If the nature of your business is manufacturing, chances are one of your biggest concerns is supply chain disruption. While there are plenty of traditional ways to manage ordinary risks, when dealing with high-impact occurrences like viral epidemics or devastating storms--when the risks are often difficult to quantify and prepare for--a different method can help.
A model developed recently by MIT Sloan Professor David Simchi-Levi and his colleagues William Schmidt and Yehua Wei offers an alternative solution that concentrates on quantifying supply chain risk by using a breakthrough Risk Exposure Index (REI). In essence, says Simchi-Levi, the model "focuses on the impact of potential failures at points along the supply chain (such as the shuttering of a supplier’s factory or a flood at a distribution center), rather than the cause of the disruption."
It's a mathematical depiction of the supply chain that can be computerized and updated by employing a common math technique, called linear optimization, to determine the best response to a disruption. Simchi-Levi says that a key component of the model is "time to recovery (TTR), or the time it takes for a particular node (e.g., a distribution center, supplier facility, or transportation hub) to be restored after a disruption." The model removes one node at a time and determines the supply chain response that would minimize the performance impact of the disruption at that node--allowing the company to identify the nodes that need the most attention.
The benefits are many. The REI model:
- Allows managers to identify which nodes create the greatest risk exposure
- Highlights previously hidden high risk areas
- Determines the optimal response to a disruption, regardless of the cause
- Promotes discussion and learning
- Reveals dependencies and bottlenecks
Research shows that supply chain risk exposure varies by industry, with those in the automotive, aerospace, and retail sectors facing the highest chance of experiencing severe risk due to natural disaster. Learn more in this recent Harvard Business Review article by Simchi-Levi and his colleagues.
The Risk Exposure Index at work at Ford Motor Company
In 2014, Simchi-Levi put the REI model to the test at Ford Motor Company and was able to significantly improve the auto giant's approach to supply chain risk management. Just a year later, Simchi-Levi has expanded the model, which, in turn, has allowed Ford to use it for operational and tactical (as well as strategic) risk management. During its application at Ford, the team made a number of surprising discoveries, including the fact that there is little correlation between how much a firm spends annually on procurement at a particular site and the impact that the site’s disruption has on company performance.
Because of the global nature of many manufacturing companies like Ford, today there are more opportunities for failure along the supply chain. Case in point is the recent situation in Portland, Oregon, where the container shipping business has suffered unprecedented delays due to a three-year labor dispute. Simchi-Levi's innovative model allows manufacturers to quantify possible risks and identify effective strategies that will lessen the impact like that at the Port of Portland.
"Our approach to managing supply chain risks allows managers to avoid guessing the likelihood of infrequent, high-impact events and instead concentrate on evaluating their organization's vulnerability to disruptions, regardless of their cause and where they strike. The method is quantitative, produces a risk exposure measure that is easy to understand, and supports a supplier segmentation process that results in supply networks that are much more resilient," adds Simchi-Levi.