My way into supply chain management is mostly academic, one element of supply chains that is sometimes overlooked in academia is transportation. By that I mean the nitty-gritty day-to-day operations of freight carriers. However, in terms of supply chain risk, each individual freight carrier, even each and every truck driver delivering a package is one of the, if not the key ingredient towards supply chain performance. Without trucks, nothing works.

 

I was reminded of this in one of the latest academic articles that passed my desk recently:

 

Bask, A. (2001). Relationships among TPL providers and members of supply chains – a strategic perspective. Journal of Business & Industrial Marketing, 16 (6), 470-486

 

The buyer-seller-3PL triad

 

What caught my attention in this article was a figure that illustrated the relationship between supplier, buyer and 3rd party logistics providers (3PLs):

 

bask-relationships-among-TPL-providers.jpg

What struck me was that 3 PLs should be seen as an integral part of the supply chain, not  as service provider or add-on to the supply chain. Similarly,  a supply chain risk assessment should also include an assessment of transportation risks.

 

Transportation risks

 

In fact, supply chains and are exposed to a wide range of  transportation risks, and the list below is taken from a recent study I was involved in, looking at disruption risks in freight transportation by road. Some of the typical transportation risks that can lead to disruptions in incoming and outgoing flows in supply chains are (in random order):

 

    1. Accidents and engine/vehicle breakdowns
    2. Lack of spare parts or lack of facilities and resources for repair
    3. Lack of fuel
    4. Weather and road conditions
    5. Errors in loading, e.g. mixing hazardous and non-hazardous goods
    6. Theft
    7. Strikes and other work-related issues
    8. Disregard of rules and regulations (e.g. driver resting hours)
    9. Bankruptcy or other financial difficulties at other players in the supply chain
    10. Wrong or erroneous driving/loading permits
    11. Wrong or erroneous documents, e.g. customs declaration
    12. Wrong or erroneous information from and to other players in the supply chain

       

      The list is potentially endless, and the above examples are not meant to be exhaustive. What is clear, is that the risks can be separated into risks related to the transportation means, e.g. the truck and the driver and to the transportation infrastructure, e.g. the road.

       

      transportation-disruption-husdal.jpg

      What we found in the study I referred to above that transportation-dependent businesses seek a vertical integration of a freight carrier into their supply chain, while freight carriers establish flexible solutions to meet the contingent needs of different businesses. What the freight owner (supplier or buyer) and he freight carrier engaged is also known as risk sharing.

       

      Risk sharing

       

      Transporting goods from one place to the other will always have a risk of the goods not arriving on time or in broken condition, and a transportation company (i.e. freight carrier) that accepts a transportation order from a freight forwarder or directly from a freight owner will want to clearly identify and contractually determine which party that is bearing which risk. Extra transportation costs will possibly occur in case of engine breakdowns, avoidable delays or unforeseeable detours, some of which may in hindsight have been foreseeable, the cost of which should ideally be fairly shared among the parties involved.

       

      If on-time delivery is imperative, the freight owner may demand the carrier to install systems for tracking and locating vehicles and or goods, and orders may be relayed directly from the freight owner to a certain vehicle of the carrier company, something that may affect the sequence of other orders the carrier has to undertake that day. The type of goods carried may demand increased vehicle maintenance or may require the carrier to invest in certain equipment for loading and handling. Such equipment typically has a high investment cost, but decreasing average costs, something that may lead the carrier to seek a long-term relationship with the forwarder to cover the costs that have been occurred in relation to this particular type of goods. In long-term contracts, there may be other uncertainties, e.g. fuel costs may unexpectedly rise or there may be changes in government health and safety regulations and driver resting hours, items that are typical candidates for a re-negotiation of the contract terms.

       

      The risk sharing principles prescribe that risk should be borne by the party closest to the risk source, and thus is the party most able to “control” (through mitigative or contingent actions) any consequences stemming from the risk. In practice, this means that the carrier should bear any risks associated with equipment, vehicles or infrastructure-related events, while the freight owner is best suited for handling risks associated with delivery times or risk related to suppliers and sub-suppliers of the goods transported.

       

      Mitigation measures

       

      With the freight carrier, i.e. truck driver being closest to handling disruption risks, here are some of the typical mitigation measures we saw in our study:

       

      1. Contingency contracts with companies offering maintenance, repair, rescue or towing services along the most frequently used road links.
      2. Cooperation agreements with other carriers to secure replacement drivers or replacement vehicles for transferring goods from the broken vehicle to the replacement vehicle.
      3. Structural and/or technical modifications of vehicles and equipment to improve operations, particular under winter conditions.
      4. Regular dissemination of information to drivers where to find which roadside assistance.
      5. Neutral and non-descript packaging to avoid theft of valuable goods.
      6. Sufficient slack in lead time of scheduled routes in order to account for possible delays.
      7. Depending on the external circumstances, no guaranteed lead time or arrival time.

       

      Clearly, freight carriers employ various measures, depending on how strong ties they may have to a certain freight owner. Mainly, freight carriers establish a certain contingent flexibility, by which additional resources (e.g. replacement vehicles or repair crews) can be called upon, either from within one’s own ranks or in cooperation with other freight carriers. In addition, vehicles are modified and adapted to ensure more reliable operations, particular for winter conditions. Within the freight carrier community there seems to be a general readiness to “help each other out” in times of need.

       

      So,  freight carriers play a vital role in minimizing overall supply chain risk. Don't forget, the devil is in the details.

      Without trucks, nothing works

       

      What would happen if there were no trucks driving in the UK?

       

      Read

       

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

       

      to find out.

      Now that I have your attention, no, this posts is not about hidden affairs and luscious constellations in the supply chain, or...maybe it is, after all. You decide, after you have read the rest.

       

      What it is about, in boring laymen terms is this: Buyer-supplier-relationships in triads. And again, we're not thinking of the murky underground world of Hong Kong here, but of a simple supply network consisting of one buyer and two suppliers. A "triad", or "ménage à trois" if you wish, since a triad is nothing more than a group of three, and a ménage à trois is nothing more than a household of three. At least, that's what Wikpedia says it means.

       

      Now, triads are a very interesting structure, and according to a recent journal article by Thomas Y Choi and Zhaohui Wu in the Journal of Supply Chain Management, titled "Triads in supply networks: Theorizing buyer-supplier-relationships", which sounds a lot less fascinating than "Ménage à trois", which is what would have used if I had written that article. What the article claims is that triads (buyer-supplier-supplier), not dyads (byer-supplier) are the building bricks of supply networks. Choi and Wu develop a highly intriguing concept of nine archetypes of triads, each with distinctive characteristics as to the relationship between buyer and supplier and between the suppliers.  These nine types are based on a set of three basic constructs that are either "balanced", "unbalanced" with positive or negative relationships between all  parties, or having a "structural hole", i.e. no relationship between the two suppliers.

       

      If you put them all together in one picture, it looks like this:

       

      choi-wu-buyer-supplier-relationships.jpg

      Described in more detail, the configurations typically look like this:

      Balanced

      A balanced state offers a stable  relational structure for the firm  members in the triad.

       

      1 Balanced State 1: The  buyer has a cooperative relationship with each supplier, and the   suppliers have a cooperative relationship with each other. The buyer’s  commitment to each supplier encourages the supplier to make   asset-specific investments in the buyer’s business, and to engage in  mutual collaboration for the greater benefit of all.

       

      2 Balanced State 2: The  buyer has an adversarial relationship with both suppliers, while  the  suppliers have a cooperative relationship with each other. In this case  the suppliers work in a formal or non-formal alliance against the buyer.

       

      3 Balanced State 3: The  buyer has a cooperative relationship with one supplier, while having an   adversarial relationship with the other supplier, while the two  suppliers have an adversarial relationship. Contradictory as it may may  seem, this is a balanced state with two negative and  one positive  relationship in the triad. For each of the three firms, the  distinction  between a friend and a foe is straight and clear.

      Unbalanced

      An unbalanced state reflects inequity  and brings instability for  organizational actors in the triad.

       

      4 Unbalanced State 1: The buyer and each supplier have a cooperative relationship, while the   suppliers have an adversarial relationship. For the buyer it may seem  the perfect choice to work with competing suppliers, and suppliers aware  of the competition may not wish to collaborate, since the other’s death  means one’s own survival.

       

      5 Unbalanced State 2: The buyer and one supplier and the two suppliers have a cooperative   relationship, while the the buyer and the other supplier have an  adversarial relationship. Interestingly, this may on one hand lead the  “favored” supplier to gain more business from the buyer, on the other  hand it may make this supplier more cautious, for fear of being treated   in the same manner as the other supplier.

       

      6 Unbalanced State 3: All three relationships are adversarial. This triadic relationship state  is dysfunctional and transitory, and often accompanied by breakups and  lawsuits.

      Structural Hole

      A triad with a structural hole is in  fact very common in the business world. Here, the  buyer maintains  relationships with its suppliers, regardless of it being  positive or  negative, while there is no  relationship between the suppliers.

       

      7 Structural Hole 1: In  this triad, the buyer sits on top of the structural hole between two   suppliers and has a cooperative relationship with both suppliers. The  buyer may actually play the role of an entrepreneur who spans across two   suppliers without ties between them, thus acting as a middleman  connecting these two in a business opportunity.

       

      8 Structural Hole 2: In  this case, the buyer has a cooperative relationship with one supplier   but an adversarial relationship with the other. Here, the buyer can take  advantage of the information asymmetry created by the structural   hole…but only until one of the suppliers finds out.

       

      9 Structural Hole 3: Here, the buyer has an adversarial relationship with both suppliers.   often resulting in suppliers’ antagonism. A cunning  buyer can actually  play one supplier against the other.

      Conclusion

      I think the article is a fascinating read and a brilliant attempt at classifying buyer-supplier triads into nine distinctively different configurations, clearly separating the relational tendencies  of firms in buyer-supplier-supplier triads and  how they operate  dynamically and adapt to given relationship situations. And reflecting upon what I said above, "hidden affairs and luscious constellations" are very much possible, albeit not in the literal sense. However, two suppliers conspiring against a buyer, a buyer playing each supplier against each other, suppliers forging alliances and collaboration are not unthinkable here.

      Question

      Can you relate to this framework? Do your own business relationships make sense using these archetypes?

       

       

      Choi, T., & Wu, Z. (2009). Triads in supply networks: Theorizing  buyer-supplier-relationships. Journal  of Supply Chain Management, 45  (1), 8-2

      Every year, the Chigao-based risk management and insurance giant AON publishes a the AON global political risk map. Last year's map  included a Commodity Crunch Exposure Matrix, which identified the countries most vulnerable to political instability in 2009 if commodity prices continue to fall. Interestingly, or maybe not surprisingly, my home country Norway makes an entry with medium to high risk. No wonder, since Norway is the world's third largest exporter of natural gas and the sixth largest exporter of oil, and in early 2009 the price of North Sea oil was $40 per barrel. These days it's hovering around $75 per barrel, so hopefully we're out of the woods on this year's map.

       

      That said, I have the map on the wall in my office, not so much for looking at Norway's predicament, but for looking at the potential risk towards global supply chains, since the map tags countries you should look out for with the label "supply chain vulnerability". Interestingly, the number of tags increased from 38 in 2008 to 54 in 2009 due to an increase in risks ranging from government embargo or interference with a supplier ,through to strikes, terrorism and sabotage.

       

      Another source of global risk analyses are the global risk reports published every year by the World Economic Forum, and it's quite interesting to follow the change in the global risk landscape from year to year. I first learned about the WEF Global Risk Reports in 2008, when that year's report claimed that local supply chain disruptions could have global implications:

      The extent and complexity of current global supply chains mean that the problem of supply chain management is not limited to a single enterprise or industry: even a relatively small supply chain disruption caused by a global risk event may ultimately have consequences across the global economic system.

      Supply chain risk are no longer a major component of the WEF Global Risk Reports, but when comparing the risk landscape matrices from 2007 until 2010, and interesting picture emerges, if you llok at the most likely/most severe risks.

       

      First, 2007:

      global-risk-landscape-2007.jpg

      Then, 2008. Note that asset price collapse has increased in likelihood, while Middle East instability and slowing Chinese economy make and entrance.

      global-risk-landscape-2008.jpg

      Now, 2009. Asset price collapse remains high (6), a slowing Chinese economy (4) is more likely, while Middle East instability has disappeared and is replaced by Fiscal crises (5), and with Global governance gaps (19) as a new threat.

      global-risk-landscape-2009.jpg

      Finally, 2010. The landscape remains very much the same as in 2009. However, Fiscal crises (5) have a marked increase in likelihood. Also note that Food price volatility (1), Retrenchment from globalization in developing countries (7) and Breakdown of critical information infrastructure (34) are creeping up from behind.

      global-risk-landscape-2010.jpg

      The WEF Global Risk Reports are always an educating read. The overall risk landscape in the reports has changed remarkably little over the years.

      What has changed dramatically is the level of recognition that global risks, like the world, are now tightly interconnected and shocks and vulnerabilities are truly global, even if impact and response can still differ at the “local” level.

      Download he reports from here: WEF Global Risk Reports

      This winter has been unusually cold for much of Northern Europe. Temperatures have on average been several degrees lower than "normal", where normal in meteorological terms is the 1960-1990 period, which by itself is already a lot colder than the last 10 years or, so it really is cold and Spring shows absolutely no sign of being anywhere near soon. No wonder then that the Baltic Sea freezes over, and no wonder perhaps that many passenger and car ferries and merchant vessels have gotten stuck in the Baltic Sea.

       

      It is a  scenario that happens every winter, which is why the countries surrounding  the Baltic Sea have icebreakers in place. However, it usually does  not happen on a scale we've seen recently.

       

      A total of about 50 ships were stuck in ice along Sweden's eastern  seaboard, said Johny Lindvall, who manages the maritime administration's  ice breaker service. Heavy ice cover is not uncommon further north, but  the ice rarely gets thick enough [...] to trap  powerful passenger ferries

       

      The BBC news has some nice video footage showing the extent of the "disaster", reportedly the worst Baltic freeze for 15 years. I'm not sure how much freight traffic there is on these ships, but it ought to be considerable. Let alone annoyed passengers.

       

       

      Britain was haunted by snowfall earlier this winter, and was in danger of running out of salt and grit to keep the roads open. No grit means no cleared roads means  no one able to get anywhere and a no-show of people everywhere, meaning thousands of working hours lost. The TimesOnline proclaimed that the snow could have cost Britain some 2 billion pounds, that  is £2,000,000,000,000.

       

      Luckily, these events do not happen too often, but every time they do  we’re reminded how vulnerable we are and how the infrastructure we take  for granted is perhaps not so granted after all. As Allan Massie wrote in The Telegraph, people have just forgotten how  winter is supposed to be. That whas the time, I want to add, when you knew that if there was bad weather things would slow down, and you readily accepted that delays would happen.

      Jan Husdal

      Remembering John Mentzer

      Posted by Jan Husdal Mar 3, 2010

      I was alerted to this sad news this morning when I visited Bob Ferrari's Supply Chain Matters blog: One of the most renown educators and thought leaders in supply chain management is no longer among us: John T Mentzer died on February 26, 2010. While I have never met John, I have read many of his articles and books, and he has certainly influenced much of my thinking, which is why I am saddened to know that he will know longer contribute directly to the supply chain industry and community.

       

      It was after reading Learning to Celebrate Life, the inspiring  53-page ‘book’ he wrote about his life, his ordeal, and his beliefs that I decided to pay my own little tribute to John, namely reiterating the four posts on my main blog, where I have reviewed some of his works:

       

      I first discovered John Mentzer when I read Global Supply Chain Risk Management, and article he co-wrote with Ila Manuj in 2008. This is an excellent paper, providing a clearly outlined, academically sound approach with a high practical value. Backed by the literature, it provides an understanding of the constituents of risk, how to createa risk profile, and how to use the risk profile to generate a set of appropriate strategies in the context of global supply chains and corporate strategies. The framework considers both quantitative andqualitative risk, and it explicitly recognizes the dynamic environment in which global supply chains operate.

       

      As I later discovered, there are in fact two separate articles, by thesame authors, Manuj and Mentzer, with almost the same title, publishedthe same year, 2008, in two different journals. That was my second encounter with John Mentzer. In Global Supply Chain Risk Management Strategies, Mentzer and Manuj, building on their first article, develop nine propositions as to which strategy that is appropriate under which supply and/or demand scenario.

       

      John Mentzer was a frequent contributor to the Harvard Business Review and in 2007 we co-wrote a piece on weak links in the supply chain. The article divides the supply chain domain into seven key areas where CEOs can exert a positive, or conversely, a negative influence, and argues that no supply chain is stronger than its weakest link, and weak links are a risk that can and should be avoided.

       

      One of the lasting impressions John Mentzer has left on me is his Handbook of Global Supply Chain Management. Solidly written, it is a handbook indeed, allowing the reader to focuson one area of investigation at the time, while never leaving the whole chain out of sight. All-comprehensive, and filled with 600 pages of intensely condensed knowledge,the book covers everything you need to know and more than you need to know about Global Supply Chain Management from A to Z.

       

      It is sad to know that the stream of knowledge from John's brilliant mind has stopped for good. He  became to me an author who is close to my heart and my  own beliefs about supply chain management, and he will stay that way. Thank you, John, I will miss you.

      Jan Husdal

      The security of supply

      Posted by Jan Husdal Mar 2, 2010

      The Chile earthquake that triggered my last post on resilience lessons hasn't quite left my mind yet. In fact, it has brought to my mind another article i wrote recently, on the security of supply. Unbeknown to me Chile's mines supplies much of the world with copper, and given the currrent destruction of ports, highways and other infrastructures, not many export goods are going to leave Chile for a while, I guess.

      The security of supply

      While the term critical infrastructure may be be familiar to many of my readers, the term critical supplies is perhaps not equally familiar.  Critical supplies are goods and materials without society cannot function, e.g. food, fuels, drinking water, medicines, spare parts for critical machinery, to mention but a few. Security of supply, then, describes the activities that are undertaken and the decisions and provisions that are made to secure a nations’ functioning and the welfare of its citizens in case of major disturbances and emergency situations. Copper, on one hand is a critical supply for many industries, and for Chile it is a critical supply in terms of exports.

      Copper - an essential supply?

      Copper is fundamental to the Chilean economy, representing about half of the  country’s $53 billion annual exports. and according to The Times Online, Copper price soars on Chile production fears.

       

      Copper is fundamental to the Chilean economy, representing about half of the  country’s $53 billion annual exports. The staggering pace of Chinese  construction – boosted by Beijing’s $586 billion stimulus package, meant  that Chile met about 50 per cent of China’s record import demand of 3.19  million tons of refined copper last year.

      Initially, the concepts of security of supply were born under the cold war and were related to national preparedness, homeland security and national defense, and became perhaps slightly outdated in the early 1990s, when I started to work with it, but in today’s networked and globalized economy, where more and more goods are imported from faraway countries via supply chains that stretch around the globe, the security of supply is maybe headed for a revival. Which country does not depend on imports and would not be severely affected if supply chains were disrupted?

       

      Key supplies = key risk

      Saturday’s disaster serves as a reminder that supply risk, in the form of supply disruption remains alive and well for many metal markets, writes the Metal Miner, a blog providing sourcing & trading intelligence for global metals markets, citing a Reuters news story that claims that the major impact may come from the disruption on deliveries from the mines. Copper thus becomes a critical supply for the metal industry. A copper shortage could have wide impacts not just in the Chinese construction business.

       

      Critical infrastructure and critical supplies go hand in hand, since the former is responsible for the distribution of the latter, while the latter in itself may be more important than the distribution channel: While securing critical infrastructure for general access and the general distribution of goods is of course essential, one should perhaps first consider what critical supplies the infrastructure is transporting.

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