Integrated Process to Manage Disruptions in Supply Chains


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Integrated Process to Manage Disruptions in Supply Chains

  1. 1. 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
  2. 2. 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
  3. 3. 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
  4. 4. Towards an Integrated Framework SC Risk SC Disruption Management Management Integrated Process to Disruption SC Risk SC Manage Management in Supply Chains Disruptions Management4 Integrated Process to Manage Disruptions in Supply Chains
  5. 5. Integrated Process to Manage Disruptions in Supply Chains Risk management starts R1: System Definition & Risk Identification Risk Management Cycle Disruption occurs D1: Disruption Detection Disruption Management D4:Disruption Cycle D2: Disruption R2:RiskR4: Risk Monitoring Learning Reaction Quantification Disruption is managed D3: Disruption Recovery R3: Risk Evaluation & Treatment 5 Integrated Process to Manage Disruptions in Supply Chains
  6. 6. Integrated Process to Manage Disruptions in Supply Chains (A Narrative) 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. 6 Integrated Process to Manage Disruptions in Supply Chains
  7. 7. R1: System Definition & Risk Identification 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. 7 Integrated Process to Manage Disruptions in Supply Chains
  8. 8. R2: Risk Quantification 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. 8 Integrated Process to Manage Disruptions in Supply Chains
  9. 9. R3: Risk Evaluation & Treatment 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 9 Integrated Process to Manage Disruptions in Supply Chains
  10. 10. R4: Risk Monitoring 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. 10 Integrated Process to Manage Disruptions in Supply Chains
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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