Manmohan S. Sodhi

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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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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Avoiding Supply Chain Breakdown

Daniel Dumke — Mon, 20 Jun 2011 14:00:00 +0000

This article presents a comprehensive practice oriented framework for managing supply chain disruptions by Sunil Chopra and ManMohan S. Sodhi. The article has been published in the MIT Sloan Management Review in 2004. The framework covers everything from risk analysis to the selection of the risk mitigation strategy.

Risk Categories

Chopra and Sodhi find nine categories for risk in the supply chain context. In figure 1 they contrast the risks with the corresponding risk drivers.

Figure 1: Risk Categories (Chopra and Sodhi, 2004)

Risk mitigation

The above mentioned risks have to be analyzed and if necessary mitigated. Risk mitigation as a process of managerial decision making can be quite cumbersome, since there is no catch-all strategy and some strategies can even increase other risks as a side effect. Figure 2 highlights the effect of selected mitigation strategies on the risk categories.

Figure 2: Effect of Risk Mitigation Strategies (Chopra and Sodhi, 2004)

Cost of risk mitigation

Very often risk mitigation not only comprises a laborious decision process, but also the resulting strategy implementation can mean a huge financial expenditure. Some strategies on the other hand are not only capable of reducing risks but can also increase profitability. Figure 3 highlights the dilemma. The goal should be to jump from the current position “X” to a higher risk-return curve (eg. “A”), instead of moving within the existing decision space.

Figure 3: Trade-off between Risk Reduction and Cost/Reward (Chopra and Sodhi, 2004)

What-if analysis

The authors suggest to use a what-if scenario analysis to assess a companies / supply chains propensity towards certain risks. In the matrix displayed in figure 4 the risk categories are further separated into supplier-related, internal and customer-related parts.

Figure 4: Exploring Scenarios using What-If Analysis (click to enlarge; Chopra and Sodhi, 2004)

Risk and reward

To balance risk versus reward the authors recall three essential relationships:

The cost of risk reduction increase with the level of risk (the higher the risk the higher the cost to mitigate)
Risk pooling reduces the cost to mitigate risks (eg. pooling demands of several customers reduces the cost to mitigate the risk)
The pooling effect is more pronounced when the pooled risks are very high

Depending on the level of risk and the cost of a mitigation reserve the authors suggest four generic strategic approaches to how to mitigate risks under different circumstances (figure 5).

Figure 5: Risk Mitigation Strategies depending on the Level of Risk and the Cost of Risk Mitigation (Chopra and Sodhi, 2004)

Tailored strategies

Finally the authors show examples of risk mitigation strategies and when to use them. The results are shown in figure 6.

Figure 6: Strategies for Risk Mitigation (Chopra and Sodhi, 2004)

Conclusion

I was surprised by the number of topics the authored covered in a single paper. They really tried to cover the whole risk mitigation process, and they succeeded.

Of course, most of the presented results are not really new and not covered in depth, but they make a excellent basis for strategic, business oriented discussions on supply chain risk management.

One drawback though: I did not really understand why exactly those risk categories (figure 1) were chosen. From my point of view the those are not very intuitive since the categories are not exclusive and thus overlap (eg. a disruption can also lead to a delay. Or why is a information infrastructure breakdown a systems risk and not a disruption?). This makes it harder to use the risk categories efficiently. But the categories could easily be replaced by another framework (eg. by Christopher and Peck, 2004)

Reference:

Chopra, S., & Sodhi, M.S. (2004). Managing Risk To Avoid Supply-Chain Breakdown MIT Sloan Management Review, 46 (1), 53-61

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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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