Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers

A two-fold purpose

The book, so the authors say, serves a twofold purpose:

• Understanding and assessing risk in the supply chain
• Decision making and risk mitigation in the supply chain

Consequently, the book has two sections covering the above divisions, with 4 and 5 chapters each, written by top ranking researchers from around the world. That much is true, as I recognize many, but not all of the names of the chapter authors.

Understanding and assessing risk

Effective Management of Supply Chains: Risks and Performance by Bob Ritchie and Clare Brindley is very similar to their journal article on Measuring supply chain risk management and performance, but the concepts are further developed than in the journal article.

Managing Supply Chain Disruptions via Time-Based Risk Management by ManMohan S. Sodhi and Christopher S. Tang is a fresh new approach towards supply chain risk, leaning on business continuity, and focusing on reducing the impact by shortening the recovery time. In this they employ a “3D”-model: (1) Detect the event, (2) Design a response, (3) Deploy the response.

Prioritization of Risks in Supply Chains by Mohd. Nishat Faisal lloks at supply chain disruptions in Small and Medium sized Enterprises, since they are particularly vulnerable to supply chain failures, due to limited resources for planning and mitigation.

A Generalized Simulation Framework for Responsive Supply Network Management by Jin Dong, Wei Wang and Teresa Wu evaluates Discrete Event Simulation as a key component in responsive supply network management for proactively assessing the robustness and resilience to disruption of a supply network

Decision making and risk mitigation

Modeling of Supply Chain Risk Under Disruptions with Performance Measurement and Robustness Analysis by Qiang Qiang, Anna Nagurney and June Dong develops a multi-tier supply chain network model with multiple decision-makers associated at different tiers and with multiple transportation modes for shipment of the good between tiers. The model formulation captures supply-side risk as well as demand-side risk, along with uncertainty in transportation and other costs. Not the easiest model to understand, but it serves its purpose well.

The Effects of Network Relationships on Global Supply Chain Vulnerability by Jose M. Cruz. analyzes the effects of levels of social relationship on the vulnerability of global supply chain networks. The chapter comes up with a network performance measure for the evaluation of the efficiency and vulnerability of global supply chain networks,  capturing risk, transaction cost, price, transaction flow, revenue, and demand information, while keeping in mind the decision-makers behavior.

A Stochastic Model for Supply Chain Risk Management Using Conditional Value at Risk by Mark Goh and Fanwen Meng establishes a stochastic programming formulation for supply chain risk management using conditional value at risk. Right…they lost me already here. I’ll skip this chapter.

Risk Intermediation in Supply Chains by Ying-Ju Chen and Sridhar Seshadri is better. They say that in some supply chains, retailers are relatively small and averse to taking risk, and thus, the varying degrees of risk aversion represent a hurdle for the design of a uniform contract for all retailers. However, this can be modelled and simplified, which is what they do.

Forecasting and Risk Analysis in Supply Chain Management: GARCH Proof of Concept is written by an array of researchers: Shoumen Datta, Don P. Graham, Nikhil Sagar, Pat Doody, Reuben Slone and Olli-Pekka Hilmola. They explore advanced forecasting models, focussing specifically on amplified demand.

The verdict

Personally, the first section is the part of the book that I like best. Forecasting and stochastic modeling for decision making are not really my cup of tea; I’m much more a man of visions, strategies, and concepts. That said, the 2nd section does have very interesting articles for me as well, it’s not all math and equations.

Reference

Wu, T., & Blackhurst, J. (Eds.). (2009). Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers London: Springer.

Author links

• asu.edu: Teresa Wu
• iastate.edu: Jennifer Blackhurst

Publisher link

• springerlink.com: Managing Supply Chain Risk and Vulnerability

amazon.com

• Buy this book at amazon: Managing Supply Chain Risk and Vulnerability

Related

• husdal.com: Book Review: Supply Chain Risk
• husdal.com: Book Review: Managing Risk and Resilience in the Supply Chain

Uncertainty, uncertainty, uncertainty

According to Jean V Murphy of SupplyChainBrain, the title alludes to “choke points” that can jeopardize an organization’s ability to provide value

The root cause is the way that supply chains have been redesigned and reconfigured over the last decade in response to outsourcing, off-shoring and customer/vendor empowerment.

While some good has come from globalization, the downside is that it significantly increases the organization’s exposure to uncertainty, but not all managers are aware of this, let alone the 1o “laws” that govern any business venture.

Globalization: the hidden culprit

Gary Lynch picks up on a notion that I highlighted on this blog last year, namely the 2008 Global Report by the World Economic Forum, where the hyperoptimization of supply chains and the resulting supply chain risk was put forward as a major contributor towards the global risk scenario.

All for one, one for all

In supply chains, everyone is connected. It is impossible to separate the supplier from the company or the company from the customer. The only way the supply chain can work is one for all, all for one.

Click image for larger version

This book shows you how everyone is involved in the supply chain itself, often on several levels at the same time, how the chain is exposed to an infinite number of constantly changing threats; how weak links in the chain represent threats and vulnerabilities, to profitability, continuity, safety and health; and how these threats can be mananged, reduces and eliminated.

The Ten Laws

According to Lynch, these are the ten basic laws of SCM:

• If you don’t manage and lead change you have to surrender to it.
• The paradigm should destroy the parasite. Begin by defining the paradigm, not by fighting the parasite.
• Manage you business DNA in a petri dish of evolving risk.
• In supply chain risk management, demand trumps supply.
• Never set up your supplier for failure
• Managing production risk is a dirty job. Focus on managing the endless risk of manufactured weakest links.
• The logistics risk management rule. Managing the sum of parts does not equal managing the whole.
• Mitigation: If supply chain risk management isn’t the solution, it will soon become the problem.
• Financing: The best policy is knowing what’s in your policy.
• Manage the risk as you manage your own: Your supply chains are all interdependent but unique.

Much of what it comes down to in risk management is just common sense. But in the day-to-day business of managing operations and logistics, the oversight and wider implications of one’s actions are often lost.

Four key points

Again, back to Jean V Murphy, four key points pervade Lynch’s thinking:

• Everyone, without exception, is part of a supply chain.
• No risk strategy is a substitute for bad decisions and a lack of risk consciousness.
• Get the details right but see the whole picture.
• People always operate from their own self interest.

Lynch certainly manages to hammer inn this message, but gently. A longer interview with Gary Lynch can be found on the Kinaxis Blog, where he explains some of his views and ideas.

Conclusion

This book is full of universally applicable real-life examples, obviously written for the practitioner and supply chain professional, and perhaps not so much for the scholar or researcher.  Nonetheless, considering the highly affordable price, this is a book that definitely should be in you bookshelf.

Reference

Lynch, G (2009) Single Point of Failure. Hoboken: John Wiley & Sons

Author link

• marshriskconsulting.com: Gary Lynch
• blog.kinaxis.com: Getting Supply Chain Risk Management right

Publisher link

Visit our partner Wiley.com to save 15% on your entire online order. To save, enter discount code AFF15 in the Promotion Code field as you’re checking out. Click the Apply Discount button so your savings are calculated.

• wiley.com: Single Point of Failure

Related

• husdal.com: The new global risk: Hyperoptimization of supply chains
• husdal.com: Are you the weakest link in your supply chain?

Blind?

In hindsight, I should have known better, I’ve come across the scholars from the Copenhagen Business School more than once, but it never occurred to me search their website? Stupid is as stupid does.

Solid work

I am very much impressed with this extensive literature study on risk and uncertainty within Supply Chain Management. It is – by my judgement – better than Vanany et al. (2009). In fact, Sørensen lists 136 articles, compared to Vanany et al.’s only 82 articles, and that’s 5 years later. That said, Vanany et al. do not investigate much earlier than 2000, while Sørensen goes as far back as 1970. And needless to say, Sørensen is a member of ISCRIM.

The classification scheme

Sørensen looks at 23 journals in 3 types of journals:

• Supply Chain Management/Logistics
  • 10 journals
• Operations Management
  • 4 journals
• Management
  • 9 journals

The articles are classified according to orientation:

• Supply
• Internal
• Demand
• Network

and strategic level

• Strategy
• Operational

and the explicit use of theory/framework is listed as well. For each group of journals the common themes in the articles are determined:

• Supply Chain Management/Logistics (36 articles)
  • Improving Techniques for Operations
  • Risk Management
  • Securing the Supply Chain
  • Supply Management
  • Vulnerability in Physical Flows
• Operations Management (44 articles)
  • Improving Techniques for Operations
  • Risk Management
  • Supply Management
• Management (43 articles)
  • Improving Techniques for Operations
  • Risk Management
  • Risk Preference
• Cross-database (13 articles)
  • Improving Techniques for Operations
  • Risk Management
  • Risk Preference
  • Securing the Supply Chain
  • Supply Chain Design
  • Supply Management
  • Vulnerability in Physical Flows

The listings are very structured and there’s a lot work that has gone into it, I can tell that much…impressive, to say the least. For example, here’s the list of SCM/Logistics journals:

The findings

Interestingly, so Sørensen says, the literature study reveals an absence of Risk Management within Supply Chain Management. Despite many efforts related to minimizing uncertainty, and assessing the vulnerability of the market and the internal operations, apparently risk has not been perceived as a parameter for supply chain design. Really? Personally, I beg to differ here. That was 2004 and now is 2009. Risk Management is now increasingly becoming an integral part of Supply Chain Management, at least I hope so. That said, most SCM textbooks still omit any mentioning of supply chain risk or only deal with it on a cursory level, so there’s still a long way to go.

Conclusion

This is the first time I have seen such an extensive literature study on risk in supply chain management. While the articles as such are not reviewed, the classification alone provides a solid framework for further analysis and research. Not only that, I’ve been made aware of journals and articles I never heard about before, and that has added a lot to my own research, and has added even more articles to my never ending literature review of supply chain risk.

Reference

Sørensen, Lars Bøge (2004) How risk and uncertainty is used in Supply Chain Management: a literature study. Working paper 2004-02. Copenhagen: Copenhagen Business School. Available online at http://hdl.handle.net/10398/6296, last accessed: 2009/11/08

Download

• cbs.dk: How risk and uncertainty is used in Supply Chain Management: a literature study

Author link

• linkedin.com: Lars Bøge Sørensen

Related

• husdal.com: Supply Chain Risk Management: Literature Review and Future Research (Vanany et al., 2009)

Roads Rule

The article picks up a notion I presented on this blog some time ago. Roads are perhaps more important to society and the economy than computers, because the one critical infrastructure everyone needs are roads. Unfortunately the reports I mentioned in that post are available in Norwegian only, otherwise McKinnon would surely have found them and used them as a reference.

Black Swans

McKinnon’s work is based on  a reflection on several major transportation-hampering events, particularly the 1979 truck driver strike and the 200o fuel distribution blockade.

The main purpose of the research was to illustrate, to government officials, company management and the wider public, the dependence of the UK economy on the road freight sector. A subsidiary aim was to examine the process of economic degeneration that would result from the widespread dislocation of supply networks and to highlight points of maximum vulnerability in these networks.

McKinnon calls these events for Low Probability High Impact Events, or Black Swan events, as they are called in yesterday’s post on an article from the Harvard Business Review.

Scenario Analysis

The research is a forward-looking what-if scenario analysis with a backward-looking experience to rely on, using the following assumptions:

No advance warning would be given to companies or consumers. They would not, therefore, be given the opportunity to stockpile or make other contingency plans.

Products would continue to be consumed at an average rate and there would be no ‘panic buying’. If panic buying did occur, this rate of depletion could increase exponentially with the result that inventories of critical products such as fuel and groceries held at point of sale would be exhausted within a day or two.

Only trucks with a gross weight of 3.5 tonnes or more would be affected.

No Beer Today

The impacts of a transport disruption are analyzed for sectors where

distribution is exclusively or predominantly by road

delivery by road is highly time-sensitive

limited inventory is held in the supply chain

order lead times are short

the sector exerts strong influence on the level of economic activity/quality of life

This led McKinnon to investigate the following sectors: grocery retailing, food services, fuel supply, healthcare, banking, postal services, parcels, beer and waste disposal. The impact on each sector is described in detail, while more general consideration are also given to the impacts on agriculture, manufacturing industry, the construction industry, office-based services sector and Britain’s external trading links. I am not sure why he included beer here, but I guess the local pub plays a major role in many Brits’ lives.

The country grinds to a halt

The impact of a major withdrawal of transport abilities is felt almost immediately:

The level of economic activity would drop sharply in the days following the withdrawal of road transport. After a week, the country would be plunged into a deep economic and social crisis. Once the trucks starting running again, it would take several weeks for most production and distribution systems to recover. Many businesses would not survive a week-long suspension of their operations. At any given time there are many companies whose trading and cash flow positions are fragile. They would be unable to withstand even a temporary loss of business.

McKinnon summarizes the scenario in a 5-day consecutive table:

Not a very bright outlook, and very much in line with the transportation disruption impacts found in the Norwegian study I referenced above. That is why transportation is so important and why access to transportation means business continuity, while no access means business dis-continuity. That said, in the current and still economic downturn, inventory depletion is not the worst that could happen.

Related research

You can find more research publications on supply chain risk and resilience at the Supply Chain Research at Centre Cranfield University. I also recommend visiting the New Zealand Resilient Organisations Research Group (ResOrgs), a multi-disciplinary team of 17 researchers and practitioners committed to making New Zealand organisations more resilient in the face of major hazards in the natural, built and economic environments.

Reference

McKinnon, Alan (2006). Life Without Trucks: The Impact of a Temporary Disruption of Road Freight Transport on a National Economy Journal of Business Logistics, 27 (2), 227-250 

Author link

• sml.hw.ac.uk: Alan McKinnon

Read online

• findarticles.com: Life Without Trucks

Related

• husdal.com: Are Roads more important than Computers
• husdal.com: Black Swan Events
• husdal.com: Supply Chain Resilience

Misunderstood Risk Management

It was a post on Michael Herrera’s BCP blog that alerted me to this article in the HBR, and it is a good article indeed. Risk Management, so Taleb & Co. say, should be about lessing the impact of what we don’t understand. It should not be a futile attempt at developing sophisticated techniques, which only succeed in making us believe that we can – when in fact we can not – predict our social, technological, natural and economic environment.

Six Mistakes

The article discusses six mistake that many executives make in risk management:

• We think we can manage risk by predicting extreme events
• We are convinced that studying the past will help us manage risk
• We don’t listen to advice about what we shouldn’t do
• We assume that risk can be measured by standard deviation
• We don’t appreciate that what is mathematically equivalent isn’t psychologically so
• We are thaught that efficiency and maximizing shareholder value don’t tolerate redundancy

Six answers

Instead of calculating the odds of whether things will happen, rather think about what you will do if they do happen. That’s actually very basic in crisis management planning. If you have made planned and exercised for one event, you can rest assured that most other events are covered by this plan. People who can handle one type of crisis, always have the potential to handle many types of crises.

Today’s world, let alone the future world, will never be like the past. There will always be something “unprecedented”. Hindsight can never be converted into foresight. Lessons should be learned from the past, yes, but the past should not be used to predict the future.

A dollar not lost is a dollar earned, and preventing losses is perhaps a better strategy than gaining profits, and risk management activities are in fact profit-generating activities. There is no separation.

Statistics is a complicated science and the often cited standard deviation is not average variation, but the square root of average squared variations. Although in a perfect world of randomness, most events fall within the -1 and +1 standard deviation, in real life (”Black Swan”), movements can easily exceed 10, 20 or 30 standard deviations.

In absolute quantified numbers, two events may be equal, but subjectively, in a group of people, the same event may have very different value to each of them and may be understood entirely differently. After all, number are just numbers, feelings, values, and risk acceptance are not so uniform.

Optimization of processes makes them vulnerable to changes. Robust processes can survive change, but resilience comes at a price. On the other hand, if you are too highly leveraged and specialized or optimized, you may have no other option if something fails, a recipe for disaster.

Achilles’ heel

The biggest risk, so the author conclude, lies within us:

We overestimate our abilities
and underestimate what can go wrong.

The message is, I guess, expect the unexpected, and always prepare for the worst. And most of all: Recognize your limits. And don’t be like Henry Kissinger, who said “There can’t be a crisis today.  My schedule is already full.”

Disasters – prepare or react?

This article carries and interesting notion, not so unlike the recent BBC World Debate on Disasters. Should we actually bother to spend time and money on disaster mitigation, or should we rather focus on preparing for disaster recovery?  Is re-active better than pro-active?

Black Swan Events – the book

On a side note, Nassim Taleb is also the author of the book The Black Swan: The Impact of the Highly Improbable

Paul Kleindorfer

Low Probability High Impact events are a specialty of Paul Kleindorfer, who has  been  reviewed on this blog previously.

Reference

Taleb, N M, Goldstein D G & Spitznagel, M W (2009) The Six Mistakes Executives Make in Risk Management. Harvard Business Review 87(10), 78-81

Link

• HBR: The Six Mistakes Executives Make in Risk Management
• michaelherrera.wordpress.com: Black Swan Events

Author links

• fooledbyrandomness.com: Nassim Taleb
• dangoldstein.com: Daniel Goldstein
• wikipedia.org: Mark Spitznagel

Related

• husdal.com: Disasters – prepare or react?
• husdal.com: What’s so special about Paul Kleindorfer?

Not the first time

Honestly, I must admit, first time I came across Stephan Wagner was in Wagner & Bode (2006) An empirical investigation into supply chain vulnerability, and at that time I wasn’t really taken aback by what I read. This time, however, is very different. While I’ve always struggled with the Graph Theory Concept (I’m a qualitative much more than a quantitative thinker), and I still struggle when reading this paper, I have to give my sincere laud for developing a totally novel approach towards analyzing supply chain vulnerability.

Supply Chain Vulnerability Index

Why are supply chains more vulnerable now than before? Wagner and Neshat list four reasons:

• Disasters (man-made and natural) have increased in number and in intensity during the last decades.
  I’m not sure this counts as a valid reason, but OK.
• Today’s supply chains are more complex than they used to be.
  Yes, no question there.
• Efficiency-driven supply chain management measures have made operations leaner and more efficient in a stable environment, they also make them more prone to disruptions in an unstable environment.
  True. A very valid reason.
• With competition becoming fiercer, competitive pressures often force companies to assume “calculated risks”.
  Has the acceptance bar been lowered too much? Perhaps.

Despite these reasons, so claim Wagner and Neshat, the understanding of the supply chain vulnerability concept still remains on a conceptual and normative level in most of the literature, so they say, and I have to concur here. That is why the main thrust of the research described in the paper is to develop a quantitative approach, were graph modeling is used to measure vulnerability using its drivers and their inter-dependencies. The result: a Supply Chain Vulnerability Index, SCVI.

Supply Chain Vulnerability Definition

While others have defined supply chain vulnerability in a succinct manner, e.g. Christopher’s “exposure to serious disturbance”, Wagner & Neshat describe supply chain vulnerability “precisely” as:

While a supply chain disruption is the trigger that leads to the occurrence of risk, it is not the sole determinant of the final loss. It seems consequential that also the susceptibility of the supply chain to the harm of this situation is of significant relevance. This leads to the concept of supply chain vulnerability. The basic premise is that supply chain characteristics are antecedents of supply chain vulnerability and impact both the probability of occurrence as well as the severity of supply chain disruptions.

Verbose, yes, but precise? Nonetheless, the definition carries within it all the necessary ingredients that need to be measured.

Supply Chain Vulnerability Drivers

Wagner and Neshat categorize supply chain vulnerability drivers (SCVD) into three groups: supply side, demand side, and supply chain structure.

Vulnerability drivers on the demand side reside in the downstream supply chain operation, including the customer (e.g., customer dependence, financial situation of the customer), the product and its characteristics (e.g., its complexity and life-cycle), the outbound supply chains (e.g., the physical distribution of products to the end-customer), the distribution and transportation operation required for serving the customer.

Vulnerability drivers on the supply side can reside in the supply base, the supplier portfolio or the supplier network (e.g., supplier-supplier relationships, supply base complexity, supply base structure).

Vulnerability drivers in the supply chain structure stem to a large degree from the disintegration of supply chains and the globalization (and off-shoring) of value-adding activities.

This encompasses the division of risk sources in Christopher (2005) and in Jüttner et al. (2003).

Supply Chain Vulnerability Levels

Wagner & Neshat contend that supply chain vulnerability exists and interconnects at many levels, something that is very reminiscent of Peck (2005) and Peck (2006).  Supply chain vulnerability can be thus measured and managed at different levels:

• an entire economy
• an industry
• an entire supply chain
• the focal firm

While Peck makes her argument from the bottom up, Wagner & Neshat start from the top, indicating that this is where supply chain vulnerability has the greatest effect and where efforts to reduce vulnerability should focus on, because the firm level of analysis is narrower and fails to consider the risks stemming from a firm’s involvement in networks of production and supply.

Decision makers at these different levels are likely to have a different understanding of  supply chain vulnerability. And, the higher the decision level, the more difficult it is for an individual firm to influence supply chain vulnerability.

Supply Chain Vulnerability Graphs

Graph theory may seem like a stranger to supply chain modeling, but Wagner & Neshat are not the first to apply graph theory to supply chain risk and related subjects. Faisal, Banwet & Shankar (2007) used graph theory for the quantification of risk mitigation environment of supply chains. The reason for using graph theory with supply chain vulnerability are the inter-dependencies among the supply chain vulnerability drivers .

Graphs have two basic elements: the node (or vertex) and the edge (or link). By considering vulnerability drivers as vertices and the inter-dependencies between them as edges, a graph can be plotted for a specific supply chain.

Thus, graph modeling does seem an appropriate method to quantify vulnerability and tap the inter-dependencies.

Wagner & Neshat propose that

a weighted directed graph and its adjacency matrix can be applied to calculate the SCVI. The interactions among the vulnerability drivers as considered in this article are direction-dependent and thus these interactions and their intensities are represented by a weighted directed edge.

Translated into a graph and an adjacency matrix, it looks like this:

While the graph representation clearly shows variables and their inter-dependencies, the adjacency matrices can easily be stored, retrieved and processed by computer programs. Truly an ingenious approach to modeling supply chain vulnerability. The Supply Chain Vulnerability Index SCVI can be thus calculated as follows:

• Step 1: Finding graph nodes
• Step 2: Finding graph’s weighted and directed edges
• Step 3: Calculating adjacency matrix permanent
• Step 4: Comparing different SCVIs (for different risk mitigation efforts)

Implications

Wagner and Neshat even go as far as providing solid pros and cons of their method: First, the applicability of the proposed approach  depends heavily on the availability of quantified data for the drivers of supply chain vulnerability.  Without grounded data this method will not work. Second, the reliability of the direction of the edges in the graphs depends on expert judgment. Bias beware. Third the graph theoretical approach may not fully take into account the dynamic nature of supply chain vulnerability.  Things change and graphs are perhaps too static. Fourth, while this is a novel method to measure and illustrate supply chain vulnerability, other methods are not necessarily worse suited. Humble, indeed.

Critique

Yes, this is a novel approach. I personally may still be struggling with the intricacies of graph theory, but the method is immediately attractive because of its illustrativeness. That said, the lack of quantifiable data on the interdependencies of the supply chain drivers may pose a serious hurdle in making this method generally applicable.

Reference

Wagner, S., & Neshat, N. (2009). Assessing the vulnerability of supply chains using graph theory International Journal of Production Economics DOI: 10.1016/j.ijpe.2009.10.007

Author links

• ethz.ch: Stephan M. Wagner
• ethz.ch: Nicrouz Neshat

Related

• husdal.com: Book Review: Supply Chain Risk

Basics of flexibility

Flexibility is an important addition to the more traditional topics of supply chain management, such as quality, cost, time and service. Winkler defines flexibility as

the ability of a system to perform proactive and reactive adaptations of its configuration in order to cope with internal and external uncertainties.

Strategic Supply Chain Networks

Supply Chain Flexibility is here seen as prerequisite for gaining competitive advantage and improving business success. To improve the flexibility of a supply chain Winkler suggests building up and using strategic supply chain networks.

A strategic supply chain network is characterised by a selected circle of supply chain members, a collective identity, an internal role differentiation and power division, the delegation of responsibility, its’ limited permanence, the possibility to transpose members, and a rational procedure for the realization of common targets executed by all of the participating companies. The strategic supply chain network is a virtual organization because every embedded member remains independent while participating in the network.

It is interesting to see how Virtual Organizations or Virtual Enterprise Networks  slowly but surely are making their way into regular Supply Chain Management theory. It’s not often that I come across this term in journals not specifically dedicated to this subject.

Winkler notes that

To design and manage a strategic supply chain network, the SCM has the task of first establishing an effective structure within the supply chain, and secondly, to guarantee on an efficient performance. The tasks of an SCM can be assigned to the life cycle. It is here that we differentiate between the stage of design, performance, development and termination.

The supply chain life cycle is not often touched upon in SCM literature, and it is only rarely that I encounter papers or books dealing with with life cycle concept. This is another reason for me to wholeheartedly enjoy the holistic approach that Winkler uses.

Literature Review

The literature review centers around some highly recommendable papers,

• Barad, M., & Sapir, D. E. (2003). Flexibility in logistic systems—modeling and performance evaluation International Journal of Production Economics, 85(2), 155-170
• Das, S. K., & Abdel-Malek, L. (2003). Modeling the flexibility of order quantities and lead-times in supply chains International Journal of Production Economics, 85(2), 171-181.
• Duclos, L. K., Vokurka, R. J., & Lummus, R. R. (2003). A conceptual model of supply chain flexibility. Industrial Management and Data Systems, 103(5/6), 446-456.
• Garavelli, A. C. (2003). Flexibility configurations for the supply chain management International Journal of Production Economics, 85(2), 141-153.
• Lummus, R. R., Duclos, L. K., & Vokurka, R. J. (2003). Supply Chain Flexibility: Building a New Model. Global Journal of Flexible Systems Management, 4(4), 1-13.
• Sanchez, A. M., & Perez, M. P. (2005). Supply chain flexibility and firm performance: A conceptual model and empirical study in the automotive industry. International Journal of Operations & Production Management, 25(7), 681-700.
• Vickery, S., Cantalone, R., & Dröge, C. (1999). Supply Chain Flexibility: An Empirical Study. Journal of Supply Chain Management, 35(1), 16-24.

highlighting the various concepts and interlinking the various definitions  of flexibility and the consequent  implications for supply chain flexibility.

The framework

Winkler’s framework appears complex, but it is stunningly simple:

He links supply chain resources with supply chain objects, i.e. subjects of modification to achieve flexibility, which is measured using a set of parameters, which reflect the results of the flexibility improvement (or not).

Supply Chain Flexibility Parameters

In order to judge the supply chain flexibility of the strategic supply chain network, Winkler proposes at set of flexibility parameters:

Transparency

• T = (Σ _j=1:n Known SC elements_j / Σ _i=1:m SC elements_i) X 100

Simplicity

• S = (1 / Σ _i=1:m SC elements_i) X 100

Responsiveness/Agility

• RA = (Σ _j=1:n Standardized SC element_j / Σ _i=1:m SC element_i) X 100

Security/Reliability

• SR = f (quality of SC elements)

Winkler admits that more parameters can be set up, but he has limited himself to these four.

Supply Chain Flexibility Potentials

As already mentioned above, within strategic supply chain networks specific flexibility potentials can be developed to realize a high degree of supply chain flexibility:

I am very fond of this figure. Simple, yet all-encompassing. I am always impressed with scholars who manage to express their ideas in figures that are easy to comprehend. It shows an ability not only to truly understand their own subject matter but also an ability to convey their message in a clear manner to an audience unfamiliar with the subject matter.

Critique

If there is one thing I would want to disagree with here, it is the definition of responsiveness/agility, or rather the lacking definition of agility as I see it. In my world agility and flexibility are inherently different.  Flexibility is scheduled or planned adaption to unforeseen yet expected external circumstances. Agility is unplanned and unscheduled adaption to unforeseen and unexpected external circumstances. With Winkler, agility seems to be a function of how standardized the supply chain is. That said, it does make sense that more operationally standardized a supply chain is, the more responsive it can be.

What is also lacking is a better definition of what constitutes quality of supply chain elements besides referring to the obvious need for high quality in order to gain sufficient flexibility.

I would also have liked to see a clearer expansion of the virtual enterprise concept, albeit it is present in much of the paper.

A new Journal

The article is printed in the first issue of the first volume of Logistics Research, a new journal with an interesting mixture of listed topics: Engineering, Engineering Economics, Organization, Logistics, Marketing, Production/Logistics, Industrial and Production Engineering, Philosophy of Language, Operations Research/Decision Theory and Commercial Law. So far, though, judging only by the first two issues, the topics have centered around logistics and supply chain management, and I have already found a number of interesting papers that I will come back to on this blog.

Reference

Winkler, H. (2008). How to improve supply chain flexibility using strategic supply chain networks Logistics Research, 1 (1), 15-25 DOI: 10.1007/s12159-008-0001-6

Author link

• uni-klu.ac.at: Herwig Winkler
• linkedin.com: Herwig Winkler

Related

• husdal.com: Book Review: Cooperative Strategy
• husdal.com: Managing Risk in Virtual Enterprise Networks
• husdal.com: A conceptual model for supply chain flexibility

A Framework for Risk Analysis

Khemani defines risk as the measurable possibility of losing or not gaining value. Risk exposure is then is the quantified measure of risk for any single event as calculated by multiplying the impact of such an event by its probability. A risk profile represents a company’s collective risk exposure. Risks, in turn, fall into three distinct categories:

(1) event risks, which occur at single point in time and have a significant impact on a company.

(2) market risks, which refer to volatility in traded markets, be they commodities or currencies.

(3) strategic risks, those longer-term trends that will have an impact over a period of time.

Khemani stresses that each company or business unit or function needs to prioritize risks by calculating its risk exposure. Without a quantified understanding of the cost-benefit trade-off around each risk, the organization cannot make a well-informed decision.

Seven ways of dealing with risk

Interestingly, the article discusses seven ways of risk management:

Avoid: Proactive action that eliminates the possibility of an event.

Transfer: Proactive action (often financial or legal) that shifts risks to a third party.

Mitigate: Proactive action that reduces the financial impact if an event occurs.

Minimize: Proactive action that reduces the probability of an event occurring.

Respond: Predetermined actions taken after an event occurs in order to reduce the impact.

Monitor: Continuous scanning of the environment that triggers alternative actions or the implementation of certain measures if predefined thresholds are exceeded.

Accept: Decision to bear risk exposure without taking any additional actions.

This includes the classic four Avoid-Transfer-Reduce(Minimize)-Accept that I have portrayed in a previous article on six ways of dealing with risk. What appears to be “missing” in the classic four is Mitigating and Responding, along with Monitoring. Albeit not explicitly mentioned, they could be said to be included in Reduce, if one keeps in mind a mitigative and contingent perspective.

Causes – Events – Outcomes – Impacts

Similar to the source-driver-impact framework in Jüttner et al. (2003), Khemani sets up a framework of causes, leading to supply discontinuity events, which in turn lead to business outcomes, having a certain financial impact.

Click image for larger version

Thus, the framework includes 1) the external and internal occurrences that directly contribute to the event, 2) the event which has immediate consequences on the enterprise, 3) the impact that the event has on various business areas within the firm, and 4) the total financial impact of the event.

An opportunity rather than a threat

In conclusion, Khemani remarks that

For companies not that far along, the key is to build momentum for their efforts by clearly demonstrating that risk management represents an opportunity rather than just a cost.

Lessard and Lucea (2009) picked up on this in their article on risk management as a core competence, where they state that no company can exist independent of its supply chain, and companies should not so much focus on risk-shedding, but instead work more on risk-shaping.

Reference

Khemani, K. (2007) Bringing Rigor to Risk Management. Supply Chain Management Review 11(2), 67-68.

Download

• atkearney.com: Bringing Rigor to Risk Management (pdf)
• atkearney.com: All AT Kearney articles in SCMR

Author Links

• linkedin.com: Kish Khemani

Related

• husdal.com: The six ways of dealing with risk
• husal.com: Risk management as a core competence
• husdal.com: Contingent versus mitigative risk management

An ISCRIM gem

I have been so busy with work lately that I have completely forgotten to thoroughly read the ISCRIM newsletter that came out two months ago. It’s a shame, because the ISCRIM Newsletter features the latest research and publications in supply chain risk and is a highly valuable source for digging up new findings, and this is where I – belatedly, I could add – came across this dissertation.

Early warnings of impending risks

For those of you not so well-versed in the German language, Supply Frühwarnsysteme means Early Warning Systems, and as far as I am able to gather, the case study used in the dissertation is the  development and implementation of a corporate-wide supply risk management system at Robert Bosch GmbH in Germany.

books.google.com

Unfortunately, Marco Moder’s dissertation is neither available at my library, nor through an inter-library loan, and the acquisition librarian told me that they would not be likely to acquire it since it is in German, and thus has a very limited audience…yeah right, it’s probably only me, anyway. Fortunately though, there is Google Books, and albeit half the pages or so are missing due to copyright issues, a glimpse of what the dissertation  is about is still possible: Google Books – Supply Frühwarnsysteme. A brief preview is also available on the publisher’s website: Gabler Online – Supply Frühwarnsysteme, presumably the same as in Google Books.

References, references, references

The dissertation features no less than 27 pages with at least 400 references, most of them in German, so if you are looking for German literature on supply chain risk, my guess is that most, if not all of the good ones are contained here. While the dissertation is not available for free download anywhere, and the reference list does not show on the aforementioned Google Books, the reference list is available on the SpringerLink website, see where to find it in the image left.

Case study survey questions

In the reference list mentioned above, you will also find the survey questions used for the case study and a short description of the  references that were directly used as the empirical and/or theoretical background for the case study. The questionnaire uses a  7-point Likert scale in identifying important supply chain risks and the also importance and effects of an early warning system. Looking at the questions posed in this survey can be very helpful in designing your own survey on supply chain risk. It will definitely help me in my research.

Reference

Moder, M (2008) Supply Frühwarnsysteme: Die Identifikation und Analyse von Risiken in Einkauf und Supply Management. Unpublished PhD dissertation. European Business School, Wiesbaden, Germany.

Download

• springerlink.de: Supply Frühwarnsysteme
• books.google.com: Supply Frühwarnsysteme

Publisher Link

• gabler.de: Supply Frühwarnsysteme

amazon

• Buy this book form amazon.com: Supply Frühwarnsysteme

Author Link

• Unknown: Marco Moder
  I consider myself and expert Googler and usually I have no problems locating the websites of the authors of the papers I review, but here I had to give up. Marco Moder is utterly shrouded in mystery. Besides the dissertation nothing turns up in Google. Perhaps my readers can help?

Related

• husdal.com: The Supply Chain of the Future

Inside and outside the supply chain

The authors lament that earlier research often neglects an important division of risk, namely the origin of risks, which can be either within the chain or from the outside environment. Hence they divide risk into two constructs, exogenous and endogenous:

Endogenous uncertainty: The source of uncertainty/risk is inside the SC and can lead to changing relationships between focal firm and suppliers

Exogenous uncertainty: The source of uncertainty/risk is from outside the SC.

The division  in external and internal and naming it exogenous and endogenous is a fresh new approach. However, that earlier research neglects the origin of risk is a contention I cannot agree with. I can think of several central pieces of  supply chain risk literature where this is explicitly not the case. Supply Chain Risk Management in Christopher (2005) and Supply chain risk management: outlining an agenda for future research by Jüttner, Peck & Christopher, M. (2003) divide risks into internal and external risks:

Click image for larger version. Adapted from Christopher (2005)

Internal:  market and technology turbulence

Internal to the supply supply chain are market and technology turbulence. Market turbulence arises from the heterogeneity of the market, and the resulting rapid changes in customer composition and thus, customer preferences. Technology turbulence refers to the degree to which technology changes over time within an industry, in production as well as in the product itself.

External: Continuous risk and discrete events

Trkman and Mc Cormack use a novel approach when classifying exogenous uncertainty: discrete and continuous, encompassing both the distribution and the probability of impact

Continuous risk: Events where the costs of potential changes are continuous in nature and relatively easy to predict.

Discrete events: This category consists of low-likelihood, high-impact events.

Interestingly, only financial risks are noted as continuous risks (interest rates, changes in consumer prices, changes in GDP, and changes in commodity prices), while the list of discrete events include anything else (regulatory changes, political instability, natural disasters, and transportation disruptions). Which goes which is perhaps not so important here, what matters is that continuous risk can be modelled and predicted, while discrete events can not. Continuous risks can be mitigated, discrete events can be prepared for.

The model

I did enjoy the model they set up, where they show how a supply chain, with its inherent supplier attributes and based on a company’s chosen supply chain strategy and structure, is exposed to endogenous and exogenous uncertainties, possibly leading to a supply chain disruption. In my usual manner I tried to make my own version of the original figure:

Click image for larger version

Critique

This is a well-written and well-researched paper, but there are a few things that have puzzled me when reading it. While the separation in endogenous and exogenous uncertainty makes perfect sense, I fail to see why there is a distinction between discrete and continuous risk only in the exogenous uncertainty, but not in the endogenous uncertainty. The endogenous uncertainty is divided into market turbulence and technology turbulence; this too makes perfect sense, but why is there no turbulence in the exogenous uncertainty? In addition, for an article written in 2008, the impressive reference list seems to be lacking many of the – in my humble opinion – now seminal works on supply chain risk, two of which I mentioned above.

Conclusion

Turbulent environments. Or is it just uncertain environments? IMHO, uncertain environments. Using turbulent/turbulence has not added anything new, except perhaps a greater degree of volatility. That said, what has added something new is the clear division between endogenous and exogenous and the division between continuous risk and discrete events. It has also made clear that the outside and inside risks need to be addressed differently, based on a contingency approach. In final conclusion, it is a noteworthy paper.

Reference

Trkman, P., & McCormack, K. (2009). Supply chain risk in turbulent environments—A conceptual model for managing supply chain network risk International Journal of Production Economics, 119 (2), 247-258 DOI: 10.1016/j.ijpe.2009.03.002

Author links

• linkedin.com: Peter Trkman
• drkresearch.org: Kevin Mc Cormack

Related

• husdal.com: Catastrophic events in supply chains
• husdal.ccom: What’s so special about this Paul Kleidorfer?