Risk, reliability, costs and efficiency

In the article, the authors test the vulnerability of three typical supply chain structures:

• single source
• multiple source
• multiple single source

using these four parameters:

• structural reliability
• consequence score
• organizational costs
• process efficiency
• risk index

The structural reliability parameter follows the traditional reliability setup:

Finding these probabilities, though, is not an easy task in a supply chain with potentially tens, if not hundreds of suppliers.

The consequence score establishes the parameter for evaluating the impact of a supply chain disruption:

The range of the consequence score is between 0 and 1 , because if δ_replace is larger than δ_collapse, the supply chain ceases to exist, and the authors suggest the following categorization for evaluating the consequences:

The organizational costs are straightforward economic terms:

The process efficiency is simply a ratio of interactions:

Finally the risk index, perhaps the most intricate equation, with the most unknowns that are presumed known:

Before calculating these parameters, the following assumptions must be considered:

Each subproduct group is providing the same amount of support to the supply chain.

All suppliers with a subproduct group are independent and non-identical.

All customers are independent and non-identical. All suppliers within a subproduct group are providing the same amount of support to the supply chain.

Processing costs for an interaction is equal to one unit of cost for each firm and structure.

There is no reliability growth.

How often does this hold true in a real supply chain?

Anyway, after running through a scenario of 10 different supply chain configurations the authors discover (not all surprising) that

There is a significant reduction of risk associated with having more than one supplier per subproduct or service.

Adding subproduct diversification does not affect risk, but improves the structural reliability of the supply chain.

The structural reliability of the supply chain increases when the number of suppliers providing the same subproduct or subservice increases.

Coordination costs decrease when the number when the number of suppliers providing subproducts or subservices decreases.

Coordination efficiency increases when the number when the number of suppliers providing subproducts or subservices decreases.

Essentially, the results indicate that excessive diversification is counterproductive, and that there are indeed limitations  as to what can be gained from outsourcing.

Critique

What I enjoy most about the approach these authors use, is how they combine several separate fields of research, i.e. reliability, economics, and operations, into seven equations that make four parameters. I wish I had come up with something similar in my previous attempts at establishing a measure of reliability and vulnerability in transportation networks. In a way they are only echoing what Smith and Buddress wrote in 2005, who said that

Supply Chain Management needs a new way to pursue research, a new way that is focused on theory building based on learned borrowing from other disciplines.

As James Stock wrote in 1997, Broader research makes better research, something Neureuther and Kuhn prove to the full. That said, the model hinges on a lot of assumptions, let alone probabilities, which have to be established or guesstimated first. That done, this model is – in my humble opinion – an excellent tool for exploring supply chain vulnerability.

Reference

Neureuther, B., & Kenyon, G. (2009). Mitigating Supply Chain Vulnerability Journal of Marketing Channels, 16 (3), 245-263 DOI: 10.1080/10466690902934532

Author links

• linkedin: Brian D Neureuther
• lamar.edu: George Kenyon

Related

• husdal.com: Reliability and vulnerability, a matter of cost and benefit?
• husdal.com: Broader research = better research?
• husdal.com: SCM – the new research cocktail?

No consensus

The authors start out by lamenting that supply chain risk research has resulted in many frameworks and concepts of risk categories and risk mitigation measures, but there is yet to be a consensus on which framework that best captures different types of supply chain risks.

Click image for larger version

Frankly speaking, I don’t think there ever will be consensus, simply because supply chains are so varied in nature and  it will be impossible to design a framework that encompasses all variations in a generic structure. The authors also point out that much research has been spent on low-impact high-likelihood risks, and very little has been done on high-impact low-likelihood risks. Really? Paul Kleindorfer has done a lot.

Research questions

The authors ask and answer the following questions:

• What are the different types of risks or potential risks in a retail supply chain?
• What are the mitigation strategies required to manage these risks? And which of these are generic and which are specific to a particular type of risk?

While the questions are geared towards the retail industry, the resulting framework has a general application.

Risk categorization in supply chains

In their review of some 20 papers (some well-known and not so well known to me and some unknown), Oke and Gopalakrishnan remark that risks fall into either low-impact high-likelihood inherent and frequent risk or low-likelihood high-impact disruption and infrequent risk. I find it interesting that they see “disruption” as a high-impact risk.

Click image for larger version

(Sidenote: In a book chapter I will review later, the risks are classified as deviation, disruption and disaster, in that order, making disruption a somewhat lesser risk than disaster.) Oke and Gopalakrishnan further argue that the simple classification of supply chain risks as high-likelihood low-impact and low-likelihood high-impact is not only highly relevant for classifying supply chain risks, but it also represents the key to identifying relevant mitigation strategies.

Three types of risk

In defining types of risks, the authors follow to traditional separation of supply-related and demand-related risk, but they also introduce a third type which they call miscellanous risk. What is miscellaneous risk and why do they invent a “new” type of risk? What they list as examples of miscellaneous risk I believe is what many researchers before them have labeled as external risk or operational risk, e.g. safety regulations imposed by government agencies, increased cost of raw materials, increased logistics costs because of increased gas prices and actions by pressure groups wishing to enforce stricter ethical business practices. Yes, they are miscellaneous, but they fit very well within the established types of risks that many researchers have used before them, e.g. the book chapter on supply chain risk in Christopher (2005).

Risk categories and mitigation strategies

In conclusion the authors come up with four propositions:

1. Most supply chain risks fall are either one of these two: low-impact high-likelihood or high-impact low-likelihood.
2. High-likelihood low-impact risks can be mitigated using generic strategies aimed at planning and coordination of supply and demand.
3. Low-likelihood high-impact risks must me mitigated using specific strategies aimed at the particular risk.
4. Miscellaneous risks (better: operational risks) can be mitigated using specific strategies aimed at efficiency gains and cost reduction.

Finally, the authors set up a table where they classify the typical retail risks they earlier had identified in each category and suggest their appropriate mitigation strategies.

Click image for larger version

Conclusion

What I like about this paper is the clear structure, the concise literature review, (although I would have liked to see a few more papers, but I can’t complain, I found a couple of new ones), four defined propositions and a practical retail-oriented application of their theoretical framework. What I don’t like is the invention of a “miscellaneous” risk category, whatever that is. Was it in lack of a better category? It is as if there’s supply, there’s demand, and then there’s everything else. That said, it is an excellent paper, nonetheless . And if I replace miscellaneous with operational this is an almost perfect paper.

Reference

Oke, A., & Gopalakrishnan, M. (2009). Managing disruptions in supply chains: A case study of a retail supply chain International Journal of Production Economics, 118 (1), 168-174 DOI: 10.1016/j.ijpe.2008.08.045

Author Links

• aimresearch.org: Adegoke Oke
• asu.edu: Mohan Gopalakrishnan

Related

• husdal.com: What’s so special about Paul Kleindorfer?

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

Blackhurst, J. and Wu, T. (Eds.) (2009). Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers. London: Springer. DOI: 10.1007/978-1-84882-634-2

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

Culture versus organization

This research investigates two cultural antecedents (market orientation and learning orientation) and three organizational practices (Internal integration, external integration and external flexibility), and their impact on the supply chain agility of a firm. Culture is seen as either market oriented (with attention given to customers, competitors, coordination of efforts), or as learning oriented (with attention given to commitment to learning, shared vision and open-mindedness).

What is supply chain agility?

It is the capability of the firm, both internally and in conjunction with its key suppliers and customers, to adapt or respond in a speedy manner to marketplace changes as well as to potential and actual disruptions, contributing to the agility of the extended supply chain. The article makes a distinction between agility and flexibility, where flexibility is seen as an internally focussed competency issue, while agility is seen as an externally focussed capability issue.

A maze of intertwined relationships

One of the most interesting parts of the paper is the figure illustrating the hypotheses as to what affects what else. No less than 12 hypotheses are presented in relation to organization and culture, and where possible referenced with the matching literature. These hypotheses are then later investigated in a large-scale survey in order to find support or no support. Depending on how the company is oriented in culture (market or learning) and organization (internally or externally integrated or flexible), one would expect different impacts on a firm’s supply chain agility.

Supported by the case studies

• Market orientation > internal integration.
• Market orientation > external integration.
• Learning orientation > external integration.
• External integration > internal integration.
• Market orientation > external flexibility.
• Internal integration > supply chain agility.
• External integration > supply chain agility.
• External flexibility > supply chain agility.

Not supported by the case studies

• External integration – external flexibility.
• Internal integration – external flexibility.
• Learning orientation – internal integration.
• Learning orientation – external flexibility.

Risk mitigation and response

Risk mitigation an response are not a major part of this article, contrary to what the title implies. Nonetheless, by enhancing agility, firms are also enhancing risk mitigation and response. Risk mitigation and response are developed by identifying key drivers for cultivating  agility. This in turn establishes a causal structure for which variables that in fact are affecting risk mitigation and response tactics.

Conclusion

This article adds much to literature on supply chain agility. It also shows the cultivation of agility can be seen as a disruption risk management tactic that enables the firm and its supply chain partners to respond rapidly to not only market place changes, but also to both potential and actual disruptions in the supply chain.

Agility and its antecedents are of value for both mitigation and response tactics, emphasizing fast, proactive measures when faced with potential disruptions, and also for rapid response measures following the occurrence of expected or unforeseen disruptions.

Reference

Braunscheidel, M., & Suresh, N. (2009). The organizational antecedents of a firm’s supply chain agility for risk mitigation and response Journal of Operations Management, 27 (2), 119-140 DOI: 10.1016/j.jom.2008.09.006

Author links

• brockport.edu: Michael J Braunscheidel
• buffalo.edu: Nallan C Suresh

Related

• husdal.com: The Severity of Supply Chain Disruptions
• husdal.com: Agile Business Continuity

Key supply chain locations

As discussed in a previous post on facility location, finding the right facility location is difficult enough. Keeping it safe is even more difficult. One of the building bricks of the this article is the identification of so-called key supply chain locations, and the primary goal of the research in Knemeyer et al (2009) is

to propose a proactive planning process for addressing catastrophic risk in supply chains. This process should help managers identify key locations in their supply chains, systematically measure the risk of suffering a catastrophic event at each key location and then select cost effective countermeasures to be adopted at selected key locations.

What in each case that constitutes a key supply chain location is based on managerial judgment. It could be the single source for a raw material; it could be the main distribution center for a major market; it could be a public port or airport or other transfer points between transportation modes. The list is potentially endless, but any key location that can be easily circumvented or substituted is not a key location.

The proactive planning steps

The article proposes a 4-step process for risk assessment and and management:

• Identify Key Supply Chain Locations and threats
• Estimate Probabilities and Potential Loss for each Key Supply Chain Location
• Evaluate alternative Countermeasures for each Key Supply Chain Location
• Select Countermeasures for each Key Supply Chain Location

The Potential Loss is an important parameter here, and is defined as the product of the probability estimate of a catastrophic event at a key location with the estimated loss at the same key location:

PL_k=P_k L_k

where P_k is the probability estimate of a catastrophic event impacting key location k, and L_k is the estimated loss that is incurred if an catastrophic event occurs at key location k.

Loss estimation

The ‘loss’ is much more than the physical assets, but it needs to be a cross-functional analysis of the catastrophic risk environment faced by each of the supply chain’s key locations:

• Human resources: death, injury, illness, kidnapping, etc.
• Product/inventory: theft, damage, contamination, lost sales, stockouts, etc.
• Physical assets: plants, warehouses, equipment, vehicles, etc.
• Public infrastructure: electric, water, gas utilities, bridges, ports, roads, etc.
• Information: loss of data, access, processing capabilities, etc.
• Financial: theft, counterfeiting, stock prices, etc.

The list implies that losses need to include tangible and non-tangible assets.

Risk management matrix

What I like about this paper is how they apply the traditional risk matrix within the setting of their own research, and how they clearly separate between risk mitigation and loss mitigation. Risk mitigation and loss mitigation are linked to the potential loss and estimated probability of a catastrophic event.

Click image for larger version

The reason for distinguishing between risk and loss becomes clear when one looks at the evaluation of  countermeasures. While reducing the risks or estimated loss associated with a catastrophic event impacting a key location is  normally considered beneficial, not every risk should be mitigated. In some cases, the costs of mitigation will be greater than the impact of the catastrophic event itself. Countermeasures whose costs exceed the decrease in PL should therefore be excluded from further analysis.

A typical example illustrating the above can be found in one of my previous articles on the ratio of cost/benefit versus vulnerability/reliability:

Click image for larger version

Here, point A indicates the costs of a supply chain disruption without mitigation. Provided some mitigation, the costs of disruption may be lowered, say, until point C. Too much mitigation may bring the disruption cost down to almost zero at point B, while the mitigation cost is much higher than the potential loss. Neither B nor C are optimal, although C is better than B. The optimum is reached where the cost of disruption intersects with the cost of mitigation.

Risk perception

Another interesting part of this article is the discussion on risk perception of catastrophic events among management at the beginning of the article. The reason why risk perception is important is because the probability of a catastrophic event occurring is very low, while at the same time the estimates of the probability of the occurrence for such rare events are inherently ambiguous. Risk aversion and loss aversion go hand in hand, and the question is whether managers will pay too little or too much attention to the low probabilities and high consequences associated with catastrophic events. When uncertainty is high, managers may underestimate the importance of an issue, and may – in the illusion of being in control – ignore or downplay the possibility of random or uncontrollable occurrences, and may downplay the probability of loss compared to the amount that is probable.

Cognitive dissonance

The theory of cognitive dissonance may also provide clarity regarding factors that influence a manager’s perceptions of the threat of catastrophic risks in their supply chain.

So supply chain managers may choose to accept the risk of a catastrophic event affecting their supply chain and choose to believe that this choice is not so risky. However, because this choice may ultimately prove to be costly based on the discrepancy between the belief and reality, any proactive planning process should enable management to utilize unbiased information to provide them direction in decision-making.

Teamwork

In their final paragraphs, ‘hidden’ among the implementation issues of the proactive planning process, the authors write that the key to manage catastrophic risk in supply chains is the people in charge of implementation. The proposed conceptual framework can only be converted into a proactive planning process if there are proper policies in place to recruit and motivate the implementation team.

The implementation team should be cross-functional because the consequences of catastrophic events cut across the supply chain. If, for instance, a facility is lost to a catastrophic event, the consequences affect supply chain operations, financial flows and possibly also information flows. It may additionally impact relationships with customers and suppliers. As a result, a wide spectrum of functional expertise is needed to foresee potential catastrophic risks and evaluate their likely consequences.

I said ‘hidden’, because to me, this is the most crucial part of managing catastrophic risk: people. the wrong people in the wrong place at the wrong time can make or break a company’s existence if a catastrophic supply chain event is not handled appropriately.

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

Author links

• osu.edu: A Michael Knemeyer
• osu.edu: Walter Zinn
• uark.edu: Cuneyt Eroglu

Related

• husdal.com: The six ways of dealing with risk
• husdal.com: Finding the right location – minimizing disruption costs
• husdal.com: Costs and benefits versus reliability and vulnerability

What is risk?

There are many many many definitions of risk in the literature, and will not attempt to list them all. Suffice it to say that I define risk as follows:

Risk is the exposure to circumstances with potentially damaging effects arising from an event that is not handled appropriately.

Risk management needs to address both sides of an accidental event, the sources leading up to it and the consequences arising from it. In figurative terms, “barriers” are put in place on both sides aimed at stopping a circumstance from evolving into an event, or aimed at stopping an event from developing disastrous consequences. Example: In  a production facility running machinery that can overheat, a fire would be the accidental event, a heat detector would be a source barrier, while a fire sprinkler would be a consequence barrier.

The missing link

The idea for this post came while looking at Jütner, U., Peck, H., & Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for Future Research, where the authors look at risk sources, risk drivers and risk consequences. Here, risk mitigation is backward looking at sources and drivers, that is correct, but the contingent actions addressing the consequences are not fully embedded into their model. In the figure below I have attempted to illustrate how this can be done in a better way.

Risk sources need risk drivers to create risk impacts. Risk impacts are addressed by using mitigative strategies aimed towards eliminating the source or the driver, or contingent strategies, aimed towards eliminating the impacts.

Money matters

In On the value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks (Tomlin, 2006) there is a distinct difference between contingent and mitigative actions. Contingency action are actions taken in the event of a disruption, mitigation actions are actions taken in advance of a disruption. While the latter will incur a cost regardless of disruption, contingent actions will incur costs mainly in their preparation stage, and the again of course, if, but only if, they need to be taken.

Barriers, barrier, barriers

In Assessing the vulnerability of your production system (Asbjørnslett,1997), and later in Assessing the Vulnerability of Supply Chains (Asbjørnslett, 2008) there is a figure that excellently illustrates the difference between mitigation and contingency.

The figure above is my extension of the figure used in A.bjørnslett (1997) and Asbjørnslett (2008), capturing both contingent strategies and mitigative strategies. Here it is clearly seen that risk management needs to address both sides of the risk: what lies behind the risk (source) and what lies in front of it (consequences).

Conclusion

Hopefully this little discourse has clarified the difference between mitigative and contingent strategies. To understand concepts I find it most helpful to draw what I read, as I have with the two papers cited today. Well, actually, I did not draw everything entirely, I just expanded already existing figures. This (above) is how I view risk management, as an effort not just to reduce risk sources, but also as an effort to reduce risk impacts.

Reference

Bjørn Egil Asbjørnslett (2008). Assessing the Vulnerability of Supply Chains In G. A. Zsidisin & B. Ritchie (Eds.), Supply Chain Risk: A Handbook of Assessment, Management and Performance. New York, NY: Springer. DOI: 10.1007/978-0-387-79934-6_2

Asbjørnslett, B. E., & Rausand, M. (1997). Assess the vulnerability of your production system (Report No. 97018): Norwegian University of Science and Technology, Trondheim, Norway.

Jüttner, U., Peck, H., & Christopher, M. (2003). Supply chain risk management: outlining an agenda for future research International Journal of Logistics, 6 (4), 197-210 DOI: 10.1080/13675560310001627016

Tomlin, B. (2006). On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks Management Science, 52 (5), 639-657 DOI: 10.1287/mnsc.1060.0515

Author links

• hslu.ch: Prof Dr Uta Jüttner
• cranfield.ac.uk: Professor Emeritus Martin Christopher
• cranfield.ac.uk: Dr Helen Peck
• ntnu.no: Bjørn Egil Asbjørnslett
• ntnu.no: Marvin Rausand
• dartmouth.edu: Professor Brian Tomlin

Related

• Assess the vulnerability of your production system
• A Future research Agenda for Supply Chain Risk Management
• Ericsson versus Nokia – the now classic case of supply chain disruption