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Supply Chain Risk: Pay Attention to the Little Things

Posted By Jeff Moad, December 17, 2013 at 5:32 PM, in Category: Redefining the Supply Chain

Contrary to widespread assumption, there’s no correlation between how much a manufacturer spends with a given supplier and the severity of the impact that would result if the flow of product from that supplier were disrupted.

That’s the conclusion of a soon-to-be released research study by David Simchi-Levi, co-director of MIT’s Leaders for Global Operations program.

Simch-Levi and fellow researchers reportedly constructed a mathematical model designed to determine the impact to a company’s operations and profits if a supply disruption occurred. The model incorporates bill-of-material information and maps each part to products and production facilities that use them. It also captures multi-tier supplier relationships, operational and financial impact measures, and supplier recovery times.

The model categorizes suppliers into three segments: those delivering low-cost components but representing high financial risk; those delivering high-cost components and representing high financial risk; and those delivering low-cost components and representing low financial risk.

The researchers then applied the model to Ford’s complex supply network. It showed that only two percent of Ford’s supplier would cause a very large impact on Ford if their deliveries were disrupted. And all of those high-risk suppliers furnished Ford with less expensive component rather than big-ticket items such as engines or car seats.

“This helps explain why risk in a complex supply network often remains hidden,” Simchi-Levi is quoted as saying in the MIT News. “The risk occurs in unexpected locations and components of a manufacturer’s supply network.”

The lesson, says Simchi-Levi, is that manufacturers should perform rigorous analysis of which of their suppliers pose the greatest risk rather than simply focusing most of their mitigation strategies on those that represent the largest spend.

What do you think? Do these conclusions make sense?



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Written by Jeff Moad

Jeff Moad is Research Director and Executive Editor with the Manufacturing Leadership Community. He also directs the Manufacturing Leadership Awards Program. Follow our LinkedIn Groups: Manufacturing Leadership Council and Manufacturing Leadership Summit



Comments

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Supply and Demand always works on mathematical formula. The more better a business understands it, it will be more better for them. Nonetheless, if the driving forces of a business is in some limited hands then the issue starts. You need to tweak your business and the model on those few driving forces and it affects the profitability a lot.
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