The recent earthquake in Chile shows how vulnerable a country is when it is facing disaster on a grand scale. While natural disasters are not man-made, the aftermaths and consequences of the disasters often are. Disasters like this call for resilience in all parts of the community, including the infrastructure, the supply chains and society as a whole. Maybe some of my older posts on this blog,  which do not see daylight too often may shed some light on som of the issues surrounding resilience.

Economic Resilience

In a post dated May 2008, I  reported on something very relevant to earthquakes  how to define and measure economic resilience, a paper published by the Multidisciplinary Center for Earthquake Engineering Research (MCEER), refers to the inherent and adaptive responses to  hazards that enable individuals and communities to avoid some potential losses. It can take place at the level of the firm, household, market, or macroeconomy. In contrast to the pre-event character of mitigation, economic resilience emphasizes ingenuity and resourcefulness applied during and after the event.

Prepare or react?

Another post I can think of are my thoughts after watching the BBC World Debate titled "Disasters - Prepare or React?" The question was, 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? Should governments spend large sums of money on mitigation, on building up rescue and recovery capabilities, or should we rather educate people how to survive on their own as long as possible if no rescue arrives, and reduce the impact in that manner ? The basic message was that the government can only do so much, you have to do the rest yourself. On the other hand, the government must also provide the funds and opportunities, the legal and economical framework, for communities to actually prepare themselves.

Emergency Logistic

I should also mention a recent article on Emergency Logistics that looks at logistics and risk mitigation in Thailand following the Asian tsunami, Interestingly, the Thai Disaster Prevention Master plan only implicitly underscores the need for logistics requirements, but does not state them explicitly. On the other hand, local and regional responsibilities for preparedness and response are clearly stated, mentioning that key supplies are necessary, but leaving it up to the local agencies to acquire whatever is necessary, should the need arise. Make do with what you have.

When disasters strike

how does the transportation network recover? That was the topic of a session I attended at TRB 2009 this week last year. Although the session was mainly aimed at US transportation agencies, some key of the points work regardless of location: recovery plans need to be broad, they must include all possible hazard events and all transportation modes. Transportation recovery plans need to look beyond their mere purpose of addressing hazards in the transportation network. The transportation network is essential to many communities. This implies that the restoration of the transportation network also means the restoration of the economy and the society, not just the infrastructure.

The focus of this blog is the vast area that comprises anything supply chain risk. As my tagline says "Supply Chain Risk: explained, explored, researched and reviewed". There is a plethora of academic articles on supply chain risk, and unfortunately, I don't have time to read them all. And frankly, not articles are equally interesting. However, every once in a while I come across an intially boring article that grows on me the more I read it. Expanding the discussion on risk and the extended enterprise by Robert E Spekman and Edward W Davis is one of those articles.

 

Six areas that relate to supply chain risk

Citing from the abstract, the article is meant to highlight six areas of supply chain risk and discuss these at length, showing how they are endemic to the extended enterprise, and develop a typology for categorizing them. And indeed, a lengthy discussion it is. That said, it is a lengthy discussion not to be missed.

 

First out are the risks related to the traditional view of the supply chain as made up of three flows: "boxes", "bytes" and "bucks":

Risk #1: material flows

  • Supplier capacity constraints
  • Quality issues
  • Changes in product design and production processes
  • Inability to reduce costs
  • Unanticipated delays and supply disruptions

Risk #2: information flows

  • Incorrect transmission of orders
  • Hesitancy to share information
  • Lack of transparency

Risk #2: money flows

  • Currency fluctuations
  • Poor credit ratings of suppliers or customers

Albeit these risks are among the more obvious risk, there are other, less obvious risks that are harder to manage:

Risk #4: security

Security in supply chains is not just physical security but more often than not information or intellectual security:

  • Denial of service
  • Malicious hacking
  • Compromised access
  • Theft of proprietary information
  • Financial fraud
  • Theft of equipment and supplies

Unfortunately though, security is often perceived as a hindrance to efficiency, and many companies will shy away from too much security, even when they would need it.

Risk #5: opportunistic behavior

As firms start working closely together, the social fabric of the supply chain becomes important in addressing supply chain risks. In supply chain risk management then,

There must be a marked transformation in behavior and mindset that goes byond the logistics activities that comprise the supply chain linkages, and managers must re-focus on relationships that develop among supply chain partners. Such relationships, based on mutual trust, form the mortar and hold the network together.

Wise words. But keep in mind that

The dilemma surrounding any collaborative supply chain relationship is that with closeness comes the fear of opportunism, where one supply chain partner acts in self-interest, to the detriment of the others

Risk #6: corporate social (ir)responsibility

Corporate social responsibility is an often overlooked risk. In supply chains this responsibility extends beyond one’s own firm, and must also take into account the actions of suppliers’ suppliers or suppliers’ trading partners. Accepting responsibility and legal liability for actions not immediately related to oneself becomes part of the larger picture any company must acknowledge.

 

Solution: Trust?

The authors offer one major solution to mitigating these risks, and that is building trust in the supply chain. It is only through trust that these risks can be managed. However,

A good supplier does not necessarily make a good partner.

Most important, how will a potential partner handle the legal and ethical challenges (or risks) described above?

Conclusion

Seemingly incoherent at first reading, the article does improve the more often I read it. Interestingly, Spekman and Davis see the above risks as a hierarchy, with the flow risks forming the basis for the  management of information security risks,  which extend towards trust risks and finally, risks related to corporate social responsibility. The message is clear:

Can we ensure that all risks can be mitigated? No.

Can we begin to enact processes that reduce the chances of these risks affecting the performance of supply chains? Yes.

A lengthy article, yes. But it is well worth spending the time required to read it, and spending even more time to read it well.

 

Spekman, R., & Davis, E. (2004). Risky business: expanding the discussion on risk and the extended enterprise. International Journal of Physical Distribution & Logistics Management, 34 (5), 414-433

Jan Husdal

Going lean = disaster?

Posted by Jan Husdal Feb 22, 2010

I guess I shold pay more attention to my fellow bloggers in the Supply Chain Expert Community, because Bob Ferrari had a very interesting post some weeks ago. In Can Lean Manufacturing Backfire? he asked he question whether Toyota had taken its Lean Manfacturing too far, thus ascerbating the recent recall of vehicles due to problems with the accelerator pedal. Bob's take on the issue is that Lean is not to blame.

I [Bob] believe the headline for Toyota is not about the backfire in lean manufacturing, but rather an awareness of both design and supply risk management. This should not be the purview of manufacturing and supply chain, but rather product management and design.

 

Or is lean to blame after all?

 

I think Bob is right. It is the product design that is at the heart of the problem. This brings to mind a recent article by Khan, Christopher & Burnes (2008) The impact of product design on supply chain risk: a case study, where the proposition is made that

the supply chain begins on the drawing board

meaning that supply chain risk does not only relate to the supply chain itself, but just as much to what is in the supply chain. What is in the supply chain is determined by a design process, and consequently, supply chain risk can be designed out of (or inadvertently designed in to) the supply chain...and maybe that is what Toyota has done here?

 

The article deals with the fashion industry and the need for retailers like Marks & Spencer to build agility into their supply chains in order to better customize its products or make short-notice changes in response to customer preferences, this agility starts at the design process. Agility is only possible if the product design allows for later changes.

The co-ordination of activities along the supply chain has extensively been focused on the efficiency along the value chain, but surprisingly, a major issue, the design of the product and how it is co-ordinated, managed and its impact to the supply chain has largely been ignored.

 


Khan, O., Christopher, M., & Burnes, B. (2008). The impact of product design on supply chain risk: a case study. International Journal of Physical Distribution & Logistics Management, 38 (5), 412-432

A recent article in the NY Times caught my attention today. Actually, it first caught the attention of one of the readers on my regular blog, so he decided to send me a small note about it. The article tells the story of Danish shipping giant Maersk, who is making its ships go slower and slower, so-called "slow steaming", saving fuel costs and saving CO2 emissions.

By halving its top cruising speed over the last two years, Maersk cut fuel consumption on major routes by as much as 30 percent, greatly reducing costs. But the company also achieved an equal cut in the ships’ emissions of greenhouse gases.“The previous focus has been on ‘What will it cost?’ and ‘Get it to me as fast as possible,’ ” said Soren Stig Nielsen, Maersk’s director of environmental sustainability. “But now there is a third dimension,” he said. “What’s the CO2 footprint?", and in what reads as a commentary on modern life, Maersk advises in its corporate client presentation, “Going at full throttle is economically and ecologically questionable.”

I find this a vey interesting development. While the going green of shipping is the focus of the article, Maersk is perhaps not only saving their own costs, but also saving its customers of the stress of not getting their goods on time. Carriers who think traditionally will naturally challenge the idea of slowing down, and argue that speed is essential to serving their clients what they need when they need it. But is it really? After all, if ships go slow by default there is ample time to catch up an unforeseen delay, something that would not be possible with a tight schedule.

 

In a corporate presentation Maersk Line states that slow steaming contributes to the reliability of their shipping.

More speed buffer means it is easier to speed up when required, and consequently an even higher schedule reliability.

Maersk is now working with customers, hoping to slow more boats, and where customers will be charged variable rates depending on speed. It remains to be seen how many customers will jump on the bandwagon, but not jump ship, in order to save costs, save the planet, and perhaps save the annoyances and disruptions that used to come with a speedy delivery.

 

Now that the delivery is a slow delivery, there are perhaps less worries?

 

husdal.com: Less costs and less disruptions?

Christopher Tang, professor since at UCLA since 1985 is an excellent writer and an excellent speaker. Most of his research work deals with complex issues faced by industry, he has developed analytical models to examine managerial issues arising from global supply chains, retail operations, and marketing/manufacturing interface. In this time and age, some of his research findings have even found their way to YouTube, and that is how I got know Christopher Tang.

 

In the video snippet, which you can see here, Tang identifies hree strategies for building a robust supply chain, related to (1) supply, (2) product, and (3) demand and gives three examples of each:

Product: Nokia changed product configurations in the nick of time to meet customer demand during a supply disruption, the infamous Albuquerque Philips plant fire.

Supply
: Hong-Kong based Li and Fung changed its supply plan in a flash to meet customer demand during a currency crisis, the 1997 Asian meltdown.

Demand
: Dell changed its pricing strategy in order to divert customer demand during supply shortage, after the 1999 Taiwan earthquake.

 

These strategies are actually part of a larger set of strategies that Tang describe in his 2005 paper Robust strategies for mitigating supply chain disruptions, where he lists nine strategies, each with several examples:

Postponement
Nokia’s modular design allowed it to switch to other components after the supply shortage
Strategic stock
Planned stockpiling of regular demand at central locations to serve areas in need or shortage
Flexible supply base
If one supplier goes down, the other can take over, some for basic demand, some for high volume fluctuations
Make some and buy some
Always keep some production in-house, outsource basic items, make high-end items in-house
Economic supply incentives
Commit to buying certain quantities from a certain supplier to keep the (backup) business running
Flexible transportation
Use multi-modal, multi-carrier, multi-route transportation, avoid chokepoints
Dynamic pricing and promotion
Sell what you have, don’t delay or promise to supply what you don’t have
Assortment planning
For retailers, display what’s in stock, thus influence customer choice and demand
Silent product rollover
Do not market the introduction of new products or the end of old products

If you look at the list above, most of it makes perfect sense.

 

In fact i found Tangs paper to be so good that I decided to incorporate into my annual lecture on supply chain risk at Molde University College in Molde, Norway.

 

Tang, C. (2006). Robust strategies for mitigating supply chain disruptions International Journal of Logistics, 9 (1), 33-45

Today's post is on a paper that was written more than 20 years ago, but that still holds true today and that still provides ample inspiration for today’s research. Global Strategy: An Organizing Framework was written by the late Sumantra Ghoshal (1948–2004, the founding Dean of the Indian School of Business in Hyderabad. Ghoshal was a brilliant academic and management guru and way ahead of his time.

 

The word “supply chain” doesn’t even appear once in Ghoshal’s paper, but why is this paper so interesting in a supply chain risk perspective?

Global strategy

The paper was written in 1987, at the very beginning of the globalization era, when the buzzword of the day, “global strategy”, was still an emerging, concept, but already very popular among managers of multinational corporations. “Going global” is (or in 1987 still “was”) one of the "hot" means to achieve competitive advantage over one's competitors. Today, it’s hard to imagine any business that does not have at least some parts of its supply chain stretched around some faraway parts of the globe. Ghoshal provided a framework for selecting appropriate strategies when going global, and risk management was one of the topics he covered.

Competitive advantage – means and ends

In a multinational or global setting, competitive advantage  can be gained from three sources (means):

- Exploiting national differences in the countries the company is involved in
- Benefiting from economies of scale, and
- Exploiting synergies from economies of scope, created by the diversification of its activities.

The strategic task of managing globally is to use these three sources to achieve these three strategic objectives (ends):

Efficiency in current operations
Risk management

Innovation, learning and adaptation
.

 

Managing risks

A multinational corporation faces many risks, some of which are endemic to all firms, and others which are unique to organizations operating across national boundaries. Ghoshal (1987) divides the risk into four broad categories, the same four categories that 20 years later are picked up by Manuj and Mentzer (2008).

Macroeconomic risks
- random movements in the economic environment (wages, interest rates, exchange rates, commodity prices)

Political risks
- policy actions from national governments (legal and regulatory actions, nationalization, war)

Competitive risks
- uncertainty about competitors actions or development of competitive technology

Resource risks
- lack of human resources, technology or capital

Mind you, many risks have a sad tendency to change over time, and the strategic task is to consider these risks jointly in the context of particular strategic issues at that time, as well as possible future issues. It is the risks that cannot be diversified in a global environment that should be of most concern.

Conclusion

It is interesting to note a paper that already 20 years ago captured the essence of risk management in global environments. Ghoshal  excellently managed to synthesize the existing ideas and techniques of his time in this paper. Since then, globalization has taken many steps forward, but some aspects of globalization, like the framework above, will definitely stand the test of time.

 

Ghoshal, S. (1987). Global Strategy: An Organizing Framework. Strategic Management Journal, 8 (5), 425-440

Following up my post on corporate vulnerability, today I'd like to present another article by professor Göran Svensson from Halmstad University in Sweden. He is one of the first academic contributors to the field of supply chain risk, beginning around 1999. Tofay's article looks at the gap between dependence and trust that leads to vulnerability in business relationships. Trust and dependence are major components of a dyadic business relationship, and it is important to see how they interact.

Trust

According to Svensson, a relationship of trust is a relationship that is

Dependable
Honest
Competent
Professional
Friendly

Dependence

Svensson finds that the dependency in a relationship is made up by 5 components

Technical dependence
Time (workflow) dependence
Knowledge dependence
Social (relationships) dependence
Economic or judicial dependence

In addition, Svensson brings in two more dependencies in his research:

Market dependence
IT dependence

Trust-dependence matrices

Svensson constructs trust-dependence matrices, linking each dependence item with each trust item, resulting in four basic scenarios:

A favorable vulnerability scenario is indicated by a high level of trust and dependence in both directions.
A convenient vulnerability scenario is indicated by a high level of trust towards suppliers and a low level of dependence towards customers.
A high level of dependence towards suppliers and a low level of trust towards suppliers would constitute a troublesome vulnerability scenario.
A low level of trust and dependence in either direction is seen as a neglectable vulnerability scenario.

The vulnerability gap

Svensson claims that the perceived trust and the perceived dependence in business relationships influence the perceived vulnerability. The higher the perceived dependence, the higher the perceived vulnerability. The higher the perceived trust, the lower the perceived vulnerability. Trust and dependence interact with vulnerability such that imbalances on either side can be countered by adding to the other side, like a see-saw. In a relationship with low trust, the degree of dependence should be lowered, in a relationship with high dependence, the degree of trust should be increased.

 

Svensson, G. (2004). Vulnerability in business relationships: the gap between dependence and trust Journal of Business & Industrial Marketing, 19 (7), 469-483

Jan Husdal

Corporate vulnerability

Posted by Jan Husdal Feb 3, 2010

Göran Svensson is one of the leading key figures in supply chain vulnerability research and his concepts and models of supply chain vulnerability are usually well thought-out and easy to understand. So is his 2004 article on Key areas, causes and contingency planning of corporate vulnerability in supply chains: A qualitative approach. Here Svensson builds the construct of supply chain vulnerability around three components: time dependence, functional dependence and relational dependence.

 

 

Qualitative, not quantitative

In this study, Svensson investigates the areas, the causes and the contingency planning of corporate vulnerability in upstream and downstream supply chains. What sets this study apart from many other studies in supply chain vulnerability is that it is based on qualitative data, while most other studies on the vulnerability construct in supply chains have been quantitative. Being a qualitative rather than a qualitative researcher myself I can only applaud such an approach.

 

Three dependencies: time - function - relation

Svensson constructs corporate vulnerability using three components, namely time dependence, functional dependence and relational dependence in the upstream and downstream supply chain. Time and functional dependencies refer to the fact that there is a chronological or sequential dependence in supply chains, and relational dependence refers to other relationship-specific factors that influence the interaction in supply chains.

 

Corporate vulnerability is a condition that is caused by time, functional and relational dependencies in a supply chain. The degree of corporate vulnerability may be interpreted as proportional to the degree of time, functional and relational dependencies, and the negative consequence of these dependencies, in a supply chain.

Consequently, the awareness of the key areas of supply chain vulnerability, together with the appropriate contingency planning for these vulnerabilities, should be of utmost importance to any company. Ericsson's unfortunate handling of the Albuquerque fire in 2000 is one of the prime examples of what happens if this is not taken care of.

 

Supply Chain Management is a management philosophy that strives to integrate the vertically dependent activities, actors, and resources between the point-of-origin and the point-of-final-consumption. According to Svensson, SCM should not only look at the vertical, but also have a horizontal emphasis. SCM ought thus to comprise different kinds of dependencies in, between and across companies, and, in and between supply chains.

 

Three key questions

In his empirical study, Svensson then asks

 

  • What are the key areas of corporate vulnerability in thecompany's upstream/downstream supply chains?
  • What are the causes of corporate vulnerability in the company's upstream/downstream supply chains?
  • What kind of contingency planning for corporate vulnerability does the company perform in the upstream/downstream supply chains?

and answers the questions in relates it to the above framework of time, function and relation dependencies.

 

Key findings

Svensson concludes that

two generic determinants influence the perception of corporate vulnerability in the upstream and downstream supply chains, namely the degree of transparency and the degree of obscurity

The degree of transparency increases as the accuracy of the information in the supply chain improves, while the degree of obscurity increases as the accuracy of the information in the supply chain deteriorates. Svensson claims that only a holistic view of the supply chain leads to transparency, while a more atomistic view leads to obscurity, as seen from the focal firm's perspective. T


Svensson suggests that there is a

prevalence of a myopic view of corporate vulnerability in the companies' upstream and downstream supply chains [...] the view is vertical, and ignores horizontal considerations

Apparently, here lies one of the core challenges of how to address supply chain vulnerability. It's not just about my supply chain and my company. Supply chain vulnerability is about the wider business environment:

 

Corporate vulnerability may be influenced by the current and potential direct and indirect dependencies, the vertical and horizontal dependencies, as well as the unidirectional and bi-directional dependencies, between business activities in and between supply chains. [...]  Therefore, the companies' strategic agenda has to be dedicated to the internal strengths and weaknesses, as well as to the external opportunities and the threats, in current supply chains.

 

 

Svensson, G. (2004). Key areas, causes and contingency planning of corporate vulnerability in supply chains: A qualitative approach International Journal of Physical Distribution & Logistics Management, 34 (9), 728-748

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