CSCMP's Supply Chain Quarterly
December 18, 2017
Supply Chain Executive Insight E-Newsletter
Each week the Supply Chain Executive Insight e-newsletter will include brief articles about developments that are often overlooked by other supply chain publications. We will present you with summaries of the latest research as well as new ideas on how to make your supply chain operations more effective. And we'll offer commentary that sheds light on what's happening in supply chains today.
Sign up now!

Most Read Articles

News from our sister publication
DC Velocity
Forward Thinking

Study: No link between supplier expenditures and risk

Forward Thinking
Comment
The supplier you spend the most money on isn't necessarily the one that could cause you the most trouble.

A new study from the Massachusetts Institute of Technology (MIT) contradicts the commonly held belief that the suppliers that pose the greatest degree of supply chain risk are those that receive the biggest annual payments from manufacturers. The study found no correlation between the total amount of money a manufacturer spends with a supplier and the financial loss from a supply disruption involving that supplier. Professors David Simchi-Levi of MIT, William Schmidt of Cornell University, and Yehua Wei of Duke University conducted the research.

The three academics studied Ford Motor Company's supply chain. Their quantitative analysis found that the suppliers whose disruption or failure would inflict the greatest blow to Ford's profits are those that provide the manufacturer with relatively low-cost components. "This explains why risk in a complex supply chain network often remains hidden," said Simchi-Levi in an article about the study in the MIT News newsletter. "The risk occurs in unexpected locations and components of a manufacturer's supply network."

Traditional methods of identifying the suppliers and events that pose the highest risk require knowing two things: the probability that a specific type of risk event will occur, and the magnitude of the problems that would ensue. Because a company's mitigation choices—maintaining more inventory or an alternative supply source—are the same regardless of the type of problem that occurs, Simchi-Levi reasoned, a more effective model of supply chain risk should calculate the impact of a supply disruption on a company's operation.

Simchi-Levi built a model that incorporated bill-of-material information and mapped each part or material to the appropriate Ford facilities and product lines. The model also considered multiple tiers of supplier relationships, supplier recovery time, and operational and financial impact.

As researchers removed individual nodes from the supply network, the model determined how to reallocate inventory, identify alternatives, and predict the associated financial impact. When applied to Ford's multitier supply network, the model predicted that a short-term disruption at 61 percent of the automaker's Tier 1 suppliers would not result in a profit loss. But a disruption among just 2 percent of Ford's suppliers would have a large impact on profits—even though each of those suppliers provides Ford with inexpensive components.

The researchers discuss their findings in "From Superstorms to Factory Fires: Managing Unpredictable Supply-Chain Disruptions," in the January/February issue of Harvard Business Review.

Join the Discussion

After you comment, click Post. If you're not already logged in, you will be asked to log in or register.


Want more articles like this? Sign up for a free subscription to Supply Chain Executive Insight, a monthly e-newsletter that provides insights and commentary on supply chain trends and developments. Click here to subscribe.

We Want to Hear From You! We invite you to share your thoughts and opinions about this article by sending an e-mail to ?Subject=Letter to the Editor: Quarter 2014: Study: No link between supplier expenditures and risk"> . We will publish selected readers' comments in future issues of CSCMP's Supply Chain Quarterly. Correspondence may be edited for clarity or for length.

Want more articles like this? Subscribe to CSCMP's Supply Chain Quarterly.