A Study on Hidden Risks in the Supply Chain

A company I recently visited relies entirely on only one supplier for a major component for their product. This is an obvious supply chain risk, and the company requires huge stocks of this component (which comes in several sizes and colors) to mitigate their risk. However, what about the less obvious risks that lurk in a supply chain? A basic business tenet that equates the greatest supply-chain risk with suppliers of highest annual expenditure was debunked in a new MIT study on supply chain risk.

That study was conducted by Professor David Simchi-Levi of MIT at Ford Motor Company. The study points out that traditional methods of identifying the highest risk to the supply chain rely on assessing a probability that a risk will occur and knowing the magnitude of the problems that would result. Since frequency and impact of risk are difficult to predict and quantify, conventional wisdom has been to assume the greatest supply-chain risk is tied to biggest suppliers.

Rather than looking at probabilities of disruptions, the study examined the impact to the company’s operations given the occurrence of any disruption. The reasoning behind this is that no matter what type of disruption companies’ mitigation choices are the same: maintain high amounts of inventory; find an alternative supply source, etc. The model uses Ford’s multi-tier supply network incorporating part mappings to product lines, supplier relationships, operational and financial impact measures and supplier recovery time to a problem. By successively removing nodes in the network and evaluating how to best reallocate inventory and analyze alternatives, the financial impact of each “disruption” was evaluated.

The model results showed that a short disruption at 61% of the tier 1 firms would not cause profit loss, but if only 2% of suppliers with the cheaper components experienced a disruption to production, Ford’s profits would be significantly impacted.

What if you could not only have visibility to your tier 1 suppliers, but your supplier’s suppliers, and so on and so on on…. Technology is emerging that enable companies to visualize their supply chains and the history behind them beyond the first tier. By employing crowd-sourcing technology companies can go beyond exposing their tier 1 suppliers. When used in conjunction with a network optimization study, supply chain risk is elevated to a whole new level of exposure. Profit Point experts are uniquely positioned to leverage both experience and technology to conduct Supply Chain network design and entire life-cycle analysis.

Supply chain experts agree that one of the greatest challenges to Global Supply Chain in 2014 is disruption either in technology or physical outages. Those companies who have prepared for these challenges will be best positioned in the coming year to be successful.