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Report produced by the Centre for Logistics and Supply Chain Management,
Cranfield School of Management
3
Creating Resilient Supply Chains
Although this report was commissioned by the Department, the findings and the recommendations are
those of the authors and do not necessarily represent the views of the DfT.
ISBN 1 861941 02 1
Published by Cranfield University, Cranfield School of Management, Centre for Logistics and Supply Chain
Management, Cranfield, Bedford, United Kingdom Mk43 0AL
Electronic copies of this report and the accompanying workbook, Understanding Supply Chain Risk: A Self-
Assessment Workbook, can be obtained from:
http://www.cranfield.ac.uk/som/scr
Ω Printed on paper containing 75% post-consumer waste and 25% elemental chlorine free pulp
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Table of contents
Page
Foreword 7
Acknowledgements 9
Executive Summary 11
1 - Introduction 13
Understanding supply chain risk: a network perspective
The four levels of risk
Events and network interactions
Appendix 2 - 84
Part 1: A Risk Management Approach for Small and Medium Enterprises (SMEs)
Part 2: Using Spreadsheets for Supply Chain Design and Risk Assessment – an example
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Creating Resilient Supply Chains
Foreword
The events of the last few years from the fuel crisis to foot and mouth disease to SARS,
have highlighted the vulnerability of many supply chains. Quite apart from the external
challenges to supply chain continuity are those possible sources of risk that are internal
to the supply chain. A number of concurrent trends have contributed to the fragility
that some observers believe now characterises many supply chains.
These trends include the rapid growth in global sourcing and offshore
manufacturing; the continued move to reduce the supplier base;
industry consolidation and the centralisation of distribution facilities
to name just a few.
Following from the earlier report prepared for the DETR in 2002,
Supply Chain Vulnerability, this report builds upon that work to identify
the opportunities for the creation of more resilient supply chains.
This work, undertaken by the Cranfield Centre for Logistics and Supply
Chain Management at Cranfield University and funded by the Department
for Transport, is empirically based and draws on insights from a number of
‘critical’ industrial sectors including food retailing, oil and petrochemicals,
pharmaceuticals, packaging, electronics, transport services and the
distribution of automotive spares. It also includes input from private and
public sector organisations involved in the provision of health care
and in defence. In particular it focuses on the development of a managerial
agenda for the identification and management of supply chain risk, with
recommendations to improve the resilience of supply chains.
During the research we were concerned that the outputs, including this
Executive Report, would address the needs of small and medium enterprises
(SMEs) and provide relevant and practical tools to assist them to manage
their supply chain risks.
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Creating Resilient Supply Chains
Acknowledgements:
Research Team
Dr Helen Peck
Contributing authors
Dr Jennifer Abley
Professor Martin Christopher
Major Marc Haywood
Richard Saw
Dr Christine Rutherford
Mark Strathern
Consultants
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Creating Resilient Supply Chains
Executive Summary
Its objective is to increase increased as a result of longer, For the vast majority
awareness, understanding and leaner supply lines between focused of organisations, business
thus the ability of UK industry to facilities within consolidating
continuity planning remains
cope with disruptions to its supply networks. Whilst many risks to the
chains. To that end it provides supply chain emanate from the a one-firm focussed activity.
insight and practical tools, which external environment, e.g. war,
will assist managers in improving epidemics, earthquakes, there is
the resilience of their organisation’s growing evidence that the structure
supply chain networks. of the supply chain is itself the
source of significant risk. The same
To gauge awareness of supply chain events that may once have caused
vulnerability as a threat to business minor local disruptions may now
continuity a survey of senior supply affect entire businesses, industries or
chain professionals was undertaken economies.
together with an in-depth case study Supply chain managers strive to
of one sector, military aircraft achieve the ideals of fully integrated
manufacturing. The findings of efficient and effective supply chains,
the case study were validated capable of creating and sustaining
by interviews with managers from competitive advantage. To this end
seven ‘critical’ sectors of industry. they must balance downward cost
pressures and the need for
Impact of business structures efficiency, with effective means to
on continuity manage the demands of market-
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Creating Resilient Supply Chains
12
Section 1 - Introduction
As a body of work it aims to move The term ‘supply chain’ is itself a Modern supply chains
forward the understanding of the relatively new addition to the lexicon allow goods to be
management of supply chain of management, first used in the
produced and delivered in
vulnerability. Its overarching early 1980s when writers coined
objective being to increase the the phrase to describe an emerging the right quantities, to the
ability of UK industry to cope with management discipline. The new right places at the right
supply chain related threats to discipline was a response to time in a cost effective
business continuity. To that end changes in prevailing trends in manner
it provides high-level insight and business strategy, which in turn
practical tools, which will assist demanded that internal functional
managers in the task of improving self-interests be put aside to achieve
the resilience of their organisations’ a greater good – a more efficient
supply chains. organisation, creating and
delivering better value to customers
Understanding supply chain and shareholders. It amounted to
risk: a network perspective a redefinition and amalgamation
of established business activities,
When working effectively and notably ‘logistics’ (integrated
efficiently modern supply chains transport, warehousing, and
allow goods to be produced and distribution) and manufacturing-
delivered in the right quantities, based ‘operations management’.
to the right places at the right time The latter drew together elements
in a cost effective manner. Until of purchasing, order and inventory
recently the term ‘supply chain’ management, production planning
was not widely used beyond the and control, plus customer service.
confines of academia, specialist
sectors of industry and the In the 1990s - the efficiency
professional management driven age of ‘business process
community. Latterly, in the wake reengineering’ - supply chain
of a number of far-reaching management sought to speed
disruptions to economic activity it the flow of goods and services
has crossed over into the everyday by extending the integration of
vocabulary of politicians, general elements of logistics, operations
managers and the wider public. management and marketing into
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Creating Resilient Supply Chains
14
not directly due to a problem “exposure to serious disturbance,
between the supplier and its arising from risks within the supply
automotive industry customers, chain as well as risks external to the
but as a result of losses suffered supply chain”.
by UPF in an unrelated but
ill-starred foreign venture. The four levels of risk
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Creating Resilient Supply Chains
16
assets. Ensuring that they continue within an enduring network
to operate is likely to fall within of complementary trading
the remit of business continuity relationships. Whilst supply chain
managers and/or logistics, managers may work tirelessly
operations, IT and human to achieve this objective, other
resource professionals and commercial interests, competitive
emergency planners. pressures and divergent strategic
goals can work against them.
Level 3 steps back further Discretionary reconfigurations
to view supply chains as inter- (e.g. outsourcing) as well as
organisational networks. It moves business failures or mergers and
supply chain vulnerability up to acquisitions within the supply chain
the level of business strategy and or industry can all herald network
microeconomics. Here the nodes instability at this and lower levels.
in Figure 1.1 revert back to being Where dominant organisations
the organisations - commercial and have the power, capabilities,
public sector - that own or manage and the will to manage their supply
the assets and infrastructure, chains in an open and collaborative
through which the products and way, we have seen the emergence
information flow. The links become of ‘extended enterprises’.
trading relationships, particularly However, establishing and
the power dependencies between monitoring close cooperative
organisations. The principles of partnering relationships is
integrated approaches to supply resource-intensive. Consequently,
chain management (as set out in large sophisticated customers
Level 1) rely on the premise that have reduced the number of direct
strong organisations will not abuse suppliers, often opting for single
their position of power vis-à-vis sourcing (usually by product line)
weaker ones. Additionally, that as the lowest cost way to develop,
information and risk will be shared manage and monitor their supplier
selflessly for the good of all, base. The downside of this is that
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Creating Resilient Supply Chains
18
Events and network The Nokia/Ericsson example
interactions highlights the vulnerability of
industries with capacity constrained
The multi-level framework outlined production and also raises other
above breaks-down the problem important themes, such as the issue
of supply chain vulnerability into of common components and the
its constituent parts, nevertheless consequential nature of supply
it should be born in mind that when chain risks. The latter is in turn
an event occurs it may impact at linked to the fact that supply chains
several levels, as the celebrated are linear processes within complex
example of Nokia and Ericsson systems of interacting networks.
illustrates (see below).
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Creating Resilient Supply Chains
20
Section 2 - Managing Supply Chain Vulnerability -
A case study
The turn of the new century saw the first real signs of interest in issues of supply
chain vulnerability. Within industry fingers were pointing towards the combination
of increased inter-organisational dependence, the globalisation of trade and the
implementation of lean manufacturing strategies as sources of increased risk,
but there was little more than anecdotal evidence to support these suspicions.
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Creating Resilient Supply Chains
22
• Supply chain planning. The together with pressure to reduce Supply chains were most
extreme left of the spectrum is costs and outsource non-core vulnerable during periods
occupied by pure supply chain activities mean that change is
of change
planning, which in an ‘ideal almost constant. In practice, the
world’ would be unencumbered managers felt that the supply chains
by the legacy commitments of never reached that mature, stable
existing production facilities or ‘steady state’ in their industry.
supplier contracts. As a result they reported that the
• Supply chain operations majority of their time was actually
management. To the right are occupied with supply chain change
pure supply chain operations management related activity, hence
management activities. the relative importance indicated in
This portion represents the Figure 2.1.
day-to-day activities undertaken
in the management of a mature Scope and limitations of
established supply chain. It is the existing tools and techniques
stage where volumes have gone
from developmental prototypes, The principles, tools and mitigation
through the step change to full- strategies identified by the
scale production, where demand practitioners to manage risk were
patterns are expected to follow arranged according to class of
a more predictable pattern. The activity, and in relation to the
well-managed supply chain is CSF-defined sources of risk into
supposedly operating in a stable the 12-cell matrix shown in Figure
‘steady state’ with supply and 2.2. It is important to recognise that
demand perfectly balanced. In Figure 2.2 represents only a
this steady state processes are not summary of what is or could be
impacted by the sources of risk in use somewhere in the network.
from planned process changes Each cell contains a set of one or
or new product introductions. more tools, techniques or principles.
• Supply chain change Collectively they offered the basis
management. The centre of the for a cohesive process risk
spectrum is occupied by supply management tool kit. Some
chain change management monitoring devices e.g. Current
activities. It represents the times Supplier Database (detailing costs,
when planned modifications to qualified component characteristics,
existing supply chain processes capabilities and performance),
are implemented. though not currently in use emerged
as being useful to organisations in
Vulnerability during periods this industry in times of change,
of change to mitigate the effects of all manner
of risks, regardless of the source
Many of the managers felt that or driver. However, other tools and
supply chains were most vulnerable mitigation techniques again suggest
during periods of change, as the contradictory requirements. For
risk profiles affecting their supply example; to mitigate cost-related
chains were also changing. risks, lean manufacturing techniques
Technology upgrades, total quality were being used (Set 5), while
management (TQM) and other elsewhere someone is using
process improvement initiatives, inventory, capacity and capability
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Creating Resilient Supply Chains
24
Supply Chain Management Activities
Supply Chain Planning Supply Chain Supply Chain
Change Management Operations Management
Key: Techniques currently in use. Techniques recognised as desirable but not yet in use.
Modifications/additional techniques identified during the validation process
25
Creating Resilient Supply Chains
26
and enjoy the confidence that management tools would be
others were doing the same. improved by the introduction
The approach represented a of a shared data environment.
formalisation of what was supposed It was felt that this would
by some to be already occurring. significantly reduce the commercial
It was supported in principle, but risks attached to sub-optimal supply
practitioners believed that it would chain performance. The majority
require industry-wide acceptance of interviewees considered this
to be effective in practice. method to be sound in principle.
Aerospace is already a heavily It reflected the frequently expressed
regulated sector and a number view that improved sharing of data
of interviewees identified currently would lead to consequential
accepted quality standards, such improvements in profitability and
as ISO 9001, the Total Quality facilitate continuous improvement
Management process standard, practices that contribute to longer
or its European equivalent, term supply chain health.
EFQM, as cost-effective vehicles Furthermore, a successful precedent
for confidence-building risk had already been created in the
management measures. The Society defence sector. The establishment
of British Aerospace Companies’ of a shared data environment for
(SBAC) ‘Supply Chain Relationships organisations involved with a single
In Action’ (SCRIA) code of conduct shipbuilding project had achieved
already promotes the benefits significant benefits. Whilst there
of accepting more widely was clearly support for the method
recognised and trusted in terms of its proven potential for
manufacturing quality standards reducing demand-related and
amongst its member organisations. process performance risk, there
were equally clear indications
The third approach was an that organisations would be
extension of the second, based on unwilling to share data relating
interviewees’ suggestions that the to other forms of risk. In short,
effectiveness of their current they expected good risk
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Creating Resilient Supply Chains
28
Collaboration v competition Competitive commercial
interests were likely to
A truncated (but as yet
deter organisations and
undetermined) interlocking and
commonly accepted approach individuals from sharing
to supply chain risk management, risk management data
supported by a common data
environment, emerged as the
managers’ favoured way forward.
The evidence from this study
suggests that inter-organisational
cooperation to reduce demand
related forecasting and inventory
management risk would be
significantly improved by more
wide-spread collaboration, allowing
mitigating action to be taken to
deal with supply-side disruptions.
However it was very clear that
competitive commercial interests
were likely to deter organisations
and individuals from sharing other
forms of risk management data.
In addition this would not
overcome problems arising from
a disconnection between supply
chain management objectives
and changes in business strategy.
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Section 3 - Managing Supply Chain Risk –
Industry Comparisons
Creating Resilient Supply Chains
The findings and conclusions of the base case study have been validated through
cross-sector comparisons and discussions with managers from leading organisations
representing the following ‘critical sectors’:
Managers were conscious • Food & drink product life cycles and the
that supply chain (manufacturing & retailing) balance of managerial effort
• Electrical/electronics and activities
vulnerability and
(manufacturing) • The reach of supply chain risk
indeed resilience • Oil/petrochemicals management measures used
were important issues (extraction & refining) by their own organisations
• Healthcare/pharmaceuticals • The usefulness of tools and
(manufacturing, private sector; techniques identified in the
distribution, public sector) original case to improve the
• Automotive spares/construction resilience for their supply chains
(manufacturer and distributor) • Which tools and techniques
• Logistics/transport were in use in the supply chains
(private & public sector) they managed
• Packaging (manufacturer) • The feasibility of the proposals
for how inter-organisational
The organisations selected are all supply chain risk management
household names, significant might be improved or extended.
players in the UK with international
interests and supply chains that span The managers interviewed found
the world. Their core businesses no difficulty in answering questions
cover at least one of the critical relating to the drivers of risk,
sectors, but some have interests in the balance of managerial effort
others. For example, the food through a range of supply chain
retailer also has significant petrol management activities, and the
sales, and the food processing appropriateness of the methods we
company is also a leading producer put forward to improve
of household cleaning and personal implementation up and down
care products (soap, shampoo etc). the supply chain. But when it
Similarly one of the two private came to the other questions
sector logistics and transport there was often hesitation.
companies we spoke to was also a Managers were conscious that
manufacturer and distributor of supply chain vulnerability and
automotive spare parts. indeed resilience were important
issues, but not ones that they
The managers we interviewed were were explicitly required to address.
asked to consider:
Sources of risk
• Whether the sources of risk
identified in the aerospace case All of the organisations we
study where recognisable and consulted were attempting to
relevant to their industries manage longer, leaner global
• The vulnerability of supply chains supply chains. The problems
during different stages of the encountered by the aerospace
30
2
managers were also familiar Similarly, the packaging The globalisation of
to the practitioners from other manufacturer and a public business has amplified
sectors, and were resulting in sector healthcare organisation
the tensions between
challenging complications for were keen to take significant costs
those concerned. In the ensuing out of their business by reducing price-focussed purchasing
discussions, the themes of quality, inventory holdings. In an uncertain and the management
delivery, relationships were clearly and dynamic environment the of supply chain risk
detectable, but cost was the dilemma they faced was just
overriding issue. In the words how deep those cuts should be.
of one practitioner with extensive
experience covering several Managing obsolescence, an issue
‘critical sectors’: raised by the aerospace managers,
was highlighted by the packaging
“There is no common language company and automotive spare
other than cost”. suppliers. They identified the
conflicting requirements of lean
Leaner supply chains and the supply chains and the need to
move towards JIT delivery manage obsolescence. For the
packaging company, it was the
All of the manufacturing or management of inventory holdings
processing organisations consulted of capital equipment spares that
had ‘leaned’ down in recent years posed the biggest questions.
and were actively pursuing further The automotive industry spares
opportunities to reduce overheads supplier accepted that it had
and inventory holdings. to buffer with ‘all-time buys’
Nevertheless several managers as a way to deal with issues of
were concerned that whilst leaner obsolescence in order to protect
operations were accepted as a service commitments in the future.
commercial necessity, overzealous
application of lean principles would One interviewee, himself a
restrict opportunities for growth. purchasing specialist, suggested that
For example, the oil company the root of many problems with
noted that in some of the markets managing obsolescence was that
it served there was not enough the purchasing managers who
capacity to meet short-term originally sourced the parts based
upswings in demand. their decisions on price at time of
order and did not have to deal with
Managers from the grocery retail any of the consequential problems.
business also expressed a belief He suggested that the ‘part not
that there was a danger that current’ problem was a particularly
leanness could limit future common with US suppliers.
opportunities to expand the business
and not just in terms of organic Globalisation of supply chains
growth. Their primary concerns
related to the dynamics of the The interviews undertaken for this
industry and strategic change. research supported earlier assertions
that the globalisation of business
has amplified the tensions between
price-focussed purchasing and the
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Creating Resilient Supply Chains
Reduced supply chain management of supply chain risk. have an entirely free hand in the
resilience as a result A manager from the automotive matter. In at least two instances its
spares company noted that material efforts to optimise the efficiency of
of the smaller supplier
brought in from the Far East at a its manufacturing operations were
base and longer lower unit cost resulted in “bigger restricted by contractual obligations
supply chains order quantities, higher inventory to certain governments. The US
and higher storage costs, but the Food and Drugs Administration
purchaser doesn’t have to pay (FDA) imposed a further limitation,
them”. The same manager also by refusing to accept product
reiterated another theme from the manufactured in some countries.
aerospace findings – the risk
associated with the migration of The oil company, food manufacturer
a parts supplier from one location and retailer were planning further
to another. These relocations rarely consolidation of their distribution
went smoothly, not least because networks. For the oil company this
experienced staff were lost at the meant fewer larger terminals.
time. The companies had to buffer Its supply chain planners were
stock against these moves. aware that they were potentially
For the transport and logistics increasing the risk from any
providers to these companies, unforeseen disruptions, but
globalisation was changing the margins were under pressure and
risk profile at an operational shareholders had to be satisfied.
and strategic business level. Hydrocarbon margins were already
The managing director of one so low that shareholders were
of the third party logistics providers urging the company to be less
(3PL) explained that his company not more risk averse.
found that although developing
markets offered many opportunities, Managers representing the food
the risks associated with operational manufacturer and the 3PLs also
control increased dramatically. raised concerns about reduced
He cited a lower level and breadth of supply chain resilience as a result
managerial skills in the indigenous of the smaller supplier base and
populations, as well as the risks longer supply chains. In particular
associated with political instability, they recognised the susceptibility
lawlessness etc as root causes. of consolidated networks to the
effects of natural disasters.
Consolidation of production The retailer we interviewed was
and distribution principally a UK operation, though
its in-bound supply chains extended
Most of the manufacturing to the furthest corners of the globe.
organisations we consulted were In the UK, cost-driven decisions
seeking to consolidate were also driving consolidation
manufacturing sites to maximise of its domestic distribution network.
return on assets. The Fewer larger service centres were
pharmaceutical manufacturer was planned and the company was
engaged in a post-merger looking at the risks associated with
rationalisation of its manufacturing the network redesign and were
base, but like the aerospace aware that the consolidated network
managers we interviewed previously, has fewer nodes and therefore
the company reported that it did not greater vulnerability. Supply chain
32
and business continuity managers family of product, but switching would The outsourcing of some
were very conscious of the fact that not necessarily be straight forward as activities - including
the leaner supply chains and greater customers were not always willing transport - had definite
reliance on JIT deliveries, coupled to accept product changes. advantages when it came
with higher dependence on to mitigating certain types
technology, may pose greater risk The trend to outsourcing of risk
to the new network than the old
one. The technological risks were Views on the issue of outsourcing
not just IT dependencies, they also were more varied than for any of
related to increased automation the previous themes. It was seen
of picking and sorting activities. as an irrelevance by some of the
managers we interviewed and
Reduction of the a simple fact of life by others.
supplier base To most it was mixed blessing.
It was least relevant to the oil and
Rationalisation of the supplier base petrochemicals production company
was another common theme, some managers. Theirs was a vertically
of the organisations had tackled the integrated process-based
issue long ago, others were manufacturing business with no
currently in the process of doing so. direct responsibility for secondary
The pharmaceutical company was distribution beyond post-refinery
moving towards greater reliance regional distribution centres (RDC).
on single sourcing, again as part
of its post-merger optimisation The supermarket managers we
programme. It was acknowledged interviewed felt that the outsourcing
that a reduced supplier base could of some activities - including
increase supply-side vulnerability, transport - had definite advantages
but this was traded off against when it came to mitigating certain
reduced inventory and demand- types of risk. For example, the
related risk from better quality retailer outsourced some but not
control and the benefits arising from all of its transport. The mixed
the subsequent introduction of strategy allowed it to retain some
consensus forecasting. control and guard against the
risks of industrial action by an
The packaging manufacturer was in-house provider.
also rationalising its supply base from
over 7000 suppliers to a much lower A manager from the pharmaceutical
and more manageable figure, company explained that his
allowing it to introduce a supplier company tries to look at the internal
development programme with first tier impact of outsourcing decisions
suppliers. The motives, risks and both “horizontally and vertically” i.e.
anticipated rewards were the same as from a functional cost effectiveness
those outlined by the pharmaceutical position and in terms of the
company. From a production efficiency of internal processes.
perspective, using a single source Nevertheless, occasionally
of supply was better because it outsourcing decisions still turned
resulted in less variable inputs which sour. For example, when the
in turn meant fewer production manufacture of one active
problems. The company was aware ingredient was outsourced with
of alternative sources of supply by disappointing results, efforts to bring
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Creating Resilient Supply Chains
The balance of supply the activity back in house then failed The majority of managers agreed
chain management is because key staff had been lost and that the balance of supply chain
with them the knowledge needed management is changing, placing
changing, placing greater
to manage the process. A similar greater emphasis on design and the
emphasis on design and problem had occurred when IT management of change.
the management of change was outsourced and there too,
the company come to realise too The food/personal care company
late that it had lost the vested manager and his colleagues
knowledge needed to understand estimated that in terms of its supply
how the new systems should relate chain management strategy, the
to specific issues within the business. balance for their organisation was
80% cost reduction and 20%
The most heavily outsourced innovation. Most of the innovation
business we consulted was the was linked to change management.
electronics equipment manufacturer At the operational level, the
who reported that over 85% of what managers believed that there was
used to be internal process activity a significant increase in managerial
had now been outsourced. Such effort going into managing change
extensive outsourcing has forced in the supply chain. They highlighted
greater interest in supply chain how marketing moves relating to
change and redesign as a brand brand management and product
protection measure. Most churn were creating real difficulties
operational processes were not for supply chain managers. It was a
‘brand critical’ though service levels view echoed by the supermarket
did require care and attention. managers who confirmed that
The resulting changes in the supply volumes and ranges change all the
chain manager’s role meant that time. Like the aerospace managers
contract management skills had in the case study they too denied
become a much more important that their supply chains ever reached
aspect of supply chain design. the established ‘steady state’.
Managers in packaging, automotive
Supply chain management components and in the 3PL
activities: the balance organisations agreed.
of managerial effort
The supply chain specialist from the
For this part of the cross-sector electronics equipment company
validation we asked the managers agreed that the balance of supply
interviewed to assess the balance of chain management is changing, but
managerial effort in relation to the was less dismissive of the notion of
three types of supply chain a steady state. There was a danger
management activity: that established ‘steady state’
processes were likely to be very
• Supply Chain Planning susceptible to external events, again
• Supply Chain because most people would be
Operations Management trying to optimise and to reduce
• Supply Chain the control limits to reduce
Change Management variability of the process. Tighter
controls would reduce risk, but
and to assess when they believed only non-conformance risk, which
their supply chains were most was fine as long as the process
vulnerable and why. requirement remained unchanged
34
and the supply chain continued The same manager was eager to
to operate within a predetermined stress that the three classes of supply
set of scenarios. chain management activity should
not just be viewed only in terms of
The oil company managers had single product supply chains and
in effect highlighted the same their lifecycles. The issues of supply
issue for their refining activities, chain maturity were often poorly
identifying changes in marketplace understood and that risk was not
requirements or surges in demand restricted to the issue of ramping
as their main sources of supply up product volumes. There was also
chain risk. a need for channel volumes to be
considered from a life-cycle
Managers from automotive parts perspective. Furthermore he
manufacturing and pharmaceuticals believed that the learning curve
stressed that supply chain managers issues were often underestimated by
should be more involved in, and those planning channel and network
pay more attention to, supply reconfigurations. His experience
chain design in the run up to suggested that the supply chains
new product launches. his company supported rarely got
the opportunity to mature properly
There is a need within an into a mid-life cycle ‘steady state’.
organisation and its associated He observed that every time the
suppliers to improve R&D, logistics grocery retail industry looked as if
and manufacturing coordination it was approaching a ‘steady state’
at the supply chain design stage. the major players changed the
The automotive industry manager structure of the industry, catapulting
also emphasised inter-organisation everyone back to the uncertainty
cooperation at an earlier stage to and inherent inefficiencies of the
overcome the inherent risk in new early part of the life cycle.
models and supercessions.
Finally, the major supply chain
A slightly different perspective was trends that we have identified, e.g.
given by a 3PL. By the very nature globalisation, centralisation and
of their business, 3PLs do not design rationalisation were widely
inter-organisational supply chains, recognised. However, it was felt by
only logistics networks, with most some of those interviewed that the
managers’ energies spent working change management implications of
on operational issues. One these trends, particularly their
manager estimated that roughly combined effects, were not fully
60% of managerial energy was appreciated by senior management.
directed there, with only about
10% going into supply chain Supply chain risk
change management and about management:
30% into design. He felt this would processes and tools
increase, as the 3PL moved to
become a provider of ‘solutions’ The research revealed that
instead of ‘requirements’. companies representing all sectors
were engaging in general corporate
risk management and in supply
chain management, though inter-
35
Creating Resilient Supply Chains
There was uncertainty organisational supply chain to at least some of the tools
about what supply chain resilience was not the motivation. identified in the aerospace
Furthermore when asked to assess case study, occasionally
vulnerability and indeed
the risk management tools and suggesting others that they
resilience entailed techniques available to manage had found to be useful for
supply chain resilience, the their particular circumstances.
managers sometimes struggled A summary of the risk assessment
to answer the question. There was tools and techniques used in the
uncertainty about what supply ‘critical sector’ companies are
chain vulnerability and indeed detailed below:
resilience entailed. The knock-on
effect of that was a degree of Pharmaceutical company - had
uncertainty about the relevance one of the most comprehensive and
of managerial tools currently well-developed risk management
employed for other purposes. processes in place to cover its own
With further explanation, most manufacturing and distribution
interviewees could readily relate network (see inset box).
36
Inevitably, things still go awry from management philosophies. The
time to time, so a formal structured company has since come to
‘issues’ management process is also recognise that many reported stock
in place for when things are out of outs were not really stock-outs.
kilter, which has to be implemented Stocks of finished goods existed, but
within four days of detection. Its were previously not always visible to
aim is to resolve (internal) problems those who needed them.
at the lowest possible level. If the Consideration is being given to
problem is an internal one it can be extending Six Sigma usage into
up to three months’ away from the purchasing activities.
market and lead times with primary
suppliers are up to a year. The The company also uses scenario
implications of far reaching planning to support the structured
externally driven events, such as formal annual risk analysis of
war, are considered by each suppliers and uses supply chain
manufacturing or marketing unit, mapping as a diagnostic approach
which inform the regional supply when problems arise. For example,
chain planning, manufacturing or when a supplier was unable to meet
therapy directors who review these demand, supply chain mapping
on a monthly or bi-monthly basis. revealed capacity constraints in the
The company is also trying to pull system. As a result the company
together teams from across its own now holds one year’s supply of the
network, involving suppliers if active ingredient to ensure continuity
appropriate, with a view to a more of supply. The buffer stock covers
community-based approach to the the time needed to ramp up
resolution of problems. volumes of supply if necessary.
The manager we interviewed
In addition the company is using believed that it was possible for
other functionally-based his company to map value-adding
approaches, reporting excellent processes more or less end-to-end,
results from the application of the because pharmaceuticals is, to
Six Sigma methodology to its a large extent, a process driven
internal manufacturing processes. industry. Scenario planning is
It has found that the methodology also used to support the internal
helps greatly in assisting the risk management assessments
factories to meet the ‘pull of the on the possible impact of major
customer’ while maintaining strategic moves such as the
reduced levels of finished inventory. introduction of new enterprise
The implementation of Six Sigma planning software following the
began as a functionally driven rationalisation of the network.
facilitator of lean supply chain
37
Creating Resilient Supply Chains
38
subjective, the managers were business units. The company had
seeking to improve their risk established net good assets registers
assessment, modelling and trade-off for the costly production equipment
analysis methods. In particular they parts (some of which represented
were keen to find better ways to multi-million pound purchases),
quantify costs vs risk trade offs. but it was still striving to get the
They had identified a requirement different European plants to work
for dual-purpose tools to assess effectively together. Some of the
supply chain risk and performance. problems experienced were believed
Internally they believed that each to relate to tensions between the
node of their own network was plants (individual profit centres) and
risk assessed, though the process the centralised inventory
was not entirely formalised. management function. For other
The feasibility of end-to-end supply supply chain management risks,
chain mapping was limited as the managers recommended FMEA
company was no longer a vertically (Failure Mode Effect Analysis) as an
integrated concern. Supplies of raw effective and versatile tool that had
ingredients were no longer as been used at many levels during the
closely controlled as in the past. project management and
commissioning of a new plant in
Packaging manufacturer - southern Europe. They also
believed that it was technically supported the use of open book
possible for them to establish an accounting when dealing with tier
end-to-end view of their supply one suppliers, including logistics
chains from raw materials to and transport service providers.
consumer. It uses some commodity
raw materials as inputs to its Third party logistics providers -
manufacturing processes and, like risk management for clients’
the oil company, it uses hedging businesses was not yet a formally
mechanisms when purchasing articulated consideration. At least
aluminium – its most expensive one of the companies used
commodity. Otherwise it minimises modelling tools to estimate the
its own inventory holding risks by impact of the loss of a link or
receiving all other materials (non- node within their clients’ networks,
metallic) from suppliers on a but stressed that they did not
consignment basis. Importantly, attempt to calculate the probability
however, the packaging of such an occurrence. Furthermore,
manufacturer’s team stressed that while they were aware of the risks
although they could end-to-end to day-to-day operations and from
map value-adding processes, they transportation links, their principal
could not map the supply chains of task was to optimise the efficiency
the vital capital equipment of their clients’ logistics networks.
manufacturers (CEMs) whose
machines they relied upon. Food retailer – as in the
pharmaceutical company, the
As with several of the other retailer used a range of well-
organisations we consulted, the developed tools to assess supply
packaging company was working chain risk. It used modelling tools
hard to integrate supply chain to calculate the effect of the loss
management efforts within its own of nodes within their own networks.
39
Creating Resilient Supply Chains
Supply chain and business continuity the 2000 fuel protest and the
managers recommended 2001 foot and mouth outbreaks.
brainstorming for scenario An assessment of external risks,
generation. Given the nature such as flooding, to each of its
of their business, which tended nationwide network of stores has
to have to trade-off conflicting been undertaken and a business
requirements of several interest continuity plan has recently been
groups - e.g. farmers, customers presented to the company’s supply
and governments – they used chain director (a main board
stakeholder analysis to estimate the member). Implementation would
likelihood of problems occurring also require the involvement of its
(e.g. the blockade of a distribution leading logistics service providers.
centre by protestors) as a result
of a given course of action. All the retailer’s business continuity
measures implemented up until this
Recently managers had been doing point had been within the retailer’s
more varied scenario planning and direct control. Managers conceded
monitoring at local, regional and that although it seemed relatively
international levels. Their trading simple to impose business continuity
division monitored international requirements on suppliers,
affairs and high-level political risks enforcement presented many
factors such as war and terrorist difficulties. Managers confirmed
threats. As one of the nation’s that the priorities of functional
largest distributors of food and business units were not always
petrol it has a more active interest entirely in tune with higher-level
in emergency planning procedures corporate strategic vision. As a
than any of the other commercial result, business continuity planning
organisations we contacted. was a requirement for some, but not
The company has well-developed all suppliers of outsourced activities.
business continuity processes in The managers had however
place, centring around a high level identified 20 out of the company’s
cross-functional group of managers top 100 suppliers with which to start
who can convene within one to the dialogue. This would move
two hours of notification of an forward with a handful of the largest
emergent threat to business suppliers rolling out to the others
continuity. The team is authorised as resources allowed.
to assume complete control of
the business in times of crisis, The retailer has the advantage that
and to take whatever actions if one of its product suppliers failed
are necessary to limit the effects it was such an important customer
of major incidents. to most that another supplier could
be prevailed upon to step into the
The business continuity planning breach. However, there have been
procedures were originally incidents such as the problems
developed to deal with IT-related experienced in 2002 with pesticide
failures, but the organisation has contaminated Chinese honey, that
steadily built on this to provide have resulted in the simultaneous
contingency planning for other withdrawal of all suppliers’ products.
specific threats. These procedures That incident left the shelves devoid
were used to good effect during of honey until suppliers had
40
completed ingredient checks on leaner, more consolidated, but It was possible to extend
their own supply chains. As a result potentially less resilient networks the widely applied internal
a supply chain specialist has been • When and where supply chains
audit processes upstream
invited to join the ‘Serious Incident (as the managers interviewed
Committee’, prompting moves for understood the term) were most and downstream
closer working between the retailer’s vulnerable were usually known,
supply chain managers and business but not always recognised
continuity teams. elsewhere in the organisation
or supply chain
Extending the reach • The volatility of operating
environments was highlighted.
Most managers interviewed agreed Few managers believed that their
that it was possible to extend internal networks or those of the
the widely applied internal audit wider industry were stable
processes upstream and enough to reach a mature
downstream as far as the most balanced state. Changes in
immediate adjacent organisations, product specifications, continuous
but that trust and relationship issues improvement initiatives,
still posed a problem. Commercial outsourcing, internal network
sensitivities could be a limiting redesigns, changes in IT support
factor. One logistics service provider systems and process technology,
noted the tendency to share data supply base and industry
vertically but for the purposes consolidations all contributed
of his business, it should be a to the volatility of their
horizontally shared environment operating environment.
at first tier. The sheer volume of • The management of change
work and the resource requirement coupled with regulatory and
needed to impose business geopolitical changes and the
continuity procedures throughout practicalities of managing across
a company’s supply chain supported different legal, cultural and
the view of the aerospace industry environmental settings made
that end-to-end monitoring of every supply chain management a far
conceivable risk to the supply chain more complex set of activities
was impractical. A majority of the than was perhaps widely
managers interviewed agreed that recognised. The balance of effort
more widely applied internal audit seemed to be changing too,
processes extending upstream with a growing emphasis
and downstream to the immediate on planning and change
adjacent organisations was the management activities.
way forward. • The managers interviewed found
the identification of suitable risk
Conclusions management tools initially
problematic. Nevertheless, they
• Sources of risk – the findings supported the general principle
demonstrated similarities between of a limited reach approach to
all sectors supply chain risk management,
• Cost reduction remained a encompassing the focal firm,
constant theme, emerging as the its immediate customers and
principle driver behind the suppliers, where possible within
universal moves towards longer, a shared data environment.
41
Section 4 - Creating the Resilient Supply Chain:
Recommendations for business
Creating Resilient Supply Chains
Emerging from the research are a number of key points which impact supply
chain resilience and business continuity:
Biggest risk to business • There is a disconnect in without the ability to connect these
continuity may well come organisations between the pieces and see the wider picture.
determination of business strategy
from the wider supply chain
and the recognition of the impact Business continuity and risk
of these strategic decisions upon management, particularly with
supply chain vulnerability regard to IT appears to be fairly
well understood and applied in most
• The globalisation of business and companies. The same is not true of
the pressure for cost reduction risk management in supply chains.
have in turn created supply Where awareness exists, major
chain risks impediments are the lack of:
42
Scanning the landscape – o Process Changes in business
a managerial framework o Control strategy change supply
chain risk profiles
Given the inter-organisation, •External to the focal firm but
international and inter-industry internal to the supply chain network
nature of contemporary supply o Demand
chain networks, a managerial o Supply
tool-kit for the identification
and management of supply •External to the network
chain risk and vulnerability o Environment
represents something of a
‘bottom-up’ approach to dealing The first two ‘internal’ categories
with the problem. of the framework relate to elements
which are within the control of the
At the beginning of this report we focal firm, more often than not this
suggested that supply chain risk can will be within the bounds of the firm
stem from sources within the supply as a legally defined unit.
chain and/or sources external to it.
However, the application of a Processes are the sequences of
managerial tool-kit necessarily value-adding and managerial
advances from the perspective activities undertaken by the firm.
of a manager in an organisation The execution of these processes is
or business unit – i.e. a single likely to be immediately dependent
node in one or more of the inter- on internally owned or managed
organisational networks described assets and on a functioning
in the earlier framework. infrastructure. Therefore, internally
We have also established that owned or managed assets and the
organisations rarely have knowledge reliability of supporting transport,
of the working of their customers communication and infrastructure
or suppliers beyond those should be carefully considered.
immediately adjacent to them. Process risk relates to disruptions
Consequently, we have provided to these processes.
a structured analytical framework,
using this truncated supply chain Controls are the assumptions,
perspective as a starting point, rules, systems and procedures that
Figure 4.1. The framework leads govern how an organisation exerts
management to consider how, control over the processes. In terms
where, when and why supply chains of the supply chain they may be
may be vulnerable at each of the order quantities, batch sizes, safety
four levels of the landscape (i.e. stock policies etc. plus the policies
value-stream, asset/infrastructure, and procedures that govern asset
organisations, environment). and transportation management.
Control risk is therefore the risks
The managerial framework arising from the application or
categorises the sources of risk misapplication of these rules.
according to perceived location
of a potential risk or manifestation
of an event, i.e. into three stages:
43
Creating Resilient Supply Chains
Processes and control mechanisms the network, between the focal firm
should be aligned to support and the market. In particular,
corporate and supply chain strategies. it relates to the processes, controls,
The next two categories are external asset and infrastructure dependencies
to the focal firm, but remain internal of the organisations downstream and
to the inter- organisational networks adjacent of the focal firm.
through which materials, products
and information flow. Ideally the Supply risk is the upstream
focal firm should have an awareness equivalent of the above, it relates
of potential or actual disturbances to potential or actual disturbances
to the anticipated flow of product to the flow of product or information
and information from within and emanating within the network,
between every node or link in the upstream of the focal firm.
supply chain networks through
which its own value-streams flow. The fifth and final category relates
In practical terms this may not be to disruptions that are external
possible, but the focal firm should to the network of organisations
at least strive to familiarise itself with through which the value-
those that are known or likely to streams/product supply chains flow.
affect adjacent organisations.
It is unlikely that the focal firm will Environment - These events may
ever have intimate knowledge of course directly impact upon the
of all potential risks, though focal firm or on those upstream
appropriate monitoring should or downstream, or indeed on the
increase the likelihood and provide marketplace itself. They may
early warning of actual events. affect a particular value stream
(e.g. product contamination) or
Demand risk relates to potential any node or link through which
or actual disturbances to flow of the supply chain passes (e.g. as the
product, information, and in this result of an accident, direct action,
instance cash emanating from within extreme weather or natural
44
disasters). They may be the result At a tactical level a set of activities Supply chain resilience
of socio-political, economic or should be carried out to prepare for implies agility
technological events many miles and handle disruptions. These
or organisations removed from activities are the processes:
the focal firm’s own supply chains,
but may have knock-on effects • Risk identification process,
through linkages to other industry e.g. product, supplier,
networks. The type or timing of supply chain related
these events may be predictable • Risk assessment process,
(e.g. those arising from regulatory e.g. likelihood v impact v cost
changes), but many will not be, • Supply chain continuity
though the impact of these types management and
of events may be assessed. co-ordination processes
• Processes to ensure learning
Principles underpinning from experiences.
resilience
Supply chain (re)
Determining the appropriate engineering
practices to manage supply chain
vulnerability appears to be context Conventionally supply chains have
specific, dependent amongst other often been designed to optimise for
things on the supply chain’s cost and/or customer service, rarely
response to the need for operational was resilience an ‘objective function’
excellence. Recognising this for the optimisation process.
situation it was possible to identify Given the risks to which modern
four general principles: supply chains are exposed this
may need to change. A number
• Risk considerations should of recommendations are suggested
influence the supply chain to provide the basis for the design
Mapping tools can help in
design and structure of supply chains with risk reduction
(i.e. supply chain in mind. the identification of ‘pinch
(re) engineering) points’ and ‘critical paths’
• Risk management should be i) Supply chain understanding
based on a high level of supply
chain visibility, process alignment A fundamental pre-requisite for
and understanding/cooperation improved supply chain resilience
amongst all supply chain partners is an understanding of the network
• Supply chain resilience implies that connects the business to its
agility, i.e. being able to react suppliers and their suppliers and
quickly to unpredictable events to its downstream customers.
• The creation of a risk Mapping tools can help in the
management culture in the identification of ‘pinch points’
organisation based on clear and ‘critical paths’.
performance requirements and
lines of communication between Pinch points will often be
all supply chain organisations will characterised as bottlenecks
enhance, indeed make possible, where there is a limit of capacity
supply chain resilience. and where alternative options may
not be available e.g. ports capable
of taking large container vessels
or central distribution facilities which
45
Creating Resilient Supply Chains
Single sourcing maybe if they were to become inoperable available. Where a firm has
advantageous from would place a heavy strain on the multiple sites it may be possible
rest of the system. to have a single source for an item
a cost and quality
or service into each site thus gaining
management perspective, but A critical path in the supply some of the advantages of single
is dangerous in terms of chain/network may have sourcing without the downside risk.
resilience one or more of the Similarly if a manufacturing firm
following characteristics: makes a range of products it may
be possible to single source by
• Long lead-times e.g. the time product thus keeping an alternative
taken to replenish components source of supply available.
from order to delivery
It is strongly advocated that one
• A single source of supply with no of the key criteria for the selection
short-term alternative of suppliers should be the risk
awareness of the supplier.
• Linkages where ‘visibility’ is poor, For example have they audited
i.e. little or no shared information their own supply chain risk profile?
between nodes Do they have procedures in place
for the monitoring and mitigation
• High levels of identifiable risk of risk? It may be appropriate for
(i.e. supply, demand, process, the company to adopt a pro-active
control and environmental risk). strategy of supplier development
to work closely with key suppliers
Following from this risk assessment to help them improve their supply
exercise should be the creation of chain risk management practices.
a supply chain risk register where
the vulnerabilities of critical nodes iii) Design principles for supply
The strategic disposition
and links in the network are noted chain resilience
of additional capacity and/or and procedures for their monitoring
inventory can and subsequent mitigation and A number of principles have
be extremely beneficial management are defined. emerged which should be
considered when (re) engineering
ii) Supplier base strategy supply chains to improve resilience:
46
• Re-examine the ‘efficiency vs. Forecasting and Replenishment Traditionally supply chains
redundancy’ trade off. (CPFR) initiatives. have been characterised
Conventionally surplus capacity
by arms-length, even
and inventory have been seen The underlying principle of
as undesirable. However, the collaboration in the supply chain adversarial relationships
strategic disposition of additional is that the exchange of information
capacity and/or inventory can be and application of shared
extremely beneficial in the knowledge can reduce uncertainty.
creation of resilience within the Thus a key priority for supply chain
supply chain. Capacity is a form risk reduction has to be the creation
of inventory but is often more of a supply chain community to
flexible in that inventory may enable the exchange of information
already be committed to its final between members of that
form or destination. Both capacity community. The aim is to create
and inventory can provide ‘slack’ a high level of ‘supply chain
in a supply chain to enable surge intelligence’ whereby there is
effects to be coped with. a greater visibility of upstream
Inventory, carried in a generic and downstream risk profiles (and
or semi-configured form, can changes in those profiles), ie at
enable the creation of a each node and link in the supply
‘de-coupling point’ that, together chain and at each level of analysis,
with additional capacity (e.g. i.e. environment, network,
production, transport, people), asset/infrastructure and process.
can enable demand uncertainty
to be more effectively managed. Supply chain knowledge can be
categorized as Strategic, Tactical
Supply chain collaboration and Operational, Figure 4.2.
47
Creating Resilient Supply Chains
48
The achievement of supply chain suppliers to when it delivers finished Supply chain visibility
visibility is based upon close product to the customer. It is not is based upon close
collaboration with customers and just velocity that matters in the
collaboration with
suppliers as well as internal creation of agile supply chains it
integration within the business. is acceleration. In other words how customers and suppliers
rapidly can the supply chain react
Collaborative planning with to changes in demand, upwards
customers is important firstly to or downwards?
enable visibility of their demand to
be gained but also for information There are three basic foundations
to be shared on market trends and for improved supply chain velocity
perceptions of risk. Equally, and acceleration:
upstream visibility also requires
high levels of collaborative planning • Streamlined processes,
with suppliers and the use of ‘event • Reduced in-bound lead-times
management’ logic to enable • Non-value added time reduction.
alerts of potential supply disruptions
to be signalled. Streamlined processes - have been
engineered to reduce the number of
A significant barrier to visibility is stages or activities involved, they are
often encountered within the focal designed to perform these activities
firm’s internal organisation structure. in parallel rather than in series and
The presence of ‘functional silos’ they are It is not just velocity that
inhibits the free flow of information e-based rather than paper-based. matters in the creation
leading to ‘second guessing’ and At the same time they are designed
of agile supply chains
a general lack of communication. around minimal batch sizes – be
This situation is often exacerbated they order quantities, production it is acceleration
when the company has internal batch sizes or shipping quantities.
suppliers or customers with The emphasis is on flexibility rather
limited integration between them. than economies of scale.
The challenge here is to break
down these silos to create multi- Reduced in-bound lead-times -
disciplinary, cross-functional one of the criteria for the choice
process teams. of supplier and the source of supply
should be their ability to respond
Supply chain velocity rapidly in terms of delivery and
to be able to cope with short-term
The second ingredient of supply changes in volume and mix
chain agility is velocity. Velocity requirements. Synchronisation of
is defined as distance over time. schedules based on shared
To increase velocity time must be information enables suppliers to
reduced. Here we are referring to become more agile without
‘end-to-end’ pipeline time i.e. the necessarily having to rely on
total time it takes to move product inventory as a buffer with all its
and materials from one end of the consequential problems.
supply chain to the other.
End-to-end pipeline time – as it Non-value adding time reduction
relates to agility – can be measured - most time spent in
as the elapsed time from when the a supply chain is not value adding
focal firm places orders on its Tier 1 from a customer perspective.
49
Creating Resilient Supply Chains
Nothing is possible without More often than not it is idle for example when new products
leadership from the top time i.e. inventory which is itself are at the design stage, issues
generated as a result of of supply chain vulnerability
of the organisation
cumbersome processes – every such as component availability
day of process time requires at and lead times should be
least a day of inventory to cover considered. Similarly when
during that lead-time. changes in business strategy
are contemplated such as a
Creating a supply chain risk move to off-shore sourcing
management culture from domestic sourcing, then
the resulting supply chain risk
In the same way that many profile should be assessed.
organisations recognised that the
only way to make total quality A supply chain risk management
management (TQM) a reality was team should be created within the
to engender a culture that made business and charged with regularly
quality the concern of everyone, updating the supply chain risk
so too today is there a requirement register and to report to the main
to create a risk management Board through the supply chain
culture within the business. director on at least a quarterly basis.
We would argue that this culture The team will need to be cross
of risk management should extend functional and to be able to audit
beyond the current boundaries risk using the tools detailed in
of business continuity management Appendix 1 in this report.
to become ‘supply chain
continuity management’. Figure 4.3 summarises the
constituent elements of our
As in every case of culture change proposed route map to resilience.
at an organisational level, nothing
is possible without leadership from
the top of the organisation. One of
the key conclusions of our research
is that supply chain risks present the
most serious threat to business
continuity and yet, paradoxically,
not every company has supply chain
management represented in its own
right in the Boardroom. If the supply
chain has a voice at all at that level
it is often represented through IS/IT
directors. Whilst this can work it is
often the case that in such instances
the understanding of what
constitutes supply chain risk is
limited to an information systems
based perspective.
50
FIGURE 4.3 : CREATING THE RESILIENT SUPPLY CHAIN
51
Appendix 1- A Toolkit for Supply Chain Process
Risk Management
Creating Resilient Supply Chains
A number of tools have been identified that can be used by managers to identify
and manage supply chain risk at the business process level.
52
under the umbrella of ‘Six Sigma’ – Define: What is it we are seeking
a philosophy and a methodology to improve? What Key
for process improvement that is Performance Indicator
data based and reliant on statistical (KPI) do we want
tools and techniques. to improve?
Measure: What is the current
Six Sigma capability of the process?
What averages, what
The term Six Sigma is largely variability is evident?
symbolic and it refers to the chance Analyse: Map the process, use
of defect or failure; sigma (or the cause and effect analysis
standard deviation) being the (e.g. Pareto Analysis and
statistical measure of variation Fishbone Diagrams)
in a distribution. Six Sigma implies Improve: Re-engineer the
that the chance of failure is only process, simplify
3.4 in a million opportunities. Control: Improve visibility and
Whilst Six Sigma performance may transparency of the
be unattainable in many cases, process. Use statistical
it is used as a target – sometimes process control
Six Sigma is referred to as
“a journey not a destination”. A modified Six Sigma model
Many of the tools of Six Sigma for supply chain process risk
have come from the total quality management
management (TQM) toolbox.
Six Sigma is a continuous The modified Six Sigma model for
improvement methodology, which supply chain risk management,
seeks to make existing processes illustrated in Figure A1.2 provides a
more robust. This may be too robust and systematic methodology
limiting a goal for supply chain that can be applied to supply chain
risk management, merely making processes. The methodology is
a process robust rather than fashioned on the Six Sigma model
changing it to make it more of Define-Measure-Analyse-Improve-
resilient. However, reducing Control, more commonly referred to
process variability creates capacity; as the DMAIC Improvement Process
capacity that can either be removed that is used widely by manufacturers
if the aim is to become leaner or for process and product quality
maintained if the aim is a more improvement. The proposed Process
resilient (or perhaps agile) supply Risk Model, Figure A1.2 adapted
chain. Whether the goal is for supply chain risk management
robustness or resilience, the comprises two cycles:
Six Sigma methodology can
bring dramatic results. • Tactical cycle
• Operational cycle.
The Six Sigma methodology follows
a five-stage sequence: Notably the tactical cycle includes a
risk prioritisation step, ‘Prioritise’,
• Define and we replace ‘Define’ with
• Measure ‘Identify’. The ‘Improve’ step is
• Analyse given the more appropriate title of
• Improve ‘Reduce’, thus transforming the
• Control DMAIC Process for Improvement
53
Creating Resilient Supply Chains
into the IMP & ARC Processes for and impact avoidance.
Risk Reduction.
• Risk prioritisation: Prioritise
Tactical cycle risks so that attention can be
focused on those with the
The main objectives for the tactical greatest potential to cause
cycle are to Identify, Measure & damage and those that
Prioritise (IMP) risks inherent in represent the greatest
the organisation’s supply chain opportunity for risk reduction.
processes. Collectively this is The process of prioritisation
referred to as Risk Chain Analysis should consider the cost of risk
(RCA) because the aim is to identify reduction in cost-benefit terms,
those process risks inherent within i.e. the organisation should
the supply chain that are critical to focus on those risks where the
the business and to prioritise them expected degree of risk reduction
so that ultimately the organisation achievable per unit cost invested
can maximise the reduction in the is the greatest.
total cumulative supply chain
process risk. It is recommended Operational cycle
that risk managers adopt FMEA
(Failure Mode and Effect Analysis) The main objectives for the
as a framework for execution of the operational cycle are to Analyse,
IMP cycle. The main objectives of Reduce and Control (ARC) high
RCA are defined as follows: priority risks through individual risk
management projects; these are
• Risk identification: Identify defined as follows:
critical path processes that
represent significant sources of • Risk analysis: Analyse in detail
risk to the output of the the root causes of each risk and
organisation’s supply chain. translate the findings into risk
reduction projects.
• Risk measurement: Measure
the impact of each risk on the It is the effect of the risk and the
business and extended enterprise. potential damage that the effect can
cause the business that is of
During this step of the process all importance when considering risk
identified risks are measured in reduction strategies and tactics.
terms of their effect on the supply
chain and impact on the business. Although some analysis is required
Using the FMEA approach and a in order to carry out ‘Risk
suite of appropriate tools and Measurement’ and ‘Risk
techniques, risks can be measured Prioritisation’ during the tactical
using three criteria: cycle, this analysis step involves a
more in-depth investigation in order
• The probability or expected to quantify the effects of each risk.
frequency of risk occurrence
• The severity of the impact of the • Risk reduction: Implement risk
risk on the business in both cost reduction strategies to reduce or
and customer service terms mitigate those high priority risks
• The probability of early detection for which cost effective solutions
54
FIGURE A1.1: KEY ELEMENTS OF SUPPLY CHAIN
PROCESS RISK MANAGEMENT
55
Creating Resilient Supply Chains
Simulation Modelling
Critical Path Analysis
Tools and Techniques
Fishbone Diagram
Scenario Planning
Pareto Analysis
Benchmarking
Brainstorming
Flowcharting
Six Sigma Supply Chain Process
(FMEA)
Methodology Risk Management
(DMAIC) (IMPARC)
Analyse Analyse
X X X X X X X
Improve Reduce
X X X X X X X
Control Control
X X
can be found. The ultimate aim The Toolkit for resilient supply
should be to follow a risk chain processes
management programme that
maximises the reduction in the Figure A1.3 lists the tools identified
total cumulative supply chain risk. as being of practical help in supply
The aim of risk reduction is to chain process risk management.
find and implement a solution A brief description of each is
that will provide the greatest provided. A more detailed guide
reduction in the combined effect to the tools and their application is
of the three key risk criteria: provided in the complete version of
this report. For details see page 12.
o probability of occurrence
o severity of impact Further reading
o ability to detect.
George, M. L., (2002), Lean Six
• Risk control: To continually Sigma. McGraw-Hill.
monitor the magnitude of the
reduced risk over time, maintain
control of the process and
feedback into the tactical cycle.
56
Scenario Planning - What is it?
57
Delphi Forecasting - What is it?
Creating Resilient Supply Chains
The Delphi method of futures forecasting has sometimes been described as ‘an
anonymous debate by questionnaire’. The idea behind Delphi Forecasting is to utilise
the insights and knowledge of experts (e.g. managers, customers, suppliers with
knowledge of the supply chain) to create a view of how likely various future scenarios
are and, usually, to place some timescale on when those future events might happen.
Further reading
58
Brainstorming - What is it?
Further reading
• Rawlinson, J. (1986)
Creative Thinking and
Brainstorming. Gower.
59
Failure Mode and Effect Analysis (FMEA) - What is it?
Creating Resilient Supply Chains
Failure Mode and Effect Analysis (FMEA) is a tool that makes it possible to determine
a system’s possible modes of failure, and then to establish the effects of those failures
on the overall performance of the system.
60
FIGURE A1.4: A FRAMEWORK FOR PROCESS
RISK ANALYSIS USING FMEA
Further readings
61
Flowcharting - What is it?
Creating Resilient Supply Chains
62
Date: 30 – 04 – 03 Location: Factory A
Analyst: ANY Process: Sub-assembly
Operation
Transport
Distance
Step Description of Process
(metres)
Storage
Inspect
Delay
(min)
Time
1 Unload pallets from truck 20
2 Move to goods in 125
3 Check, inspect 30
4 Move to warehouse 75
5 Store until needed 360
6 Move to production 35
7 Sub-assembly 25
8 Work in progress store 240
9 Place on conveyor 5
10 Move to final assembly 25
% Total: 680 260
Further reading
63
Supply Chain Mapping - What is it?
Creating Resilient Supply Chains
The map will also show the time that • Contingency plans regarding
is taken at various points along the alternate transport arrangements
chain including time when the in the event of disruption
materials or products are waiting, • Decisions to hold inventory
i.e. as work in progress or finished in a form in which it is most
goods. flexible, e.g. undyed cloth,
rather than dyed.
Using it, businesses can determine:
Step by step outline:
• The inter-connecting “pipeline” of
suppliers through which products, 1. Plot the different processes
components and materials must through the supply chain from
travel to reach the end-user raw material to end user, through
• The transport links by which production and all other
products, components and processes on to the horizontal
materials are passed from one axis of the map.
node to another in the chain 2. Horizontal time is when
• The amount of work-in-progress something is happening,
and inventory stockpiled at each e.g. the days taken to ship
stage in the pipeline a product from point A to B.
• The time it would take to source This is measured in number
replenishment from various points of days.
in the pipeline in the event 3. Vertical time is when nothing
of disruption. is happening; the inventory
is standing still. This can be
The resulting information can because it is being held as part
assist businesses to identify areas of the production process,
of risk and take appropriate e.g. curing or machining, or it is
actions, including: held in buffer against demand.
64
4. Inventory holding points are
positioned as vertical lines rising
upward from the horizontal line
and are again measured in days.
The resulting outputs from the
technique are: a) pipeline length,
i.e. the sum of the horizontal
intervals. This is often described
as the time taken to pull a
product through the supply chain;
b) pipeline volume, i.e. sum of
the horizontal and vertical lines.
This is the time that the supply
chain can operate without further
replenishment of supplies.
Further reading
65
Critical Path Analysis - What is it?
Creating Resilient Supply Chains
Critical Path Analysis is the most commonly used form of network analysis.
Typically, it is employed for one off or infrequent tasks, and is the conceptual
backbone behind most project planning.
66
i.e. the start and/or finish of an 3. Project or process time is the
activity or group of activities. shortest time in which the project
or process can be completed and
Diagrammatically, in a network this is determined by the
diagram, an activity is sequence of activities known
represented by an arrow and as the critical path, i.e. the
an ‘event’ by a node or circle, sequence of events where the
e.g. Figure A1.6. Bar charts can least slippage can be tolerated
also visually represent a critical before the overall sequence
path. Alternatively, the of ‘events’ (i.e. project or
information required, i.e. activity process) is jeopardised.
duration, order of precedence
and resource consumption can Further reading
be calculated arithmetically.
• Baker, S. and Baker, K. (2000)
The Complete Idiot’s Guide
to Project Management.
Alpha Books, Macmillan, USA
67
Bottleneck Identification - What is it?
Creating Resilient Supply Chains
68
Statistical Process Control - What is it?
Statistical Process Control (SPC) is a technique that has long been used to great effect
within manufacturing industry.
69
Process Capability Analysis - What is it?
Creating Resilient Supply Chains
Further reading
70
Simulation Modelling - What is it?
A simulation model imitates the operation of a real-world process or system over time.
The development of a computer-based simulation model allows the user to study the
behaviour of a system or process.
71
Root Cause Analysis - What is it?
Creating Resilient Supply Chains
Root Cause Analysis, sometimes known as Fault Tree Analysis, is a technique that aims
to discover the first - or “root” - cause of a failure or problem.
72
3. Establish by asking ‘why’ five
times what created the
contributory causes and map
onto the fault tree
4. Repeat the process until the initial
problem’s root cause is identified.
Take action to eliminate
the problem
5. Secondary factors and
circumstances which exacerbated
the problem will also be identified
6. Use a matrix diagram to plot
problem characteristics against
possible causes to identify if the
same cause keeps reoccurring.
Further reading
73
The “Fishbone” diagram - What is it?
Creating Resilient Supply Chains
Fishbone diagrams are a well-known tool in the worlds of quality management and
continuous improvement.
74
Pareto Analysis - What is it?
Pareto Analysis, sometimes referred to as ABC Analysis, is a decision support tool that
aids in prioritising problems and issues to be tackled.
75
Creating Resilient Supply Chains
76
Process Decision Programme Chart
- What is it?
A Process Decision Programme Chart is a tool for use in contingency planning.
77
Creating Resilient Supply Chains
78
Benchmarking (incorporating SCOR) - What is it?
Benchmarking was popularised in the late 1980s and early 1990s by companies
such as Motorola, Xerox and Hewlett-Packard.
79
Business Process Re-engineering - What is it?
Creating Resilient Supply Chains
80
Time-Based Process Mapping - What is it?
81
Creating Resilient Supply Chains
Further reading
82
Supply Chain Event Management
Supply Chain Event Management (SCEM) is the term given to the process of
monitoring the planned sequence of activities along a supply chain and the
subsequent reporting of any divergence from that plan. Ideally SCEM will also
enable a proactive, even automatic, response to deviations from the plan.
The Internet can provide the means Event management is rooted in the
whereby SCEM reporting systems concept of workflow and milestones.
can link together even widely
dispersed partners in global An event is a conversion of material
supply chains. The use of XML at a node in the chain or a
communications across the web movement of material between
means that even organisations nodes in the chain. Events should
with different information systems only happen as a result of an
can be linked together. instruction (control). Therefore
The key requirement though on the time horizon over which
is not technological; it is the instructions are issued, events are
willingness of the different entities capable of being monitored for
in a supply chain to work in a the timeliness and completeness
collaborative mode and to agree with which they are executed
to share information. against the original instruction.
83
Appendix 2 - Part 1: A Risk Management Approach for
Small and Medium Enterprises
Creating Resilient Supply Chains
The general observation of supply chain vulnerability management in the Small and
Medium Enterprise (SME) sector is that many SMEs currently do not address the supply
chain disruptions that could affect their business, and ultimately their customers.
The relationships Our research identified that some Basic tools that can support
established with suppliers organisations have generated an risk management
and customers are informal ‘list’ of identified risk-
recognised as key tools sensitive areas in the business and The cost and complexity of software
in reducing supply there was an observed correlation can be very high and beyond the
chain vulnerability between quality assessment/ control financial and technical capacity
qualifications such as the ISO 9000 of many small and medium sized
series, and the ability of SMEs to firms and their trading partners.
understand and proactively ‘see’ The key requirements for software
possible areas of vulnerability and tools that can be applied by
supply disruption in their network. SMEs are:
For example, ISO qualifying
requirements often include visits to • Affordability for companies with
suppliers to assess the extent of their a modest budget
quality and process compatibility. • Ease of application in
organisations that will likely
To improve the resilience of their be constrained for both skills
supply chains, SMEs need to take and resources
charge of their individual competitive • Ability to start to connect with
and supply chain situations. Tracking both customers and suppliers
of disruptions that do occur helps to to gain visibility, albeit at a
better tailor future risk management simple and low cost level
strategies to high risk areas within the • Ability to quantify basic risk
organisations and its supply chain. issues at a simple level –
The chosen tools need to be relatively mainly in the dimensions of
easy to use, and easily accessible and demand and supply
flexible. Internet based product and
order status traceability is no longer The criteria for software tools that
out of the reach of SMEs and could are both in widespread use and
provide a level of supply chain could assist in the management of
visibility for example. The relationships supply chain risk for SMEs are:
established with suppliers and
customers are recognised as key tools • The cost should be no more than
in reducing supply chain vulnerability. £20,000 or be charged on a
‘pay for use’ basis, and
The research concluded that SMEs • The software can be implemented
have found it difficult to determine and applied without very high
sources of supply chain defects and level IT skills, extensive training
problems without investing in or major data integration.
expensive tools and systems. Hence,
the availability of an affordable
tool to better address this issue
is essential.
84
2
FIGURE A2.1: RISK MANAGEMENT TOOLS FOR SMES
There are four blocks of software In the area of risk and vulnerability,
functionality that could be applied spreadsheets can be applied by
by SMEs that meet the basic criteria, SMEs to develop a solution to
Figure A2.1. The role, application understand issues of vulnerability in
and limitations of the solutions are relation to:
summarised below.
• Investment in capacity and the
i) Spreadsheets risks associated with different
demand forecasts on a long
The spreadsheet is almost term horizon
ubiquitous in the world of business. • Long/medium/short term time-
It can be used for a wide range of phased models of supply and
tasks and can be user configurable demand to illustrate the sensitivity
or apply industry/application of the business to different
templates. It is important to note outcomes of both demand
that quite large companies do and supply.
much of their planning based on
spreadsheets, which have evolved The challenge for the user, as with
to the company’s way of thinking all spreadsheets, is to maintain data
and expression of their activities. accuracy and quality and to design
It is extremely low cost and is now the spreadsheet without error to
present on most personal computers accurately reflect the issues that
at the time of commissioning. the company faces. An example
Microsoft Excel and Lotus 123 of supply chain modelling using
are dominant in this area and few spreadsheets is provided at the end
users look beyond these choices of this section.
unless they have particular
requirements.
85
Creating Resilient Supply Chains
86
In common with demand planning, iv) Consignment tracking
the risk resolution capabilities of
MRP and material control give a The facility for SMEs to take
level of visibility of requirements advantage of basic event
and the ability to place orders management using the consignment
with confidence in known lead tracking capabilities of their logistics
times. It is clear from the research service or transport providers should
that this will be a useful first step be considered depending on the
for those firms that do not have nature of their inbound and
that capability. outbound freight.
87
Part 2: Using spreadsheets for supply chain
design and risk assessment – an example
Creating Resilient Supply Chains
Spreadsheets are frequently used to undertake modelling studies because the software
is readily available, data acquisition is straightforward and the approach is flexible in
the level of detail that is employed.
88
STAGE 1:
DEFINE SUPPLY
CHAIN
OBJECTIVES
AND POTENTIAL
RISKS
STAGE 2:
SPECIFY AND
MODEL THE
BASE CASE
STAGE 3:
IDENTIFY AND
MODEL
ALTERNATIVE
SUPPLY CHAIN
DESIGNS
STAGE 4:
EVALUATION OF
ALTERNATIVES
AND SELECTION
OF SUPPLY
CHAIN DESIGN
89
Creating Resilient Supply Chains
It is important that before Stage 1 Defining supply chain behaviour of the supply chain in
changes in business objectives and potential risk sufficient detail. A product group
is likely to consist of similar
strategy are implemented
All business strategies will have a products, with raw materials from
a supply chain risk analysis level of risk attached to them and the same suppliers being sold to
be conducted this is well understood. However, similar customers.
what is not always recognised is that
these strategies will also have supply • Product flow.
chain risk consequences. Thus, a Using agreed product groups
decision to move manufacturing off- and sites/locations the flow of
shore in order to take advantage of raw materials from suppliers,
lower labour costs might adversely through manufacturing and
affect the supply chain risk profile in distribution is determined.
terms of increased variability in A to/from matrix can be used
lead-times. to represent the flow of a
product; each worksheet
It is important therefore that before representing a different
changes in business strategy are product group.
implemented a supply chain risk
analysis be conducted. • Product costs.
In order to represent the total
Stage 2 Specification and picture of the supply chain base
modelling the base case case, for each flow there is a
corresponding cost. These costs
The base case is a model of the of flows can be summed along
current situation. Data is collected the supply chain to represent the
and assembled into a model that total delivered cost of each
represents the important aspects product group to each final
of the supply chain. The components customer. Transport (trunking
of base case modelling are: and local delivery), inventory
holding and facilities are the
• Site identification and key costs.
customer location.
All sites must be identified and • Inventory.
located including first and second The flow of product does not
tier suppliers, manufacturing represent the total supply chain
sites, warehouses and distribution situation. At each site, for each
centres. To model the location product group the level of
of customers it is usually inventory needs to be measured.
necessary to group (cluster)
them according to a • Service.
generalised location - grid - The final aspect of the base case
square, country or department. picture is the service level, which
is provided to end-users and
• Product categorisation. intermediate customers. A variety
Establishing the product groups; of metrics can be used to
too many and the model will be measure customer service:
too complex; too few and the usually these reflect availability
model will not represent the and order-fill. In some situations
90
detailed metrics are not available • What modes of transport should
and approximate measures be used?
have to be used – for example,
delivery frequency. Answering these questions is made
easier with an understanding of the
The Model key cost trade-offs associated with
the decisions.
With the six major data sets
available, the base case model Key supply chain cost
can be constructed - flows are trade offs
represented by matrices, total costs
can be calculated by multiplying Changing the design of the supply
a flow matrix by a unit cost matrix. chain has different impacts on
To flow costs must be added the different related costs.
costs associated with sites -
warehouses, factories and depots. • Facility costs - can be described
in terms of a fixed cost for the
Having constructed the base capital investment involved, and
case model, the results must be also in terms of a variable cost,
compared with the real situation. which equates to the cost of
This process is called validation. managing activity levels. This
Only when the model reproduces variable cost relates to the level
the performance of the real system of throughput at a given facility.
with a reasonable level of
agreement can the base-case • Transport costs - are made up
model be accepted. The usual of two components:
key comparators are costs, service
and inventory. The demands and o Trunking costs which represent
flows are the independent variables the bulk transport of products,
in the model. for example from a source
factory or port to a warehouse.
Stage 3 – Identify and o Local delivery costs, i.e. relate
model alternative to the cost of transporting
supply chain designs products to customers/markets.
91
Creating Resilient Supply Chains
92
This approach to supply chain of the spreadsheet models either by
design can allow the modeller simply changing a model parameter
to approach an optimal theoretical such as transport unit costs, or
solution for the location of a given through the manual manipulation of
number of facilities. Within the the spreadsheet (for example
confines of a simple spreadsheet reallocating throughput).
the user would still engage in an
iterative process of model testing, The relative vulnerability of the
where the impact of alternative alternative designs, the probability
numbers of facilities for example, of different identified risks occurring,
could be compared against total and the total costs of the supply
supply chain costs. chain at equilibrium need to be
carefully examined to determine
Stage 4 Evaluation of which supply chain design should
alternatives and selection be selected and implemented.
of supply chain design
93
Appendix 3 - Glossary of Terms
Creating Resilient Supply Chains
94
Create Wealth in your Corporation, Recovery management team -
Touchstone) ii) by clearly defining a team of people, assembled in an
‘value’ for a specific service or emergency, who are charged with
product from the perspective of the recovering an aspect of the
end customer all non-value enterprise, or obtaining the
activities, or waste, can be removed resources required for the recovery.
step by step (Source: Lean Enterprise
Centre, Cardiff Business School) Resilience - the ability of a system
to return to its original (or desired)
Links - are the transport and state after being disturbed.
communication infrastructures (e.g.
roads, railways, shipping lanes), Risk assessment and
which link together the nodes (i.e. management - identification
the fixed assets such as factories, and evaluation of operational
distribution centres, retail stores) risks that particularly affect the
in a supply chain. enterprise’s ability to function
and addressing the consequences.
Logistics - i) the time related
positioning of resources (Institute Risk reduction and mitigation -
of Logistics and Transport) implementation of the preventive
ii) strategic management of the measures which risk assessment
procurement, movement and has identified.
storage of materials, parts and
finished product inventory and the Robust - strong or sturdy in
related information flows, through physique or construction
the organisation and its marketing (Collins English Dictionary).
channels in such a way that the In IT terminology robustness is the
current and future profitability are ability of a computer system to cope
maximised through the cost-effective with errors during execution.
fulfilment of orders (Source: A robust process may be desirable
Christopher, M (1998) Logistics but it does not equate to a ‘resilient’
and Supply Chain Management: supply chain
Strategies for reducing cost and
improving service, 2nd edition, Strategic knowledge - an
London, Financial Times awareness of trends and emerging
Prentice Hall) issues that may have an impact on
supply chain continuity at a point in
Networks - see Supply chain the future (Associated term: Supply
chain intelligence)
Nodes - are points in the supply
chain where value is added through Supply chain - the total sequence
processes taking place, e.g. a of business processes, within
factory where products are a network of organisations that
configured, distribution centre where enable customer demand for a
orders are assembled. The focal product or service to be fulfilled.
company, its suppliers and The notion of networks is
customers are all nodes particularly important. Modern
95
Creating Resilient Supply Chains
96
Appendix 4 - Further reading
97
Notes
98
Creating Resilient Supply Chains
99
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