Christopher S. Tang

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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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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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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Robust Strategies for Mitigating Disruptions

Daniel Dumke — Wed, 25 May 2011 14:51:00 +0000

There are several scientific research centers on supply chain risks in the US (as around the world): The east coast has several researcher on this topic e.g. with Yossi Sheffi from the MIT, in the center with Joseph Fiksel from the Center for Resilience at the Ohio State University and on the west coast Christopher Tang from the UCLA or Hau L. Lee from Stanford University.

I wanted to write about this article, by Christopher and Tang, for some time now.

History teaches us

After a major disruption there are many firms who severely suffer and take a long time to fully recover. On the other side of the spectrum there are a few companies that continue to satisfy their customers demand, and thus use these capabilities to retain and acquire new customers in the process.

Defining robust strategies

Tang defines “robust” strategies as those which fulfill two objectives at once:

Help reducing costs or improve customer satisfaction during times without a disruption,
Support the firm during and after a disruption in continuing operations.

The goal therefore is to create a win-win situation where the investment into the strategy can pay of no matter if a disruption occurs or not.

Cases

Tang lists three cases to highlight some of the few companies that achieved that goal:

Nokia vs. Ericsson
I wrote about this case before, where Nokia and Ericsson were affected by the same disruption at a micro chip plant of a common supplier. Nokia was able to quickly adapt the product design and find another supplier, while Ericsson suffered sever financial consequences leading to the Ericsson / Sony “merger”.
Li and Fung
changed its supply plan in a flash to meet customer demand during a currency crisis.
Dell’s adaptive pricing strategy
to accomodate to supply shortages and still guide and satisfy customer demand.

Robust strategies

Building on these case the author selects and describes nine supply chain strategies that fit above mentioned definition (figure 1).

Figure 1: Robust Supply Chain Strategies (click to enlarge; Tang, 2006)

There are however challenges which have to be considered before implementing the strategies:

Cost versus benefits
These strategies probably make it easier to justify the investments due to their positive effects with or without disruptions, nonetheless there is still a tradeoff which has to be analyzed. Tang suggest to think of the remaining cost surplus as insurance premium.
Strategic fit
Not every strategy may fit for every company. For example Dell’s pricing strategy might be adaptable for airline tickets but not for heavy machinery with a new quote every day.
Proactive execution
Proactive strategies (e.g. rerouting of shipments after a port strike) can be better than reactive strategies (e.g. increasing stocks).

Conclusion

I like this article due to the practice oriented approach taken. But I am missing some clearer description of the ways to generate these strategies. Also, there is no consideration of the completeness of this listing. So I have to assume that it is probably a good starting point. And to my knowledge there are already several studies building on this paper.

As a side note: Nokia also may be a mixed example for a company as role model for good strategies. I would argue that either Nokia was lucky or had a very in-homogenous state of strategy execution: The mentioned disruption happened in 2000, exactly the same time where they should have laid ground for the new smart phone generations which are commonplace now from many manufacturers, but not Nokia.

Reference:

Tang, C. (2006). Robust strategies for mitigating supply chain disruptions International Journal of Logistics Research and Applications, 9 (1), 33-45 DOI: 10.1080/13675560500405584

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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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