Recently I came across an interesting academic paper titled Mitigation of supply chain relational risk caused by cultural differences between China and the West, written by Fu Jia and Christine Rutherford from Cranfield University and published in the International Journal of Logistics Management, who claim that the Chinese concept of Guanxi may be to blame for the failure of many Chinese-Western joint ventures. The basic contention is that the Chinese establish and groom their  business relationships different from what is the norm in Western  countries, but is it really so?

 

The  authors start with lamenting that much of the existing literature on supply chain risk  is focused on the sources and mitigation of performance risks, like Peck (2006), while only very few have touched on the mitigation of relational risk, like Das and Teng (2001). That is why this paper focuses on a neglected area of supply chain risk, which they call supply chain relational risk (SCRR) and its mitigation. Jia and Rutherford define Supply Chain Relational Risk as

The  risk to the supply chain of either party in a buyer-supplier  relationship not fully committing to joint efforts due to either  problems associated with cooperation or problems associated with  opportunistic behaviour.

I think the key phrase here is not fully committing to joint efforts,  as a supply chain can only work effectively if all members or parties  are fully dedicated to making it work. What then is it that makes  Chinese or Western businesses not fully commit?

 

Oversimplified, the basic cultural difference in managing supplier-buyer relationships between China and the West can be summarized by this: contracts (rules) versus connections (ties and networks) or “Guanxi”, as it is termed in Chinese. Guanxi is hard to explain and can best be described as

a special type of relationship that bonds the exchange partners through reciprocal exchange of favours and mutual obligations

Guanxi is a the root of all business transactions in China, something that is perhaps overlooked by many Westerners, beliveing that once a relationship has been established (with the help of a little Guanxi, or maybe not), it can then be governed by conventional contracts. Not so.

 

The authors go on to describe the cultural differences between China and the West in more detail:

Collectivists, such as the Chinese, place group goals and collective action ahead of self-interest and gain satisfaction and feelings of accomplishment from group outcomes. In Chinese society, it is specifically the interests of the family that is put before individual interest. In the West, self-interest is more often than not put higher than group interest.

 

The Guanxi network or extended family network is probably the most important informal institution in the Chinese-speaking world. Respect for age, authority and social norms stem from the Confucian concept of li, which refers to rite and propriety in maintaining a person’sposition in the social hierarchy. Another major characteristic of Chinese culture is the maintenance of internal harmony, which is most likely to be achieved by compromising individual interests and choosing social conformity, non-offensive strategies and submission to social expectations. In the context of management, the Confucian li principle favours organizational hierarchy and centralized decision making, which means that the Chinese are more willing to recognize and accept a hierarchy of authority than their Western counterparts, as well as depending on the decision of their supervisors without question. In the West, people are governed by multiple institutions such as laws, regulations and procedures rather than hierarchy.

 

Models that describe relationship building in a Western context are similar in that they define the sequential stages of an evolutionary process from initial partner contact through to commitment/dissolution. Chinese society places great stock on the importance of face (mianzi), which is an intangible form of social currency and personal status affected by one’s social position and material wealth, while renqing is first a set of social norms by which one has to abide in order to get along well with others in Chinese society; and second a resource that an individual can present to another as a gift in the course of social exchange. Relationship building in China is dominated by the forces of Guanxi and as such is informal, has a long-term orientation and is based on the interplay of face and renqing, i.e. it occurs at a personal level.  In the West, the process of building a relationship has a short-term orientation, is more formal and based on the interplay of competition and cooperation, i.e. it occurs at a corporate rather than personal level.

Much of the article is based on Fu Jia's PhD thesis with the same topic, Cultural adaptation between Western buyers and Chinese suppliers, available for download from the University of Cranfield, so I assume there is some solid research behind the contentions.

 

Or is this simply not true? My original posting on Guanxi was picked up by the China Law Blog, where the comments ranged from discarding Guanxi as "utter nonsense", to "it does matter", so I'm left a bit confused here. What is your take on Guanxi? Is it really something that must be considered?

Jan Husdal

Supply chains and volcanoes

Posted by Jan Husdal Apr 19, 2010

The volcanic ash cloud over Europe has been on my mind for the last couple of days, and it's time for some thoughts.

 

Can we do without air traffic?

 

Many supply chains are exposed to natural hazards. And many supply chain managers are no strangers to managing suply chain disruptions after natural disasters. Usually, the hazards that can disrupt supply chains are in the direct  vicinity of the supply chains. If you are importing wine from Chile, earthquakes are on your shortlist of risks. If you're importing pineapples from the Caribbean, tropical storms are on your watchlist. The last 5 days however have been somewhat extreme. A natural hazard, a volcanic ash cloud, coming from a country as far away from most supply chains as possible, is able to completely paralyze European air traffic, and for that matter, many flights worldwide.

 

Holiday travelers and business travelers is one side of the disruptions. Air cargo is the other side. No flights also means no air freight, and at the airports stores and warehouses are probably full to the rim by now with fresh produce in danger of perishing. In turn, this may have widespread ramifications for the producers, as they may have to lay off staff, or even being forced out of business, as if the aftermath of the recession wasn’t enough. We haven’t heard much about the business impacts yet, because so far the focus has been on getting people home...or anywhere, for that matter.

 

This incident also shows how dependent airlines are on keeping their planes flying. No flights, no cash. After all, a flight is not something you can produce and stock somewhere. It is produced and instantly consumed at the same time. Cash in from one flight, is money in the bank for the next flight. Without passengers and without fligths, no airline can survive, sparking emergency talks on the impacts of the volcanic ash cloud in the EU. While they did lift the restrictions I do expect to hear demands for government actions (i.e. bailouts) soon. And, I do expect to see airlines, businesses and perhaps also insurance companies suing civil aviation authorities for closing too many airports, causing them to lose money or even go out of business.

 

While the threat of the volcanic ash cloud appears to be winding down somewhat, now is the time for reflections: What if this goes on for a prolonged period, say weeks or months of intermittent air traffic restrictions? Will we change our travel behavior? Will we start valuing slow travel again, like it used to be in the old days, before the aeroplane came? Will business meetings be replaced by teleconferencing and videoconferencing and will we perhaps realize that we do not need this face-to-face meeting that much? Maybe we really don't need to be a able get every where in just a matter of hours? Or having our cargo delivered asap?

 

The German newspaper Die Welt had an interesting, semi-humorous article about this some days ago. In a "what if"-scenario description titled Was passiert, wenn die Wolke viel länger bleibt? they look at the possible impacts of a volcano ash cloud scenario that lasts one week, one month and one year. I have made an attempt at translating it into English on my blog here:

 

What happens if the cloud stays much longer? Can we do without air traffic?

 

While perhaps a bit too much on the funny side to take it seriouly, it is still worth pondering. Enjoy!

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.

      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

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