Supply chain risk occurs in ‘unexpected locations and components’

Gurjit Degun
21 December 2013

Spending more money with a supplier does not necessarily equate to a greater risk of business failure if there is a disruption in the supply chain.

That’s according to a study from the Massachusetts Institute of Technology (MIT), which looked into the Ford Motor Company’s supply chain. 

The analysis by professor David Simchi-Levi found that disruption from suppliers that provided Ford with relatively low-cost components have the greatest impact.

“This helps explain why risk in a complex supply network often remains hidden,” said Simchi-Levi, who is co-director of MIT’s leaders for global operations programme. “The risk occurs in unexpected locations and components of a manufacturer’s supply network.” 

Simchi-Levi explained that there is an assumption among companies that supply chain risk is tied to suppliers that they spend the most money with.

He added: “Because a company’s mitigation choices – maintaining more inventory or an alternative supply source, for example – are the same regardless of the type of problem that occurs, a mathematical model of supply chain risk should determine the impact to the company’s operations if any disruption occurs, rather than estimating the probability of specific types of risks.”

The study found that a halt in distribution from around 2 per cent of firms that supply Ford would have a very large impact on the manufacturer’s profits. Those 2 per cent provide Ford with less expensive components, rather than expensive car seats and instrument panels that fall into the high-financial-impact segment. 

The analysis also found a short disruption from 61 per cent of suppliers would not cause a loss in profit.

Simchi-Levi’s model incorporates “bill-of-material information”, or the list of ingredients required to build a company’s products. It maps each part or material to one or more of the firm’s facilities and product lines; captures multiple tiers of supplier relationships; includes operational and financial impact measures; and incorporates supplier recovery time if a problem occurs. 

The research added: “As nodes are removed one at a time from the supply network, the model determines how best to reallocate inventory and obtain alternatives, and predicts financial impact.

“The resulting analysis divides suppliers into three segments depending on the cost of the individual components they provide and the financial impact their shortage would have: low-cost components/high financial impact; high-cost components/high financial impact; and low-cost components/low financial impact.”

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