Integrated Process to Manage Disruptions in Supply Chains

Behzad Behdani1, Arief Adhitya2, Rajagopalan Srinivasan2, 3, Zofia Lukszo1

1- Delft University of Technology, Faculty Technology, Policy and Management

2- Institute of Chemical and Engineering Sciences

3- National University of Singapore, Dept of Chemical and Biomolecular Eng

Risk and Disruption in Supply Chains Managing disruptions is part of daily operation of supply chains. Some examples

of disruptions are: Natural disasters, supplier shutdown, transportation delay , product recalls…

To handle disruptions, we may: Do something in advance to prevent disruptions from happening or reduce their

expected impact

or/and

Improve the capabilities to better detect and react to disruptions when they happen

Both of these two are necssary and important and must be considered together in the process, because:

With investment in risk prevention, we will face with less number of disruptions or less severe disruptions.

Without plans and resources, the disruption management process will be very slow.

but:

Not all disruptions are known to company and even for known ones, no company affords to investment for all possible disruptions.

Having resources and pre-defined plans does not seem guarantee the success in coping with disruptions. How to use those resources and execute the plans in real-time is also very critical.

2 Integrated Process to Manage Disruptions in Supply Chains

Overall Idea

The Problem: There are two quite separate and isolated views (and accordingly approaches) on handling disruptions in supply chains:

Focus on what must be done before a disruption happens(pre-disruption view called as Supply Chain Risk Management)

Focus on what must be done after a disruption has materialized in real world (post-disruption view called as Supply Chain Disruption Management)

However there are very few frameworks that interrelate these two views.

Our Solution: The framework presented here aims to fill the gap and present all relevant steps in handling “Disruptions” in supply chains in one framework, before and after its happening.

The Advantage: we expect this framework to provide a full picture and systematic view for practitioners and researcher on how to face the

problems related to managing disruptions in supply chains.

3 Integrated Process to Manage Disruptions in Supply Chains

Towards an Integrated Framework

4

SC Risk

Management

SC Disruption

Management

SC Risk

Management

SC Disruption

Management Integrated Process to Manage

Disruptions in Supply Chains

Integrated Process to Manage Disruptions in Supply Chains

Integrated Process to Manage Disruptions

in Supply Chains

5 Integrated Process to Manage Disruptions in Supply Chains

Disruption is

managed

Risk management starts

Disruption Management

Cycle

Risk Management Cycle

R1: System Definition

& Risk Identification

R2:Risk

Quantification

R3: Risk Evaluation

& Treatment

R4: Risk Monitoring D4:Disruption

Learning

D1: Disruption

Detection

D2: Disruption

Reaction

D3: Disruption

Recovery

Disruption occurs

Integrated Process to Manage Disruptions

in Supply Chains (A Narrative)

6 Integrated Process to Manage Disruptions in Supply Chains

Managing disruptions is not a Project; it is an ongoing process with two main cycles:

Firstly, we must identify the possible disruptions in our

supply chain; then, for recognized disruptions, we

need to quantify the level of risk in terms of their

probability and severity (impact). When we have an

evaluation of risk of expected disruptions, we must

decide on how to treat them. If (after treatment)

the risks level seems acceptable, SC operations

proceed; however the level of risk must be

monitored and re-evaluated frequently due to

changes in the business environment or SC itself.

Despite enough safeguards, at a specific point, the disruption may happen. The first step to

handle the disruption is to detect it as quickly as possible. The next step is using the

resources and pre-defined plans to react to detected disruption. If the pre-defined plans are

not adequate to handle disruption, we need to find alternative solutions until we can

recover system to its normal operation. After recovering from disruption, we may learn

some lessons; for example, we may revise the plans for that type of disruption or re-

configure the supply chain in a way to reduce the probability or severity of similar

disruptions in future.

R1: System Definition & Risk Identification

7

The first step is to recognize uncertainties and risks that influence the SC operation. A comprehensive “Risk Identification” process will provide a list of “risk sources” –the disruptive events might affect the normal operation-, possible “risk consequences” –performance measures important for SC operation- and the main “risk drivers” –the characteristics of SC that increase its vulnerability- for a SC.

One Example: Ericsson identifies and analyzes its supply chain risks by mapping the supply chain upstream,

looking at suppliers as well as products/services. The purpose of this is verifying the business flow between Ericsson and the supplier/service provider and defining the critical parts and risk sources in the process, i.e. products, components, sites, etc. So far, more than 10,000 components have been analyzed, mainly of first and second tier suppliers.

First, each component is classified into four different classes depending on the number of sources. Ericsson then tries to understand the impact by looking at how long an accident will affect deliveries. 1

[1] Norrman, A. and Jansson, U. (2004). “Ericsson’s Proactive Supply Chain Risk Management Approach After a Serious Sub-Supplier Accident.”

International Journal of Physical Distribution & Logistics Management, 34(5): 434-456.

Integrated Process to Manage Disruptions in Supply Chains

R2: Risk Quantification

8

Each risk source is then quantified in terms of its influence on the

performance measures determined before and/or ranked according to

some pre-defined criteria. The quantification is mostly done by evaluating

two main risk dimensions –probability/frequency and severity- taking into

account the effects of any existing safeguards and mitigating actions.

One Example:

To quantify the risk factors, Ericsson has developed a tool called Ericsson risk management

evaluation tool (ERMET). This system tries to combine severity(impact) and probability in a

risk map/matrix. But as calculating the “risk value” (calculated by multiplying impact and

probability) is not always easy - as the probability could be difficult to get and the value is not

always “understandable” to business people-, Ericsson is focusing on the financial impact when

assessing the risk. To get a financial value of the impact, the company calculates the business

interruption value (BIV). This value is defined by gross margin multiplied by the “business

recovery time” (BRT) plus extra costs such as idle capacity labor and equipment, inventory

carrying etc. Its aim is to also consider values such as lost goodwill. 1

[1] Norrman, A. and Jansson, U. (2004). “Ericsson’s Proactive Supply Chain Risk Management Approach After a Serious Sub-Supplier Accident.”

International Journal of Physical Distribution & Logistics Management, 34(5): 434-456.

Integrated Process to Manage Disruptions in Supply Chains

R3: Risk Evaluation & Treatment

9

Based on experience, industry standards, benchmarks, or business targets , this step evaluates whether the risk quantified in the previous step is acceptable. If not, additional control actions or treatment are required.

The Risk Treatment might include mitigating actions (to reduce the probability or severity of risk sources) or emergency/contingency procedures/plans for the case of disruption happening. This step is repetitive step and will continue checking different options until the risk level is acceptable for the problem owner.

One Example:

Sodhi & Lee present a list of risk-mitigation steps taken by Samsung Electronics. This list includes several actions to manage the risk of different sources. For example to manage “inventory risk”, Incentives for suppliers and for managers and global visibility are two major taken actions. Some of other policies to handle other types of risk factors include flexible capacity, having redundant suppliers for a bulk of its non-core components, and using information technology to keep its supply chain from the plant to the end consumer responsive and informed.1

[1] Sodhi, M.S., Lee, S. (2007). “An analysis of sources of risk in the consumer electronics industry”, Journal of the Operational Research Society 58 (11), pp. 1430-1439

Integrated Process to Manage Disruptions in Supply Chains

R4: Risk Monitoring

10

Once the risks have been deemed acceptable, SC operations proceed with the appropriate safeguards and mitigating actions in place.

The SC structure and operation do not remain stationary but changes regularly due to, for example, new suppliers, new regulations, new operating conditions, new products, etc. The risk management team should continually monitor the SC for new risk sources and -if necessary-start over from “Risk Identification” to consider the new risks arising from these changes. It must also constantly monitor the level of risk for pre-identified factors.

One Example:

A supplier risk assessment framework for measuring, tracking, and analyzing supplier and part specific risk over time for major US-based automotive manufacturer has been discussed by Blackhurst et al. The proposed methodology calculates part and supplier specific risk indices, can be used to analyze critical parts and suppliers to determine if and why they might be a cause for concern, and allows part and supplier risk indices to be tracked over time to identify trends towards higher risk levels. 1

[1] Blackhurst, J.V., Scheibe, K.P., Johnson, D.J. (2008). Supplier risk assessment and monitoring for the automotive industry, International Journal of

Physical Distribution and Logistics Management 38 (2), pp. 143-165.

Integrated Process to Manage Disruptions in Supply Chains

D1: Disruption Detection

The first step in managing a disruptive event in SC is to detect its

happening as quickly as possible. Faster “Detection” gives more

time to an enterprise (and its SC partners) to handle “Disruption”.

One Example: A “real-time” tracking and analysis system helped Wal-Mart to see the surge in the demand of

US flags, lapel pins and other patriotic items after the September 11, 2001 tragedy.

Noticing this significant increase in the sales, world’s largest retailer immediately locked up all

the supplies they could find. On the evening of 9/11, the buyers at Wal-Mart had already

ordered all of the available flags in the supply chain. Other retailers like Kmart and Target

were slow to realize and respond and for a while, these items could only be found in Wal-

Mart stores. 1

[1] Pal N. and Pantaleo D. (2005) The Agile Enterprise, Reinventing your Organization for Success in an On Demand World. Springer-verlag.

11 Integrated Process to Manage Disruptions in Supply Chains

D2: Disruption Reaction

After a disruption detected in SC, the first response is activating the

response plans and performing control actions that have been defined to

handle this type of disruption in “Risk Treatment” step.

One Example:

As part of its contingency planning, Cisco not only identifies alternative suppliers for a

component, but also different components that could be substituted – and which customers

might be willing to accept products built with these substitutions.

Cisco’s business-continuity planning was put to the test when an earthquake disabled one of

its suppliers. Because it had already identified and planned for this exposure, Cisco was able to

shift to its secondary source and did not miss a single shipment.1

[1] Butner, K., (2010). “The smarter supply chain of the future”. Strategy and Leadership 38 (1), pp. 22-31

12 Integrated Process to Manage Disruptions in Supply Chains

D3: Disruption Recovery If pre-defined actions/plan cannot cope with full impact of disruption –or no

action has been defined for that specific disruption-, alternative solutions must be considered, evaluated an implemented. This iterative process in which disruption management options are implemented and improved frequently (based on the feedback of their impact on managing disruption consequences) must continue until SC gets back to its normal operation.

One Example: In March 2000, lightning caused a fire that shut down the Philips Semiconductor plant in

Albuquerque, New Mexico, for several weeks, leading to a shortage of components for Nokia as one of the main customers. With a preliminary investigation, Nokia realized that the disrupted supplies would prevent the production of some four million handsets. Nokia quickly ascertained the availability of alternative sources for the parts. Three of the five affected parts could be purchased elsewhere. But two of the parts came only from Philips or a Philips subcontractor. To handle the situation, Nokia in its highest managerial level demanded Philips to reroute its production in other plants and provide the parts. A Philips factory in Eindhoven, and a factory in Shanghai worked to free up more capacity for Nokia’s needs.1

Moreover, Nokia quickly started redesigning the chips so that they could be sourced from other locations.2 With the design change and intensive collaboration with its suppliers, Nokia was able to meet its production target.

[1] Sheffi, Y., (2005).The Resilient Enterprise. Overcoming Vulnerability for Competitive Advantage. MIT Press.

[2] Lee, H.L. and Wolfe, M., 2003. Supply chain security without tears. Supply Chain Management Review, 7 (1), 12–20.

13 Integrated Process to Manage Disruptions in Supply Chains

D4: Disruption Learning After a company manages the disruption and gets back to its normal

operation, it might learn some lessons from this abnormal situation. These lessons can be an update of its assessment of the risk of this disruption (in terms of probability and expected severity), improvement in pre-defined plans to handle this type of disruption or redesigning its SC to reduce this type of risk in the system.

One Example:

The fire of Philips plant in Albuquerque had its impact on another cell phones company, Ericsson, as well; however, Ericsson neither had alternative sources nor was prepared and adequately responsive to the accident. Consequently, Ericsson was not able to sell and deliver one of its key consumer products during its booming “market window”. The company lost many months of mobile phone production, and the accident finally had a great impact on Ericsson’s decision to withdraw from the mobile phone terminal business.

Learning from that disruption, a formal SCRM organization has been put in place, and many SCRM processes and tools have been developed and implemented. Today’s philosophy at Ericsson is that “everyone is a risk manager”. 1

[1] Norrman, A. and Jansson, U. (2004). “Ericsson’s Proactive Supply Chain Risk Management Approach After a Serious Sub-Supplier Accident.” International Journal of Physical Distribution & Logistics Management, 34(5): 434-456.

14 Integrated Process to Manage Disruptions in Supply Chains