November 1, 2012

Mitigating Supply Chain Risks in an Unpredictable World

James Giese UWEBC Communications Director

Dr. David Simchi-Levi, a Professor of Engineering Systems at MIT, was a featured speaker at UWEBC Business Best Practices & Emerging Technologies Conference on October 4, 2012.

To those working in supply chain management, Dr. David Simchi-Levi, a Professor of Engineering Systems at MIT, is known as a “rock star.” He is considered one of the premier thought leaders in supply chain management and is the founder of Logic Tools, which provides software solutions and services for supply chain planning. Simchi-Levi’s latest book, “Operations Rules, Delivering Customer Value through Flexible Operations” was given to each attendee in the Supply Chain Management track. Simchi-Levi spoke on Mitigating Supply Chain Risks: The Risk Exposure Index at the UWEBC Business Best Practices & Emerging Technologies Conference held Oct. 4 in Madison WI.

Simchi-Levi described how businesses can use his tool, the Risk Exposure Index, to reduce supply chain risk and he detailed several real-world examples. The Index allows companies to focus on where the risks are and how they can be reduced without having to know each individual risk.

In the last few years, we have seen significant increases in supply chain risks faced by many companies, says Simchi-Levi, “Some of the drivers of this risk have been due to the successful implementation of strategies such as outsourcing and offshoring and lean or Just-in-time manufacturing.” These strategies have meant that supply chains are geographically more diverse and lean manufacturing has meant much lower inventory levels. However, events just last year demonstrated how vulnerable supply chains can be with unforeseen flooding in Thailand that cut production for many companies, including Nikon, Sony, Intel, Canon, Honda, and Toyota. Another example was a General Motors truck plant in Louisiana that was temporarily shut down due to lack of parts because of the distant earthquake and tsunami in Japan.

Regardless of whether a risk is controllable or uncontrollable; companies need to develop risk mitigation strategies to deal with these sources of risk, according to Simchi-Levi. Although each individual unknown risk is very hard to predict, it is almost given that some type of high impact unknown risk will hit a supply chain in the next twelve months and the question is: Is there anything we can do to protect the supply chain against such risks? According to Simchi-Levi there are things we can do.

Mitigation methods include understanding the Time-To-Recovery (TTR)--the time it takes to recover to full functionality after a disruption. Once the TTR is determined for a step in the supply chain, a company can calculate the financial impact from lost sales during a TTR. Calculating this financial impact throughout each step of the supply chain allows a calculation of the Risk Exposure Index, which is a measure of maximum financial impact over all nodes in the supply chain.

“Using the Risk Exposure Index provides a dollar measure of risk,” says Simchi-Levi, and avoids the need to forecast the unknown-unknown risks. It focuses efforts on something that can be quantified: the time to recovery or TTR. By focusing a supply chain review on TTR, companies can determine ways to reduce financial impact and have a discussion to understand why TTR for similar facilities or suppliers is different. It forces the company to develop a process which reduces TTR at various stages of the supply chain.

 “By looking at the entire network and understanding dependencies between different parts of the supply chain, you can quantify the level of risk in the business,” says Simchi-Levi. And once a company understands its Risk Exposure Index, it can develop strategies to implement to reduce risk.

UWEBC Members can view the Mediasite recording>

Mitigating Supply Chain Risks: The Risk Exposure Index (49:35)