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This event is open for all professionals interested or currently working in Starups in Hanoi, or supply chai professionals in Hanoi, or who are interested in looking for business collaboration for U.S. market through meeting with a delegation of Baylor University (U.S.), Executive Master Program.

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PURCHASING MANAGER - DETMOLD PACKAGING

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The Bosch Group is a leading global supplier of technology and services, in the areas of automotive and industrial technology, consumer goods as well as building technology. 

From Superstorms to Factory Fires: Managing Unpredictable Supply-Chain Disruptions

2014-05-15 16:42:27

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Traditional methods for managing supply chain risk rely on knowing the likelihood of occurrence and the magnitude of impact for every potential event that could materially disrupt a firm’s operations. For common supply-chain disruptions—poor supplier performance, forecast errors, transportation breakdowns, and so on—those methods work very well, using historical data to quantify the level of risk.But it’s a different story for low-probability, high-impact events—megadisasters like Hurricane Katrina in 2005, viral epidemics like the 2003 SARS outbreak, or major outages due to unforeseen events such as factory fires and political upheavals. Because historical data on these rare events are limited or nonexistent, their risk is hard to quantify using traditional models. As a result, many companies do not adequately prepare for them. That can have calamitous consequences when catastrophes do strike and can force even operationally savvy companies to scramble after the fact—think of Toyota following the 2011 Fukushima earthquake and tsunami.

To address this challenge, we developed a model—a mathematical description of the supply chain that can be computerized—that focuses on the impact of potential failures at points along the supply chain (such as the shuttering of a supplier’s factory or a flood at a distribution center), rather than the cause of the disruption. This type of analysis obviates the need to determine the probability that any specific risk will occur—a valid approach since the mitigation strategies for a disruption are equally effective regardless of what caused it. Using the model, companies can quantify what the financial and operational impact would be if a critical supplier’s facility were out of commission for, say, two weeks—whatever the reason. The computerized model can be updated easily and quickly, which is crucial since supply chains are in a continual state of flux.

In developing and applying our model at Ford Motor Company and other firms, we were surprised to find little correlation between how much a firm spends annually on procurement at a particular site and the impact that the site’s disruption would have on company performance. Indeed, as the Ford case study described later in this article shows, the greatest exposures often lie in unlikely places.

In practice, that means that leaders using traditional risk-management techniques and simple heuristics (dollar amount spent at a site, for instance) often end up focusing exclusively on the so-called strategic suppliers for whom expenditures are very high and whose parts are deemed crucial to product differentiation, and overlooking the risks associated with low-cost, commodity suppliers. As a result, managers take the wrong actions, waste resources, and leave the organization exposed to hidden risk. In this article, we describe our model and how companies can use it to identify, manage, and reduce their exposure to supply chain risks.

Time to Recovery and the Risk Exposure Index

A central feature of our model is time to recovery (TTR): the time it would take for a particular node (such as a supplier facility, a distribution center, or a transportation hub) to be restored to full functionality after a disruption. TTR values are determined by examining historical experience and surveying the firm’s buyers or suppliers (see the sidebar “Assessing Impact? Use a Simple Questionnaire”). These values can be unique for every node or can differ across a subset of the nodes.

Assessing Impact? Use a Simple Questionnaire

The first step in assessing the risk associated with a particular supplier is to calculate time to recovery (TTR) for each of its sites under various disruption scenarios. Companies can develop a simple survey to collect key data, including:

1. Supplier: Site location (city, region, country)

2. Parts from this site

- Part number and description

- Part cost

- Annual volume for this part

- Inventory information (days of supply) for this part

- Total spend (per year) from this site

3. End product

- OEM’s end product(s) that uses this part

- Profit margin for the end product(s)

4. Lead times from supplier site to OEM sites: Days

5. Time to recovery (TTR)

- The time it would take for the site to be restored to full functionality

   + If the supplier site is down, but the tooling is not damaged

   + If the tooling is lost

6. Cost of loss

- Is expediting components from other locations possible? If so, what is the cost?

- Can additional resources (overtime, more shifts, alternate capacity) be organized to satisfy demand? If so, what is the cost?

7. Supplier risk assessment

- Does the supplier produce only from a single source?

- Could alternate vendors supply the part?

- Is the supplier financially stable?

- Is there variability in performance (lead time, fill rate, quality)?

8. Mitigation strategies for this supplier-part combination

- Alternate suppliers

- Excess inventory

- Other

Our model integrates TTR data with information on multiple tiers of supplier relationships, bill-of-material information, operational and financial measures, in-transit and on-site inventory levels, and demand forecasts for each product. Firms can represent their entire supply network at any level of detail—from individual parts to aggregations based on part category, supplier, geography, or product line. This allows managers to drill down into greater detail as needed and identify previously unrecognized dependencies. The model can account for disruptions of varying severity by running scenarios using TTRs of different durations.

To conduct the analysis, the model removes one node at a time from the supply network for the duration of the TTR. It then determines the supply chain response that would minimize the performance impact of the disruption at that node—for instance, drawing down inventory, shifting production, expediting transportation, or reallocating resources. On the basis of the optimal response, it generates a financial or operational performance impact (PI) for the node. A company can choose different measures of PI: lost units of production, revenue, or profit margin, for instance. The model analyzes all nodes in the network, assigning a PI to each. The node with the largest PI (in lost sales, for instance, or lost units of production) is assigned a risk exposure index (REI) score of 1.0. All other nodes’ REI scores are indexed relative to this value (a node whose disruption would cause the least impact receives a value close to zero). The indexed scores allow the firm to identify at a glance the nodes that should get the most attention from risk managers.

At its core, the model uses a common mathematical technique—linear optimization—to determine the best response to a node’s being disrupted for the duration of its TTR. The model accounts for existing and alternative sources of supply, transportation, inventory of finished goods, work in progress and raw material, and production dependencies within the supply chain.

Our approach provides a number of benefits. It:

Identifies hidden exposures. The model helps managers identify which nodes in the network create the greatest risk exposure—often highlighting previously hidden or overlooked areas of high risk. It also allows the firm to compare the costs and benefits of various alternatives for mitigating impact.

Avoids the need for predictions about rare events. The model determines the optimal response to any disruption that might occur within the supply network, regardless of the cause. Rather than trying to quantify the likelihood that a low-probability, high-risk event will strike, firms can focus on identifying the most important exposures and putting in place risk-management strategies to mitigate them.

Reveals supply chain dependencies and bottlenecks. Companies can also use the analyses to make inventory and sourcing decisions that increase the robustness of the network. This includes taking into account the likely scramble among rival companies to lock in alternative sources if a supplier’s disruption affects several firms. Such cross-firm effects of a crisis are often overlooked. Contracts with backup suppliers can be negotiated to give a company priority over others should a disruption with the primary supplier occur, which would decrease time to recovery and financial impact.

Promotes discussion and learning. In the course of analyzing the supply chain in this way, managers engage in discussions with suppliers and internal groups about acceptable levels of TTR for critical facilities and share insights about best-practice processes to reduce recovery time. As a result, the impact of disruptions is minimized.

Prescriptive Actions

Our model provides organizations with a quantitative metric for segmenting suppliers by risk level. Using data generated by the model, we can categorize suppliers along two dimensions: the total amount of money that the company spends at each supplier site in a given year, and the performance impact on the firm associated with a disruption of each supplier node. Let’s now take a look at the supplier segments and consider the risk-management strategies appropriate for each.

(to be continued)

Source: Harvard Business Review