New for 2011: New insights and new risks

2011 provided me with a couple of new insights as to supply chain risk:

• I simply could not have leave out the impacts and aftermaths of the earthquake and tsunami in Japan.
• I included the risk definitions and risk matrix in this book on Security Risk Mangement, because I found them very illustrative.
• I expanded on the issue of risk and uncertainty in the three most common risk definitions.
• I thought it might be good to highlight supply chain deviations, disruptions and disasters versus supply chain disturbances and disruptions.
• I included a figure on how to reduce risks from this excellent German PhD on Risks in Low Cost Country Sourcing.
• Finally, as a teaser and “wake-up call”, since the lecture started at 8:15 in the morning I included a funny TV commercial from Norway, showing risk management in practice: assessing the current situation and visualizing all that can go wrong, deciding what to do and then realizing that you haven’t thought of everything after all:

The lecture slides

Reference

Husdal, J (2011) Supply Chain Risk – The dark side of supply chain management. Unpublished. Lecture notes, Molde University College, Molde, Norway.

Related

• husdal.com: Supply Chain Risk 2010

• husdal.com: Supply Chain Risk 2009
• husdal.com: Supply Chain Risk  2008

The highlights

So then, a little less than two years ago, what was keeping executives up at night? Below is a short summary of the questions and the replies, where I have cited the three top items and the three bottom items. You can read the full list in the report that you download below.

Over the past year, what has contributed most to the magnitude of disruption to your supply chain?

• Unpredictability of demand
• Exchange rate volatility
• Energy price volatility
• …
• Disputes with partners/suppliers
• IT or utility failure
• Intellectual property infringement

Over the next year, which of the following do you see as the biggest threats to the resilience of your supply chain?

• Unfavourable exchange rate movements
• Input price increases
• Energy price increases
• …
• Theft
• Product tampering
• Disruption from unknown third-parties to supply chain

Which of the following steps has your organisation taken in the past 12 months as a result of the current downturn?

• Negotiated lower prices from suppliers
• Increased efficiency of logistics
• Increased use of outsourcing
• …
• Increased prices to customers
• Reduced capacity levels
• No particular steps

Which of the following are exerting pressure on your company to increase its supply chain resilience?

• Executive management
• Customers
• Own business units and staff
• …
• Suppliers
• Non-executive management
• Logistics providers

Over the next 12 months, what do you see as the biggest obstacles to improved supply chain risk management?

• Concerns about increased costs and redundancy
• Underestimation of potential impact of supply chain risks
• Poor communication across supply chain
• …
• Inadequate technology
• Excessive focus on efficiency
• No representation of supply chain at board level

Which of the following steps are you currently taking to increase the resilience of your company’s supply chain?

• Improve collaboration with suppliers and partners
• Shift from single to multiple supplier base
• Streamline processes
• …
• Introduce supply chain event management system
• Increase capacity levels
• Nothing—resilience is not a concern

As I said above, this was written two years ago, and perhaps it is already outdated and no longer valid, but I’m not so sure. That said, how would you answer the questions above?

Related link

• acegroup.com: Managing supply chain risk for reward

Related posts

• husdal.com: Stemming the rising tide of supply chain risks
• husdal.com: The supply chain of the future

My point of view

The reason why I came across this initiative is that I was invited to contribute to it, by sharing my thoughts and insights about what I think are most pressing issues in supply chain risk management. In particular I was asked regarding systemic exogenous supply chain risks, their distribution (whether they are acute and concentrated or dispersed and pervasive) and their current state (whether these are emerging or constant risks).

One of the most pressing issues that I see is the consolidation of third party logistics providers (3PLs). As more and more supply chains span the globe, many of them are operated by the same 3PL, using the same equipment or carrier for many supply chains.

If there is a disruption it will only affect one supply chain, but many, and the affected companies will all scramble to find alternative sources, and whoever is the fastest will win, as Nokia did over Ericsson in 2000. The 3PL may also have to prioritize which affected customer that should receive the most help, and probably whoever pays the most will receive the most help here.

The point is that 3PLs have become increasingly important in not only “orchestrating supply chains“, as Zacharia et al. write, they are also orchestrating the risk management of supply chains.

The Supply Chain and Transport Risk Initiative

The reason for establishing the initiative is best explained in their one-page flier:

In our physically and virtually interconnected world, the risk of systemic supply chain and transport disruptions is becoming ever more acute, affecting economic, security and geopolitical interests. The global economy has been built on the free movement and circulation of goods, components and labour.

Vast transportation networks have developed, spanning the globe, while inefficiencies, delays and slack have been eliminated in pursuit of lower cost margins and ever-more efficient supply networks.

But where do we draw the line? In our quest for greater efficiency and greater choice, are we developing robust global transport networks or building a house of cards?

The aim of the initiative is to bring together a range of leading experts from across WEF’s diverse communities to explore the most critical threats facing supply chain and transport networks and to apply new risk response tools that can promote efficient risk management, security and resiliency in our complex global trading environment.

I feel honored and privileged that I was given the opportunity to contribute, although not in a direct meeting with said experts (that would have been something), and only by phone interview with some of the key staff of the project, but nonetheless, I see it as a stamp of quality to the work I have laid down in creating this blog, and for that I am thankful.

Global Risks Meeting

The World Economic Forum’s Risk Response Network (RRN) was launched in Davos in January 2011 to bring together the world’s experts in managing risk from all sectors of society. Just three months later, the inaugural Global Risks Meeting in New York on 6 and 7 April gathered over 80 decision-makers and experts to figure out ways to better manage, respond to, prepare for and capture opportunities associated to global risks.

When reading the online report from the meeting, in particular the chapter on supply chains, my attention was immediately drawn to a figure on page 43 that looked oddly familiar:

Yes, if you are an observant reader of this blog, it is the figure I used in my post on Sheffi’s disruption profile that he used in his book on The Resilient Enterprise. Actually, from the way it is set up, I can see that the figure in the report is taken from a slide in my 2008 lecture on supply chain risk. Well, I cannot claim to be the owner of the figure, as it was drawn by Sheffi originally, but it is nice to see that my adaptation was used. This makes me wonder…did they perhaps use more of my slides at that meeting? I guess I will never know…

Supply Chain Dependencies

The chapter on supply chains is highly recommended reading for anyone interested in supply chain risk. These are the issues that the world’s leading decision-makers and experts are concerned about:

The tendency is to underpredict how vulnerable systems are, especially when they are functioning well or taken by surprise, such as when volcanic ash closed much of the European air space in 2010, almost causing an international supply chain breakdown.

Whether in transportation or cybersystems, weaknesses exist in how to communicate to the public that risk is a shared responsibility. A massive paradigm shift that takes into account a robust bottom-up approach is needed, especially with regard to first responders to a disaster.

Another vulnerability to global systems are the obstacles presented when countries have different laws and regulations governing supply chains and trade; regulators often think nationally, not globally. The challenge is to ensure that governments and regions apply consistent standards so that supply chains run more smoothly and industries can invest without too much cost to customers.

While larger companies have the capacity to monitor an entire supply chain or network, often SMEs have no control, especially when there is a disruption.

Other risks that can undermine supply chains are not just catastrophic events but also non-state actors such as terrorists and organized crime.

I think they are on the right track, and this is indeed a highly commendable follow-up of the Global Risk Report 2008, where supply chain vulnerability was highlighted as an important and perhaps invisible global risk that should no go unattended.

Supply Chain and Transport Risk Issues

What I found most delightful was that the report from the Global Risks Meeting  features “scribes” of the discussions from the meeting session. I think the supply chain and transport scribe is very illustrative, don’t you?

Perhaps not the easiest scribe to follow if you weren’t there, but it works, and brings together all the issues mentioned above. Maybe I should use this figure in my supply chain risk lecture for 2011 and spend the whole three hours dissecting all its details? Unfortunately my students will probably have a lot less to say about the figure than the experts at the meeting, but you never know…

Recommended reading

In conclusion, the website of the Supply Chain and Transport Risk Initiative, along with the Risk Response Network, and especially the report from Global Risks Meeting should absolutely be on your reading list, without any doubt. That said, what do you think supply chain experts and decision-makers should focus on in terms of risk?

Related links

• weforum.org: Supply Chain and Transport Risk Initiative
• weforum.org: Risk Response Network
• weforum.org: Global Risks Meeting Report 2011
• weforum.org: Global Risks

Related posts

• husdal.com: Future Value Chain Trends 2020
• husdal.com: Supply chain risk – an invisible global risk?

“Supply Chain Vulnerability” revisited

Much of the report stems from an earlier report prepared at Cranfield, namely Supply Chain Vulnerability, but this report goes much further in identifying the opportunities for the creation of more resilient supply chains. And more importantly, it is freely available online (link may be slow). While the original Supply Chain Vulnerability report unfortunately is not available for download, at least not for the time being, the self assessment workbook for understanding supply chain risk, which is based on said report, has been made available online (link may be slow). Here are some of the highlights from the report:

1 Introduction – understanding supply chain risk

The introduction dives straight into the hallmark of Helen Peck’s work, the four interlocking levels that can be found in any supply chain:

• Level 1 – Process/Value Stream
• Level 2 – Assets and Infrastructure Dependencies
• Level 3 – Organisations and Inter-organisational Networks
• Level 4 – The Environment

Published in her 2003 article, Drivers of supply chain vulnerability, this framework has been picked up by many researchers since then, e.g. in yesterday’s conference paper on supply chain resilience. When I first came across it, I must admit that I had some trouble grasping the idea behind these four levels, but the more I study supply chain risk, the more fond I have become of this model.

2 Case study

Chapter 2 is a case study based on companies engaged in the manufacture of high-performance military aircraft. the reason for choosing this particular industry is because it operates in an extreme risk environment, characterised by high levels of commercial, technological and political risk, as well as inherent product safety issues, thus providing the almost perfect breeding ground for all sorts of deliberations on risk, vulnerability and resilience. The case study investigates how supply chain management tools and techniques are used in relation to supply chain risk and how they can be linked to risk management.

3 Managing Supply Chain Risk – Industry Comparisons

In this chapter, the conclusions of the base case study are validated through cross-sector comparisons and discussions with managers from leading organisations representing the following “critical sectors”:

• Food & drink (manufacturing & retailing)
• Electrical/electronics (manufacturing)
• Oil/petrochemicals (extraction & refining)
• Healthcare/pharmaceuticals (manufacturing, private sector; distribution, public sector)
• Automotive spares/construction (manufacturer and distributor)
• Logistics/transport (private & public sector)
• Packaging (manufacturer)

While they remain unnamed, the companies selected are described as “household names, significant players in the UK with international interests and supply chains that span the world. Their core businesses cover at least one of the critical sectors, but some have interests in others.” What I found very interesting in the report was reading how each company viewed their own state of being at risk or not.

Cost reduction remained a constant theme, emerging as the principle driver behind the universal moves towards longer, leaner, more consolidated, but potentially less resilient networks.

When and where supply chains (as the managers interviewed understood the term) were most vulnerable were usually known, but not always recognised elsewhere in the organisation or supply chain

Few managers believed that their internal networks or those of the wider industry were stable enough to reach a mature balanced state.

The management of change coupled with regulatory and geopolitical changes and the practicalities of managing across different legal, cultural and environmental settings made supply chain management a far more complex set of activities than was perhaps widely recognised

The managers interviewed found the identification of suitable risk management tools initially problematic. Nevertheless, they supported the general principle of a limited reach approach to supply chain risk management, encompassing the focal firm, its immediate customers and suppliers, where possible within a shared data environment.

Considering that these are major and thus resourceful firms, it seems clear that supply chain mangers are aware of risk, but uncertain as to whether they will be able to cope with the situations and problems that may arise.

4 Creating the Resilient Supply Chain: Recommendations for business

Building on the two previous chapters, the last chapter contains the key points which impact supply chain resilience and business continuity, two of which are:

There is a disconnect in organisations between the determination of business strategy and the recognition of the impact of these strategic decisions upon supply chain vulnerability.

Business continuity and risk management, particularly with regard to IT appears to be fairly well understood and applied in most companies. The same is not true of risk management in supply chains.

The report goes on to say that “dealing with supply chain vulnerability requires a change management approach. Such an approach recognises that the ‘right’ philosophy for tackling supply chain vulnerability depends on culture, structure and business drivers dominant in an industry sector.”  Every company must find out for themselves how to

• Understand their supply chain risk
• Re-engineer the supply chain
• Engage in supply chain collaboration
• Ensure supply chain agility
• Nurture a supply chain risk management culture

So basically, there cannot be a “one size fits all” solution when it comes to supply chain risk, vulnerability and resilience. I think that is a major point.

Appendix galore

Notably, the above is only half the report. The remaining 50 or so pages contain appendix after appendix, toolkits, examples, step-by-step guides, a glossary and more. In particular, there is a risk management approach for Small and Medium Enterprises (SMEs).

Conclusion

Why haven’t I mentioned this report before? An accidental oversight perhaps, because this report is so obvious that anyone should be able to find it without me guiding them. Since its publication this report has sparked much of the current research in supply chain resilience, and in my opinion it ought to become the standard reference for risk, vulnerability and resilience in supply chains, and it ought to belong in every literature review on those subjects.

Reference

Creating Resilient Supply Chains: A Practical Guide. Centre for Logistics and Supply Chain Management at the Cranfield School of Management

Read online/download

• cranfield.ac.uk: Creating resilient supply chains (link may be slow)

Related posts

• husdal.com: Is your supply chain vulnerable?
• husdal.com: Drivers of supply chain vulnerability

The lecture slides

New for 2010: New insights and new risks

2010 provided me with a couple of new insights as to supply chain risk:

• The impact of the volcanic ash cloud on air freight in April is something I could not have left out, let alone the bombs on US cargo planes in October.
• The classic demise of Ericsson as the once leading mobile phone company is underscored by including Hendricks and Singhal (2003) The effect of supply chain glitches on shareholder wealth.
• The issue of risk and uncertainty in Aven (2007) is briefly mentioned
• I aligned my risk definition as described in ISO 28002.
• I found place for Mitul Shah’s concept of calculating the Value-at-Risk
• Some references have been updated and revised, and I managed to slip in both my presentation at WCTR 2010 and at ISCRIM 2010.
• Finally I included two new videos, with Richard Wilding from the University of Cranfield. The first is perhaps not so supply chain risk related, but nonetheless an important reminder of how supply chain collaboration mitigates risks:

The second video focuses specifically on issues in supply chain risk and business continuity.

Reference

Husdal, J (2010) Supply Chain Risk – The dark side of supply chain management. Unpublished. Lecture notes, Molde University College, Molde, Norway.

Related

• husdal.com: Supply Chain Risk 2009
• husdal.com: Supply Chain Risk  2008

Daunting

While few of the risks faced by toy makers are unique to the industry, the combination of risks is daunting, Johnson says.

There are risks associated with product demand including seasonality, volatility of fads, new product adoptions, and short product life. The public’s perception of safety and toy company ethics (such as the use of child labor) are also elements of demand risk (not to mention the risk of litigation). Then there are the risks of product supply such as manufacturing and logistics capacity during crunch periods. With supply chains that extend into Asia, there are also substantial currency and political risks that can change product cost or disrupt supply. Moreover, the long lead times between demand and supply exacerbate all of the risks.

Essentially, again according to Johnson, it’s all about supply and demand:

Managing demand

• Reduce Seasonality and New Product Adoption Risk through Licensing
• Increase Product Life and Lifetime Sales by Matching Product and Channel Strategies
• Reduce Seasonality by Increasing Number of Channels
• Smooth Demand and Build Longer Life Products through Variety Strategies

Managing supply

• Reduce Capacity Risks by Outsourcing and Building a Flexible Web of Partners
• Improve Supply/Demand Matching through Information, Air Freight, and Warehouse Consolidation
• Reduce Currency and Political Risk through Operational Hedging

This table summarized the above, with examples:

Critique

At it’s inception it was a timely article; it still is. It is well researched and well written, and one would expect nothing less from a professor Tuck School of Business at Dartmouth. What is particularly enriching are the examples and practical experiences from a wide range of toy makers. It is perhaps not the article that is most easily translated into an action plan, but it is an article that leaves your mind pondering. Obviously, the toy industry is not all about fun, it sis serious business as well, let alone risky business.

Reference

M Eric Johnson (2001). Learning From Toys: Lessons in Managing Supply Chain Risk from the Toy Industry California Management Review, 43 (3), 106-124. Proquest ID: 74766340

Author link

• dartmouth.edu: M Eric Johnson

Download

• dartmouth.edu: Learning from Toys

Related posts

• husdal.com: Can you outsource risk?
• husdal.com: Outsourcing – risking it all?
• husdal.com: Lessons from the China recall crisis

Vulnerability of supply chains

From the fact that many companies engage in supply chain risk management practices, presumably because it is needed, the authors formulate their first hypothesis:

Supply chains are regarded as being susceptible to supply chain risks. (H1)

Drivers of supply chain risks

The authors list a number of drivers or trends that contribute to increasing supply chain risks. Essentially, this list reads like a copy of what Martin Christopher wrote in his chapter on supply chain risk in his book, Logistics and Supply Chain Management:

• Focus on efficiency instead of security aspects
• Globalization of the  supply chain
• Focus on central distribution
• Enforced outsourcing
• Reduction of suppliers
• Increased product variety
• Centralized production

From this the authors postulate the following hypothesis:

Complexity and efficiency are key drivers for supply chain risks. (H2)

Supply Chain Risks

The list of potential risks and their impacts reads almost like the list I presented yesterday from a study on supply chain and logistics risks in Germany:

• Supplier failure
• Supplier quality failure
• Oil crisis
• Terrorist attack
• Strike
• Malfunction of IT-systems
• Accident
• Natural disaster
• Machine breakdown
• Import or export restrictions
• Transportation failure
• Delivery chain disruption
• Increasing customs duty
• Change in customer demand
• Technological change
• Increasing raw material prices

Because these risks exist external or internal to the supply chain, the next two hypotheses are formulated as such, while at the same time appreciating the probability and impact of risk events:

Internal supply chain risks have a higher likelihood to occur than external supply chain risks. (H3a)

External supply chain risks have a greater impact on the supply chain than internal supply chain risks (H3b)

Instruments of supply chain risk management

The authors differentiate supply chain risk management (SCRM) instruments as being either reactive or preventive. This is similar to my own formulation of mitigation versus contingency in risk management strategies, and leads to the final two hypotheses:

Companies with a high degree of supply chain risk management show a higher performance than companies with a low degree of supply chain risk management. (H4a)

There is a difference in terms of performance criteria between companies using preventive instruments contrary to those using reactive instruments. (H4b)

Hypothesis testing

Based on a survey designed to confirm or reject the above hypotheses, the authors conclude that only H3b is to rejected, i.e. that external supply chain risks do not have a greater impact than internal supply chain risks.

Supply chain risks – probability and impact

The probability/impact matrix of supply chain risks in the German automotive industry looks like this:

Although not directly comparable to the probability-impact-matrix developed by Pfohl et al. (2008), which I presented yesterday, similar trends can be discerned.

Globalization – risk number one

When asked about which driver of supply chain risk that is most important, these are the answers on a 1-5 Likert scale:

While globalization topping the list is no surprise, it is more confounding to see product variety listed as a risk factor.

Reactive versus preventive supply chain risk management

When comparing the supply chain performance of companies using preventive versus reactive risk management (mitigation versus contingency strategies), an interesting picture emerges:

Obviously, with no or little SCRM in place, the overall supply chain performance is rather lackluster. In general, preventive SCRM seems to fare better than reactive SCRM, but reactive SCRM does better when faced with reacting to external risks, as well as the bullwhip effect. Preventive SCRM is particularly useful in decreasing stocks and inventory. It also appears that a resilient supply chain cannot – at the same time – be a flexible supply chain.

Critique

This is an excellent study that highlights the virtues of preventive versus reactive supply chain risk management. I do question the selection of supply chain risk drivers, though, and in particular the “ambiguity” that is inherent in “globalization”. Maybe I’m just playing the devil’s advocate, but what exactly is meant here? Globalization is a very vague term in my opinion. Another question is the juxtaposition of efficiency and security. Others may disagree, but I do not necessarily see a conflict here. Nonetheless, the study is worthwhile pondering, and it would be very interesting to see if the same conclusions about risk drivers and supply chain performance also apply to businesses not in the automotive industry. For now, what I can say, is that German autos are not at risk.

Reference

Thun, J., & Hoenig, D. (2009). An empirical analysis of supply chain risk management in the German automotive industry International Journal of Production Economics, 131 (1), 242-249. DOI: 10.1016/j.ijpe.2009.10.010

Author links

• frankfurt-school.de: Jörn-Henrik Thun
• tum.de: Daniel Hoenig

Second opinion

External risks in this sample of companies has been perceived as not more impactful than internal risks. So this might be true or it might be based on a skewed perception. What do you think? And if it’s true, does this hold true for all industries?

Hitting the nail on the head

The study splits supply chain risks in risk and consequences faced by businesses in their supply chain from risks and impacts faced by logistics providers in the supply chain. In my opinion that is the right way to do it, because the importance of transportation operations is often overlooked in supply chain management. This study highlights the role of logistics very well and is one of the very few where I have seen it done.

All-encompassing

This is a thorough study, and my review can only skip the surface of this book chapter, which unfortunately, for many of my readers, is in German. That said, I will do my best in providing a translation to the opening question, namely What are the most common supply chain and logistics risks that businesses and logistics providers have to deal with? Below is a collection of figures from the book chapter, which I have translated the best I can, so that Non-German-speaking readers can make use of the findings in this study. There is a lot more to this chapter than the figures below, but that will ave to wait for another (rainy day when I have the time to write another) post.

Logistics and supply chain risks – company perspective

The model framework follows the traditional division of risk sources in supply risks (Versorgungsrisiken) related to the supplier (Lieferant),  demand risks (Nachfragerisiken) related to the customer (Abhehmer), process and control risks (Prozessrisiken/ Steuerungsrisiken), and external risks (Umfeldrisiken). In addition, there are two logistics risks (Logistikrisiken) related to the logistics provider (LDL), one related to sourcing (Beschaffung) and one related to distribution (Distribution). These risks are then evaluated, first from the company supply chain perspective, and from the logistics provider perspective

Supply chain risks – probability and impact

The risk matrix shows the overall picture of supply chain risks in the survey, with the probability (Eintrittswahrsheinlichkeit) increasing from left to right, and the impact (Schadensausmaß) increasing from bottom to top.

• Supply risks (diamond)
• Sourcing-related logistics risks (square)
• Process and Control risks (triangle)
• Distribution-related logistics risks (dash)
• Demand risks (cross)
• External risks (circle)

Each of the risk sources is covered in detail in the following figures. Albeit a small sample, and perhaps not generalizable, it is still interesting to read what the companies that were surveyed list as their most imminent risks.

Supply risks

1. Capacity fluctuations/bottlenecks in the supply market
2. Dependence on a certain supplier
3. Production delays or disruptions
4. Inflexibility of supplier when faced with last minute order changes
5. Varying quality
6. Low quality
7. Crucial information is not passed on to purchaser
8. Supplier insolvency
9. Rigid contracts
10. Outage of IT-systems

Process and control risk

1. Production close to capacity limit
2. Long-term production outage
3. Outage of IT-system
4. Varying quality of products made
5. Short-term production outage or delays in production
6. Lack of personnel
7. Low inventory of raw materials
8. Inventory outage (facilities unusable)
9. Personnel lacks qualifications
10. Personnel lacks motivation
11. Accidents
12. Malicious acts/sabotage/theft

Demand risks

1. Price slump
2. Unexpected demand fluctuations or total failure
3. Last-minute changes in order specifications
4. Market segment changes
5. Necessary information is not passed on by customer
6. Customer insolvency
7. Rigid contracts
8. Production outage at customer
9. Loss of intellectual property
10. Production disruption/delay at customer
11. Outage of IT-systems at customer

Sourcing logistics risks

1. Breakage during transport
2. Low quality transport
3. Lack of personnel, equipment, vehicle and storage space
4. Theft
5. Rigid contracts
6. Insolvency of logistics provider

Distribution logistics risks

1. Breakage during transport
2. Low quality transport
3. Lack of personnel, equipment, vehicle and storage space
4. Insolvency of logistics provider
5. Rigid contracts
6. Theft

External risks

1. Terrorist attack
2. Strikes and other labor conflicts
3. Natural disasters
4. Export or import restrictions
5. Delays or other formality (“red tape”) issues with customs clearance
6. Negative PR, loss of brand reputation
7. Political instability
8. Outage of ICT-systems external to company
9. Organized crime
10. War

Logistics and supply chain risks – provider perspective

The framework for the risk sources for the logistics provider follows the same principle as the framework for the supply chain risks, but now the logistics provider is center stage, having process and control risks, with a supply side (Resourcenrisiken) and a demand side (Nachfragerisiken).

The supply side consists of personnel (Personal) and operational means (Betriebsmittel), or transportation means. The customer (Kunde) makes up the demand side, and the demand risks are separated further into initiation (Anbahnung), contract design (Vertragsgestaltung) and cooperation (Kooperation).

Logistics risks – probability and impact

The risk matrix shows the overall picture of logistics risks in the survey, with the probability (Eintrittswahrsheinlichkeit) increasing from left to right, and the impact (Schadensausmaß) increasing from bottom to top.

• Supply risks (diamond)
• Process and control risks (square)
• Demand risks (cross)
• External risks (circle)

Each of the risk sources is covered in detail in the following figures. Again, a small sample, and perhaps not generalizable, it is still interesting to read what the logistics providers that were surveyed list as their most imminent risks.

Supply risk

1. Sub-performing sub-contractor
2. Lack of sufficient transport capacity
3. General lack of personnel
4. More and more HES regulations, requirements and restrictions
5. Lack of (intermediate) storage space
6. Lack of personnel during peak operations
7. Lack of sufficient transfer capacity (mode or means change)

Processs and control risks

1. Handling of sensitive goods
2. Breakage during transport
3. Personnel lacks qualification
4. Outage of IT-systems
5. Interface issues between different IT-systems
6. Theft
7. Inventory outage (facilities unusable)
8. Malicious acts or sabotage
9. Personnel lacks motivation
10. Lack of procedural documentation
11. Outage of transport means (vehicles)
12. HR-issues during/after company takeover/merger
13. Overworked personnel
14. Lack of competence using new/latest technology
15. Theft at warehouse or storage facility
16. Theft at transfer facility
17. High turnover of personnel
18. Accidents

Demand risks

1. Deficiencies in customer data/information
2. Deficiencies in tender documents
3. Delinquent customer payments
4. Decreasing profit margins during contract period
5. Loss of intellectual property during tender phase
6. No/little return on investment
7. Short contract period
8. Rigid contracts
9. Clustered location of customers
10. Customer insolvency
11. Termination of outsourced services
12. Increasing legal arguments

External risks

1. Terrorist attack
2. Natural disasters
3. Organized crime
4. Negative PR, loss of brand reputation
5. Delays or other formality (“red tape”) issues with customs clearance
6. Strikes and other labor conflicts
7. War
8. Outage of ICT-systems external to company
9. Political instability
10. Export or import restrictions

Critique

In my humble opinion, this is, by far, the most comprehensive overview of logistics and supply chain risks that I have seen to date. I already said that above. What I like about this chapter is the framework that shows how supply chain risks are intertwined with logistics or transportation risks, and that one cannot be treated without the other. The framework allows for a holistic perspective, where not only the risk realm of the supply chain is viewed end-to-end, but where the risk realm of every individual contributor to the supply chain is incorporated. It’s a shame that this is available in German only.

Reference

Pfohl, H.-C., Gallus, P., & Köhler, H. (2008). Risikomanagement in der Supply Chain – Status Quo und Herausforderungen aus Industrie-, Handels- und Dienstleisterperspektive. In H.-C. Pfohl (Ed.), Sicherheit und Risikomanagement in der Supply Chain. Gestaltungsansätze und praktische Umsetzung (pp. 95-147). Hamburg: DVV Media Group.

Author links

• tu-darmstadt.de: Hans-Christian Pfohl
• tu-darmstadt.de: Philipp Gallus
• tu-darmstadt.de: Holger Köhler

Related

This is not the first time these authors appear on my blog. In a recent article on the state of the art in supply chain risk management the authors identify security, resilience, risk, disturbance and disruption is key factors that need to be considered in supply chain risk management.

What is a Dutch book doing on my blog?

Admittedly, only two percent of the visitors on this blog come from the Netherlands, and Dutch ranks number seven if I count the languages used in the operating systems of the computers of my visitors (after English, German, Chinese, Portuguese, Spanish and French), so promoting this book through this post may seem like a waste of time and effort. Nonetheless, there are a number of reasons why I decided to review this book. First of all, it is a very good book. It is extremely hands-on and practitioner-oriented, with many great examples, most of them from the Netherlands, which brings a new and not often heard of perspective to logistics risk management. Secondly, it is perhaps not so much a book about risk management, but more a book about resilience management, and here the authors develop a – in my humble opinion – brilliant framework for how to improve a company’s resilience. Thirdly, and that is how I came across this book in the first place, they use some of the work from this blog for illustration.

Robustness, flexibility and resilience

I found this book when I was checking Google Scholar for citations of my work. Curious as to what they may have cited, I decided to get a hold of this book, and what they used was a bit surprising, but not really, given the book’s main focus: resilience. In a post back in 2008 I wrote about the difference between robustness, flexibility and resilience, a post that I a year later later enhanced to include flexibility, robustness and resilience and agility and illustrated with a  figure the authors apparently found useful:

The figure above is taken from the book (page 13) and is clearly marked as coming from my work. Thank you for that. It is nice to see that other authors pick up my work because the find it useful, and the above figure is indeed a very good illustration of the differences between robustness, flexibility and resilience, if I may say so myself.

Resilience Management

The subtitle reads something like “Can your business take a blow?” and that is exactly what the book is trying to answer. What I like about the book is that the authors introduce a new framework for resilience, where a company’s resilience is made up of three components: cognitive resilience, behavioral resilience, and contextual resilience.  Cognitive resilience comes from the realization and awareness of one’s own risks. Behavioral resilience stems from transparency, flexibility and abundance. Contextual or perhaps operational resilience is based on supply chain visibility, supply chain (risc) culture and supply chain interaction. While the three resilience terms were easy to translate, I struggled slightly with their individual components, and the result below is thus my personal interpretation (See below for the original figures if you would like to suggest a better translation).

Cognitive resilience is more than just awareness. It is also linked to the ability to analyze and interpret risk and to envision the consequences these risks have, and the vulnerability they result in. Behavioral resilience is linked to the ability to learn from past experiences and the ability to learn and react and improvise in a crisis situation. Contextual resilience is related to the supply chain itself, and is that what integrates and supports behavioral and cognitive resilience.

Behavioral resilience or “gedragsresilience” is based on “overvloed”, “flexibiliteit” and “transparantie”. Flexibility I can understand, transparency less, but abundance? Maybe I don’t know Dutch well enough, but abundance seems a bit out of place here. That said, if I apply Alex Fullick’s thoughts on business continuity, abundance could mean the presence of security. It could also mean, quite simply, that there are enough employees available to deal with the crisis, as a shortage of staff obviously will impact any crisis management. Anyway, I leave it up to my readers to come up with better suggestions.

Logistics Management

Inside the resilience triangle is the company and its logistics, with key elements as shown in the figure below.

Here, the company’s overall strategies from the basis for the logistics goals, which in turn are reflected in the four key logistic elements structure, control, information and organization. The logistics structure relates to the flows of the supply chain and how these are designed, essentially the structure provides the roadmap for a company’s logistics. Logistics planning and control relates to the supervision of the flow of goods as it was established in the structure. Logistics IT relates to the use of information systems to track the flows, so that deviations and disruptions can be detected and alleviated at the earliest possible opportunity. Organization relates to the humans that populate the supply chain and what decisions they (are empowered to) make when facing a potential crisis.

In essence, uninterrupted logistics depends on resilience, while resilience itself depends on three factors, people (behavioral), mind (cognitive), and the company and its environment (contextual). Hitherto, oversimplified of course, supply chain risk has perhaps focused very much on the latter, acknowledging the the second, but ignoring the first? All three must come together and work in synergy, as Ken Simpson writes, in order to provide resilience.

Conclusion

The book is easy to read and even easier to grasp, and for that alone it deserves to be translated into English. To some degree this book resembles much of the Swedish handbook Säkra företagets flöden or “Securing the company’s flows” as I translated it, written in 1999. While that book looks at business continuity in general, making transportation issues a part of the overall risk picture, this book looks at uninterrupted logistics as the basis for a company’s well-being and existence. Here their view of logistics as an integrative part of business operations is similar to the definition of logistics as a science that the German BVL would like it to have.  To me, two things stand out in this book: The resilience framework and the logistics framework. The resilience framework looks at a company’s resilience from a holistic perspective, integrating the human side and the physical side with risk and vulnerability, something I haven’t seen before. The logistics framework is also simple and straightforward, and risk or resilience management in logistics never seemed easier than after reading this book. To bad it is available in Dutch only, but hopefully my Dutch readers will help me in my hopeless translation attempts.

Reference

Lammers, B.; Ploos van Amstel, W.; Eijkelenbergh, P. (2009) Risicomanagement en Logistiek. Amsterdam: Pearson Education.

Author links

• tno.nl: Bart Lammers
• waltherploosvanamstel.nl: Walther Ploos van Amstel
• linkedin.com: Pascal Eijkelenbergh

Publisher link

• pearsoneducation.nl: Risicomangement en Logistiek

Buy this book

This online bookstore in Belgium ships this book internationally, and has an English version of their website.

• proxis.be: Risicomanagement en Logistiek

Related

• husdal.com: Supply Chain Risk – the forgotten discipline

Do you know Dutch?

In order to review this book, obviously, I must know some Dutch. Otherwise I would be just guessing. Luckily, since I did grow up in Germany, near the Dutch border, I learned some basic Dutch by reading the subtitles on foreign movies on Dutch television. Besides, Dutch is not that far from my two mother tongues German and Norwegian, so I’m pretty much able to make sense of most of what I read in the book, but some subtleties may still escape me, which is why I am inviting my readers to suggest better translations more adapted towards English logistics terminology. As I have already said, it is a great book, and it deserves to be known to a wider audience beyond those who speak Dutch, so for my Dutch-speaking readers, here are the original figures:

Please comment below or contact me directly if you would like to suggest a better translation.

George Zsidisin

Anyone studying or researching supply chain risk will have come across Zsidisin’s many articles on the subject, and a small sample can be found under “Z” in my literature review. So far, unfortunately, I haven’t reviewed any yet, and perhaps now is the time to catch up with some of them, especially now that I have personally met George Zsidisin at the ISCRIM 2010 seminar last week. I met many of my review subjects at that seminar, and I guess it is fair to say that many of them will find more of their articles reviewed on this blog in the near future…as it is always more fun to write about (or for) people you know.

Why grounded?

When I first read the title did not realize that the word “grounded” carried a certain meaning and was referring to a special research methodology named Grounded Theory. I simply thought it meant grounded as in based on case studies, which indeed it is but Grounded Theory is more than that. Here the researcher begins with an area of study and allows the theory to emerge from the data. No theoretical framework exists prior to the case studies, which are conducted until the researcher reaches a point of information saturation, where then many of the concepts of the topic of study that are discussed by the case study participants became repetitious. Thus, a structure and a framework are starting to appear from the data itself.

What is supply risk?

In his case study, Zsidisin looked at seven companies, five electronics and two aerospace firms, and how they, i.e. the purchasing department/function manages supply risk. What I found astonishing was the following statement he made:

The majority of firms in this study do not currently have formal definitions for supply risk. However, each of the respondents from those firms had strong conceptions of what supply risk means to their organizations. Case study participants provided definitions of supply risk by its sources and outcomes.

So even if there is no formal and written definition of supply risk, the concept of what it entails is still clear to most companies. In summary, what the companies came up with  were these problem areas (with “X” indicating the number of times this answer was given):

• Sources
  • Individual supplier failures X X X X X X
    • Price/cost increases X X X
    • New product development problems X X
    • Quality problems X X
    • Inability to meet quantity demand X X
    • Delivery failures X
    • Relationship issues X
    • Supplier obligations to other customers X
    • Technologically behind X
    • Discontinuity of supply X
  • Market characteristics X X X X
    • Sole source/limited qualified sources X X
    • Market shortages X X
    • Commodity price increases X X
    • Geographic concentration of suppliers X X
    • Supplier patents X
• Outcomes
  • Inability to meet customer requirements X X X X X X X
    • Negative effect on profit targets X X X X X
    • Unable to meet customer specifications X X
    • Impedes new product introductions X X
    • Missed shipments X X
    • Subcontractor failures X
    • Loss of customer business X
    • Failure to meet customer demand X
  • Threats to customer life and safety X X
    • Product liability and integrity X X
    • Quality failures result in loss of life XX

Much of the list is perhaps not surprising, not even the fact that price/cost increases is what seems to worry purchasers more than other potentially more harmful issues. However, what is interesting to note is the fact that threats to customer life and safety, i.e. the companies liability vis-a-vis a third party or customer is of some concern, and that outcomes or consequences of supply failures are something that companies consider in their purchasing strategies.

A definition of supply risk

Armed with the perhaps small but tell-tale sample above Zsidisin then formulates his definition of supply risk as such:

Supply risk is defined as the probability of an incident associated with inbound supply from individual supplier failures or the supply market occurring, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety.

Supply risk is a multifaceted concept, Zsidisin says so himself. Nonetheless, he managed to capture the full facets by using a relatively small sample, which goes to show that pre-screening and selection is crucial in determining the outcome of case studies.

Critique

Is this a good definition? Yes. And perhaps no. It is a good definition because it views the supply chain from end to end, acknowledging that what you purchase as a supply, in the the end will wind up in some customer’s hand, to which you may be liable, if your product or service is faulty. It is perhaps not a good definition because it is rather verbose, e.g. why is there a need to separate individual suppliers from the supply market as such? On the other hand, if I leave out the words from individual…market occurring something seems to be missing, so it is better left as is.

Further reading

Supply chain risk has many definitions, probably as diverse as the business world itself, but if you would like to study more, Rao and Goldsby (2009) did a very good review and typology of supply chain risk. Bøge Sørensen (2004) made another good  classification of supply chain risk, and Vanany et al. (2009) tried to make a complete literature review on supply chain risk management. These three should keep you busy for a while…

Reference

Zsidisin, G. (2003). A grounded definition of supply risk Journal of Purchasing and Supply Management, 9 (5-6), 217-224 DOI: 10.1016/j.pursup.2003.07.002

Author link

• bgsu.edu: Professor George Zsidisin

Related

• husdal.com: Supply chain risk – a review and typology