for detection
Design recovery plans
Develop scenario plans and conduct stress tests

Risk and reward

As argued in the beginning robust strategies should not only support the company during times of disruption, but also increase competitiveness.
Using the case of Zara (fashion industry) the authors outline the advantages of time-based risk management. By managing their design, manufacture and deliver operations very closely and centralized with a already very low lead time Zara can detect disruptions almost in real time (low D1). New clothes and therefore a market adaptation can be designed very quickly, so D2 is quite low as well. Since suppliers and distribution are usually in close proximity to the factories deployment of new strategies is fast as well (low D3).

However these low lead times have not (primarily) been established for risk management purposes, but they are part of Zara’s business strategy and help them achieving continuous high growth rates as well.

Conclusion

Sodhi and Tang use very illustrative cases to make their points for a time-based risk management approach. This approach represents a corporate strategy which of course has to include a very broad definition of supply chain management. So not only the logistics and manufacturing parts are included, but also product design, finance, …

Reference:

Sodhi, M.S., & Tang, C.S. (2009). Managing Supply Chain Disruptions via Time-Based Risk Management Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers., 29-40

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Managing Supply Chain Portfolios

Daniel Dumke — Mon, 22 Aug 2011 14:31:00 +0000

A supply chain usually does not stand alone. Frequently a supply chain is defined by the need of the end customer which has to be satisfied. Since one company commonly deliver several products, within a single company there can be multiple different supply chains aggregated under one organization. This task of managing multiple supply chains is most often referred to as Supply Chain Portfolio Management. It is still in a very early stage of research, so there are only few researchers focusing on this part. But today’s article employs this portfolio point of view and is concerned with the question of how adaptive a single supply chain has to be.

Setting and method

The authors pose the following questions:

Under which conditions does the firm need a strategy of high adaptation and when might medium or low adaptation be sufficient?
To what extent may product portfolio decisions moderate the level of supply chain adaptation required?
To what extent does the level of supply chain adaptation impact the optimal configuration of a firm’s supply chain portfolio, e.g. the number of production facilities?

The authors develop several mathematical models to address these question, overall four models (building on one base model) are used to represent different states of adaptability:

A no adaptation model, in which every product that is delivered in different planning periods has to be brought out via the same supply chain.
A low adaptation model, in which products may be reassigned to different transportation modes, for example from air cargo to ocean freight.
A medium adaptation model, in which products may additionally be reassigned across the firm’s production facilities.
A high adaptation model, in which the firm’s entire manufacturing footprint, product- to-facility assignment and transportation modes may be updated over time.

So the ability to adapt a specific supply chain is differentiated into no, low, medium and high adaptability. Whereas the business dynamics are divided into global business trends and product portfolios dynamics.

Results

Based on numerical experiments with their models the authors develop the following framework to differentiate product strategies and supply chain adaptation (figure 1).

Figure 1: (Seifert and Langengberg, 2011)

Four types of product portfolios are revealed, based on the rate of product commoditization (x-axis) on the rate of the new product introduction (y-axis).

Stable product portfolios, show only low adaptation rates and do not need them due to specific environmental factors. Nonetheless adaptation might be required due to global business dynamics.
Commoditizing product portfolio: “We refer to a product portfolio as commoditizing if the products characteristics change at a high rate, while relatively few products are introduced or abandoned from the product portfolio.”
Discontinuous product portfolio: “If a product portfolio doesn’t exhibit significant commoditization, but an important number of products are nevertheless added or abandoned, we refer to it as discontinuous.”
Dynamic product portfolio: “We refer to a product portfolio as dynamic if the products in the portfolio commoditize at a high rate and, at the same time, the rate of product introduction and abandonment is high.”

Overall the authors conclude:

Insight 1: Our results indicate that although supply chain adaptation may indeed be important for a firm to retain its competitiveness, the need for it differs widely across firms. Important drivers to determine the value of supply chain adaptation in response to product portfolio dynamics are the commoditization rate a product portfolio experiences and the distribution of product types in the portfolio over time. While the commoditization rate of a product portfolio is highly industry-dependent and thus mostly exogenous to the decision-maker, the firm can actively manipulate the distribution of product types over time, e.g. ensuring a stable distribution of product types over time.

Insight 2: By balancing product decisions and supply chain adaptation strategy, a firm may weight how much supply chain adaptation it is ready to pursue to support its competitive strategy

Insight 3: This flexibility to respond to business dynamics by either supply chain adaptation or product portfolio renovation may be reduced if high global business dynamics necessitate high adaptation per se.

Insight 4: Finally, to exploit the full potential of supply chain adaptation a firm should carefully design its supply chain portfolio according to the adaptation strategy employed. Optimal supply chain portfolios may vary significantly in the number of production facilities and supply chains in use.

Conclusion

Using their classification schemes the authors were able to analyze their models in depth and unveil several key findings to guide a strategic supply chain portfolio management based on company internal and external factors.
Business dynamics pose risks and imply the need to adapt to this changing environment, but not all companies need to have the same level of adaptability for their supply chains.

Reference:

Seifert, R.W., & Langenberg, K.U. (2011). Managing Business Dynamics with Adaptive Supply Chain Portfolios European Journal of Operational Research

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Research Critique: Determinants of Strategic Supply Chain Risk Management

Daniel Dumke — Wed, 17 Aug 2011 12:44:00 +0000

In 2010 Lassar et al. did a grounded theory study (see here for more information on techniques for theory creation) on the question of what the determinants of strategic supply chain risk management might be?

Methodology

The authors used a grounded theory approach to validate their theory. GT consists of a series of interviews where each subsequent interview may build on the last one with the goal of exploring a concept from different angles. In the case of Lasser et al. the focus was on high tech companies located in Mexico. As a first step the authors build their conceptual model for the determinants of strategic supply chain risk management based on literature. They hypothesis that supply chain risk management is built on resources available for the company (resource based view), the network and performance criteria.

Resources include organizational systems and processes, information, knowledge, capabilities, partners and alliances, and other assets.

Based on this theoretical background the researchers conducted 24 interviews within eight different companies.

Results

The interviews lead to a multitude of answers in five key areas:

How do firms conceptualize and define supply chain management?
What kind of processes and systems do supply chain participants utilize in their enterprises?
How committed is senior management to SCM?
What role does performance play in supply chain management?
What specific risk management actions do companies employ?

Our qualitative assessment of the sample firms – multinational buyers along with suppliers – confirms that a symbiotic triad of resources, networks, and performance are key determinants of strategic risk management in supply chains in one important emerging market – Mexico.

Critique

I seldom use a critique section for an article, since usually I only present articles which I deem well written, reliable and interesting.
This study sounds very interesting at first, so I included it on my reading list, but during the evaluation process I came to the conclusion that I found it unpresentable. I really struggled with myself, but then after I continued reading it, I started to realize that this is a great chance for showing you some of the things I dislike in a scientific paper.

The concept proves to be very vague
The authors build a concept for the influences on supply chain risk management from literature. The result: SCRM is based on resources, the network, and performance. The authors do discuss shortly what they subsume under these terms. But what is conspicuously missing is the reasoning for taking exactly these? Why not go with strategic choice and argue that SCRM is defined by the managers and their environment? Why is it the network and not the type of supply chain which defines the SCRM? As a result, already the first chapter leaves us with more questions than we had before.
No pictures
Even though I am a fan of nicely written paragraphs where a picture of what the author meant just pops into your mind, I also know that this writing-only method is not for everyone. So it is always a good idea to support a concept with a picture containing the key elements and their relations to each other and with their “environment”. For example the authors could have used a three column layout with SCRM on top and the determinants underneath? At least if its that what they meant.
Methodological discussion
Building on the definition of their framework the authors claim to use grounded theory to validate their concept. Sadly, there is no real description of the authors’ understanding of the methodology so I can only analyze the context.
To my understanding there are two different streams within grounded theory. One (my feeling is, that it’s the more popular one) particularly states, that grounded theory is based on the idea, that the theory has to develop itself during the interviews. This is done to prevent a very important thing: Bias. Every human interaction is somehow biased. So questions during an interview, not only contain the content of the question but also prejudice and believes of the sender of the question. And of course the interviewees not only respond to the content of the question but also the prejudice and biases. In this case the authors already had their completed framework in mind, and were supposedly steering the conversations towards their framework, of course confirming their preexisting believes. Interestingly I do not think you can find this bias easily in the results, but this does not mean it is not there.
Results
Even worse then a bias in the result, is the presentation of the results themselves. The goal of the interviews was to validate the preexisting believes of the authors (that’s is bad as explained above). But if I wanted to validate the concept, why not use this concept as a foundation for the outline of the discussion of the results. Why? I really have problems with seeing the correlation even between the headlines of their results (see above) and their concept? Some do correlate, but for example what does the “employment of risk management actions in a company” have to do with their concept of resources, network and performance. And in my point of view this gets worse the more you read the interpretations. So I am really asking myself: How could the authors really see their framework supported by the interviews?
Representativeness
Last and just a small addition: The authors rightfully state at the end that this study cannot be viewed as representative, since it only included a small sample of companies. So the authors imply that with a bigger sample (and the same method) it would be representative…? No! Grounded theory does not want to be representative, so this argument is just mute. The goal is instead to generate a valid (grounded) theory (not to validate a preexisting theory!), which can then be tested using other methods, like a survey.

Conclusion

I have to admit that I am not an expert on grounded theory either. So I may be wrong with the forcefulness with which I presented my opinion. But even if we abstract from the methodological aspects, the work can be summarized with two points:

Too little discussion of the methodologies and processes employed to generate these findings and
No obvious connection between their proposed concept and their own stated findings (or again too little elaboration).

The full study can be downloaded here.

Reference:

Lassar, W., Haar, J., Montalvo, R., & Hulser, L. (2010). Determinants of strategic risk Management in Emerging Markets supply Chains: the Case of Mexico Journal of Economics, Finance and Administrative Science, 15 (28), 125-140

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Supply Chain Risk Management in Financial Crises

Daniel Dumke — Wed, 03 Aug 2011 14:44:00 +0000

I am still abroad right now, but nonetheless I still want to keep the German share within the articles high. So I present to you the second article from German authors in just one week. On monday I already talked about Supply Chain Risk Management in the German Automotive Industry and so the second is today on how supply chain risk management is performed during a financial crisis.

The authors Constantin Blome and Tobias Schoenherr are both from the European Business School (EBS), one of only few privately owned German business schools. Their 2011 paper is on supply chain risk management during times of a financial crisis.

Methodology

The authors employ a case study design for two reasons:

Only little is known of the consequences of a economic crisis on supply chain risk management (and there are no other studies concerned with this topic).
Case study research is furthermore a good method to study complex phenomena.

The authors decided to focus on the procurement departments of eight participating companies, overall conducting 25 interviewees.

Results

From the interviews the authors inferred propositions in four categories:

Impact on SCRM

The effect of the financial crisis on SCRM process (risk identification, analysis, mitigation and monitoring) has been analyzed. The interviews indicate that the tasks within SCRM process are shifting towards a more comprehensive approach concerning all aspects.

A typical statement concerning the risk analysis is:

Before the financial crisis we didn’t have a very professional assessment of our suppliers’ financials; now we have a very good system working

Risk mitigation vs. acceptance

The authors differentiate two major strategic orientations: Risk acceptance and risk mitigation. They were able to identify two company classes: direct spend (most purchases are raw materials and input products; especially in manufacturing companies) and indirect spend (mostly service companies).
Based on this classification the authors found:

The current financial crisis fosters especially a risk acceptance (as opposed to mitigation) approach in direct spend firms. Indirect spend firms are already more focused on risk acceptance approaches and have not changed their behavior.

Service vs. manufacturing

Next the authors analyze the findings concerning the relationship between manufacturing and servicing companies and conclude:

Overall, we found that the emphasis on the four risk management processes was greater among firms procur- ing predominantly direct materials (manufacturing firms) than for firms producing primarily indirect items (service firms).

Enterprise risk management and SCRM

Finally the author analyzed the relationship between supply chain risk management and enterprise risk management and find that:

“The financial crisis has not influenced the relationship between ERM and SCRM.”
“The existence of an ERM system is a major antecedent for the implementation of a SCRM process.”

Conclusion

Case study research is meant to be the qualitative foundation for further in depth analysis using other methods like surveys, simulation or similar. Blome and Schoenherr deliver exactly this basis, by stating their results in the form of four propositions.

Reference:

Blome, C., & Schoenherr, T. (2011). Supply chain risk management in financial crises – A multiple case-study approach International Journal of Production Economics

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Planning for the Catastrophe

Daniel Dumke — Mon, 11 Jul 2011 09:14:00 +0000

Practitioners often complain about the huge gap between practice and research related to the estimation of risks. In theory all is easy: A disruptive event just gets a probability and outcome assigned. But in practice these figures most often have to be estimated.
Todays article by Knemeyer et al. (2009) covers exactly this dilemma and tries to answer the question of how to plan for a catastrophe.

Catastrophes

A catastrophe can be defined as an event which happens with a low probability but comes with a large impact on the business.

Figure 1: Defining Catastrophes (Knemeyer et al., 2009)

Estimating risks

Risk analysis is a major part of risk management. Figure 2 shows an example of a process where the data from a risk assessment is combined with the understanding of how risks are perceived by managers (e.g. read my articles on Managerial Risk Perception Part 1 and 2). Depending on the context managers seem to either over- or underestimate the probability of low-likelihood events, and since accuracy is very important (if you miss judge the probability of an 1% event by +1% you already doubled your probability and with it the expected loss)

Figure 2: Process for Risk Analysis (Knemeyer et al., 2009)

In the next step the strategies have to be devised and selected. Finally, the strategies should be evaluated on a regular basis to foster organizational learning.

Planning process

Figure 3 shows the suggested planning process.

Figure 3: Process view: Planning for Catastrophes (Knemeyer et al., 2009)

The first step in the planning process is to identify key supply chain locations. A location is considered key if interruption of its operations results in a major disruption in the flow of goods in the supply chain.

After finishing the first step, the manager should have a list of key locations, together with the major catastrophic events that should be considered.

As a next step the probabilities have to be estimated. The authors suggest catastrophe simulation as a tool to estimate probabilities. Figure 4 shows other possibilities. In addition to that, the potential losses have to be evaluated as well.

Figure 4: Methods used for Probability Estimation (click to enlarge; Knemeyer et al., 2009)

For the third step potential countermeasures are designed and selected in the next step for each key location. Figure 5 shows a sample of countermeasures and their impact on probability and incurred loss.

Figure 5: Sample Strategies to mitigate Catastrophes (click to enlarge; Knemeyer et al., 2009)

To select the strategies the authors suggest simple expected loss comparisons.

Conclusion

The suggested process should be suited for implementation within a company. Of course there are several simplifications which have to be analyzed prior to implementation. For instance, the authors suggest to use scenarios (each with probability and impact). I believe that when starting a process implementation like this it might be sufficient to use plain probabilities, but later on probability distributions make show a more detailed and accurate picture. But, I am wondering what you think? Could a process like this be used to improve the risk profile of a company?

Reference:

Knemeyer, A., Zinn, W., & Eroglu, C. (2009). Proactive planning for catastrophic events in supply chains Journal of Operations Management, 27 (2), 141-153 DOI: 10.1016/j.jom.2008.06.002

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Categorization of Supply Chain Risk and Risk Management

Daniel Dumke — Mon, 16 May 2011 14:13:00 +0000

Several questions I receive concern the very basic elements of supply chain risk management. Since reading “Categorization of Supply Chain Risk and Risk Management” by Norrman and Lindroth (2004) I often referred to it, to describe the different aspects.

Framework

Norrman and Lindroth suggest a three dimensional framework to analyze different supply chain risk management issues (figure 1). The dimensions are:

Unit of analysis, describing the levels which are affected by this issue (more local to the company or affecting the whole supply network)

Type of risk or uncertainty, describing if the issue is operational or strategic

Risk and business continuity management process, which shows the stage within the risk management process

Figure 1: Supply Chain Risk Management Framework (Norrman and Lindroth, 2004)

The framework can be applied to many supply chain problems, an example of which can be found in figure 2.

Figure 2: Application of Supply Chain Risk Management Framework (click to enlarge; Norrman and Lindroth, 2004)

Definition of SCRM

Supply chain risk management can be defined as,

… to collaboratively with partners in a supply chain apply risk management process tools to deal with risks and uncertainties caused by, or impacting on, logistics related activities or resources’ (Norrman and Lindroth, 2002)

Since SCRM is dealing with more than the risk from a single company it takes a broader perspective than the traditional risk management approach. It also considers the rippling effects of events connected entities.

There are several definitions for risk. The Royal Society defined it in 1992 as:

risk is the chance, in quantitative terms, of a defined hazard occurring. It therefore combines a probabilistic measure of the occurrence of the primary event(s) with a measure of the consequences of that/those event(s)

An important dimension of risk is its contextual association, which can be strategic, financial, operational, commercial or technical:

Strategic: the risk of plans failing or succeeding, e.g. marketing strategy, changes in consumer behavior or political/regulatory changes.

Financial: the risk of financial control failing or succeeding.

Operational: the risk of human error or achievement, e.g. design mistakes, unsafe behavior, employee practices risk, sabotage.

Commercial: the risk of relationships failing or succeeding, e.g. business interruption due to loss of key executive, supplier failure or lack of legal compliance.

Technical: the risk of physical assets failing/being damaged or enhanced, e.g. equipment breakdown, infrastructure failure, fires, explosion, pollution, etc.

But the locational source of the risk is as important and can be divided into (a) externally-driven or environmental risk, (b) internally-driven or process risk, © decision-driven or information risk.

Risk Management Process

After highlighting some basic aspects of SCRM and risks in the supply chain context, the authors present their risk management process, which contains three elements: Risk Analysis and Assessment, Risk Management and Business Continuity Management (BCM).

The process starts with a listing of the risks affecting the supply chain using Fault Tree Analysis (FTA) and assessing the effects of those events in case they happen on the supply chain using Event Tree Analysis (ETA). As the second step, the decision has to be made if the risk can be accepted or if the risks can be mitigated by reducing the likelihood or impact.

Thirdly, one can argue if BCM (see figure 3) has to be part of a risk management process, nonetheless it is related, since it covers the aspect of planning for when an adverse event happens.

Figure 3: Business Continuity Management (Norrman and Lindroth, 2004)

Conclusion

The framework combines several important aspects of risk management in general and specifically supply chain management. It is therefore very suitable for an introductory purpose on supply chain risk management.

Reference:

Norrman, A., & Lindroth, R. (2004). Categorization of Supply Chain Risk and Risk Management Supply Chain Risk (Ed. Clare Brindley), 14-27

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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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Purchasing's involvement in risk management

Daniel Dumke — Tue, 15 Mar 2011 09:02:00 +0000

I already reviewed one of the articles of Zsidisin (Perception of Supply Risk). Today I had a look at an article about how the purchasing organization is involved in the supply chain risk management activities.

Exploratory Study

Zsidisin et al. did an exploratory study with semi-structured interviews with purchasing professionals in nine companies from the manufacturing industry.

Semi-structured, open-ended interviews were employed to gain an understanding of how purchasing organizations conduct supply risk assessments and incorporate contingency plans.

Findings

The analysis show that the formalization of the risk management techniques used are quite different. The most commonly used method for risk mitigation is: multiple sourcing for strategic parts. But some of the respondents also had more elaborate approaches to reduce risk, like:

Closer relationships with suppliers
Taking suppliers responsible for risk mitigation
Common product platforms and industry standards

Furthermore buffer strategies are used, as of course holding safety stock, controlling stock within the whole SC or multi-sourcing strategies.
Risk management are seen as important functions, but most also stated that the priority is set very low.

Conclusion

It is interesting to see that similar patterns, like the divergence between the expressed need for risk management activities and the current state of those, arise also in talks I had with SC professionals in the last year. So compared to ten years ago not so much seems to have changed in this regard.

Reference:

Zsidisin, G., Panelli, A., & Upton, R. (2000). Purchasing organization involvement in risk assessments, contingency plans, and risk management: an exploratory study Supply Chain Management: An International Journal, 5 (4), 187-198 DOI: 10.1108/13598540010347307

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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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