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Robust Strategies for Mitigating Supply Chain Disruptions

Robust Strategies for Mitigating Supply Chain Disruptions

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Published by: priyal.singh on Jul 16, 2008
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 International Journal of Logistics: Research and Applications
Vol. 9, No. 1, March 2006, 33–45
Robust strategies for mitigating supply chain disruptions
UCLAAnderson School, 110 Westwood Plaza, UCLA, LosAngeles, CA 90095, USA
Whenmajordisruptionsoccur,manysupplychainstendtobreakdownandtakealongtimetorecover.However, not only can some supply chains continue to function smoothly, they also continue to satisfytheir customers before and after a major disruption. Some key differentiators of these supply chainsare cost-effective and time-efficient strategies. In this paper, certain “robust” strategies are presentedthat possess two properties. First, these strategies will enable a supply chain to manage the inherentfluctuations efficiently regardless of the occurrence of major disruptions. Second, these strategies willmake a supply chain become more resilient in the face of major disruptions. While there are costsfor implementing these strategies, they provide additional selling points for acquiring and retainingapprehensive customers before and after a major disruption.
: Disruptions; Supply chain management; Risk management
1. Introduction
Our world is increasingly uncertain and vulnerable. Over the last 10 years, we have witnessedmanytypesofunpredictabledisasters,includingterroristattacks,wars,earthquakes,economiccrises, devaluation of currencies inAsia, SARS, tsunamis, strikes, computer virus attacks, etc.According to two independent studies, one by the Centre for Research on the Epidemio-logy of Disasters (www.cred.be) and the other by the world’s largest re-insurer, Munich Re(www.munichre.com), historical data indicate that the total number of natural and man-madedisasters has risen dramatically over the last 10 years. Moreover, Munich Re reported that theaverage cost of these disasters has increased by a factor of 10 since the 1960s.When disasters occur, major business disruptions follow.As many supply chain executivesstrived to improve their financial performance, such as return on assets,
they implementedvarious supply chain initiatives to increase revenue (e.g. increase product variety, frequentnew product introduction), reduce cost [e.g. reduce supply base, just-in-time (JIT) inventorysystem,vendor-managedinventory]andreduceassets(e.g.outsourcedmanufacturing).Theseinitiatives are powerful and effective in a stable environment. However, these initiatives havecreatedlongerandmorecomplexglobalsupplychains,whicharemorevulnerabletobusinessdisruptions in a turbulent world. Examples of supply chain vulnerabilities are widespread:Ericsson lost 400 million euros after their supplier’s semiconductor plant in New Mexico
*Email: ctang@anderson.ucla.edu†Return on asset (ROA) is equal to earnings before interest and tax (EBIT) divided by total net assets.
 International Journal of Logistics: Research and Applications
ISSN 1367-5567 print
ISSN 1469-848X online © 2006 Taylor & Francishttp:
 journalsDOI: 10.1080
C. S. Tang
caught fire in 2000; Land Rover laid-off 1,400 workers after one of their key suppliers becameinsolvent in 2001; Dole’s revenue declined after their banana plantations in Central Americawere destroyed by Hurricane Mitch in 1998; and Ford closed five plants for several days afterall air traffic was suspended after September 11 in 2001. The reader is referred to Chopraand Sodhi (2004), Christopher (2004), Martha and Subbakrishna (2002) and Monahan
et al.
(2003) for more details.AshighlightedbyLee(2004),costefficiencycomeswithahugehiddencostshouldamajordisruption occur, and one must balance the notion of cost efficiency with agility, adaptabilityandalignment.Basedonanecdotalobservations,mostsupplychainstendtobreakdownduringmajor disruptions and many of them cannot recover afterwards. For example, as reported byEskew (2004), out of the 350 businesses operating in the World Trade Centre before the 1993bombing of theWorldTrade Centre, 150 of them were out of business a year later. In addition,supplychaindisruptionscanhavelong-termnegativeeffectsonafirmsfinancialperformance.For instance, Hendricks and Singhal (2005) investigated the long-term stock price effects andequity risk effects of disruptions based on a sample of 827 disruption announcements madeover a 10-year period. They found that companies suffering from supply chain disruptionsexperience 33–40% lower stock returns relative to their industry benchmarks over a 3-yeartime period that starts 1 year before and ends 2 years after the disruption announcement date.The detrimental effects of various major disruptions reported by Eskew (2004) andHendricks and Singhal (2005) have motivated us to examine ways to identify supply chainstrategies that are efficient, yet resilient to major disruptions. Based on different pieces of evidence gathered by other researchers, many firms find it difficult to justify certain costlystrategies for mitigating supply chain disruptions that may not occur. This observation mayexplain why so few firms are taking bold steps to secure their supply chains. Therefore, inorder to motivate firms to secure their supply chains, “robust” strategies need to be developedthat serve dual purposes. First, these strategies should be able to help a firm to reduce costand/or improve customer satisfaction under normal circumstances. Second, the same strate-gies should enable a firm to sustain its operations during and after a major disruption. In thispaper, several robust strategies are identified, and it is shown how these strategies can help afirmtosucceedbefore,duringandafteramajordisruption.Someoftheunderlyingchallengesfor selecting and implementing some of these robust strategies are also discussed.
2. Supply chain security initiatives
Soon after September 11, 2001, the US government developed various security measures toimprove supply chain security. First, the Container Security Initiative (CSI) was launched in2002byUSCustoms.
Thisinitiativecalledfornewtechnologytoidentify/pre-screenhigh-riscontainers before they arrive at US ports. Second, in 2002, the Department of TransportationandCustomslaunchedtheOperationSafeCommerce(OSC),whichcalledfornewtechnologyto track and monitor containers so as to ensure that each container is routed as planned andstays sealed at all times. Third, the Customs–Trade Partnership Against Terrorism (C-TPAT)certification programme was established in 2002 by US Customs. To entice companies tocomplywithbestsecuritypractices,C-TPAT-certifiedcompaniesareallowedtoclearcustoms
As a way to reduce the vulnerability of the USA, President Bush reorganised various departments (USCustoms, Department of Transportation Security Administration, Department of Immigration and NaturalisationServices, etc.) into a single department (Department of Homeland Security) in 2003. The reader is referred towww.dhs.gov
4081 for details.
 Mitigating supply chain disruptions
faster with less inspection.
While these initiatives could improve security, some scepticshave doubts. First, as reported by Damas (2002), the estimated cost of implementing thesenew security measures is approximately US$150 billion. Second, Rice and Caniato (2003)commented that these initiatives might not guarantee security in the long run because theactual security would depend on the continuous efforts of many parties.The reader is referredto Closs and McGarrell (2004) and Rice and Caniato (2003) for detailed descriptions of theseinitiatives.At the corporate level, Rice and Caniato (2003) reported that few firms rely on insurance tosecure their supply chains for two key reasons. First, insurance premiums for major disrup-tions are prohibitively expensive. For example, Delta Airlines terrorism insurance premiumsincreased from US$2 million in 2001 to US$152 million in 2002. Second, even though insur-ance can help a firm to stay afloat financially after a major disruption, it cannot protect afirm from losing its customers. Instead of relying on insurance, many firms have developedvarious risk assessment programmes that are intended to: (1) identify different types of risks;(2) estimate the likelihood of each type of major disruption occurring; (3) assess potential lossdue to a major disruption; and (4) identify strategies to reduce risk. Rice and Caniato (2003)and Zsidisin
et al.
(2000, 2004) concluded the following.
Mostcompaniesrecognisetheimportanceofriskassessmentprogrammesandusedifferentmethods, ranging from formal quantitative models to informal qualitative plans, to assesssupply chain risks.
Not only does a supply chain risk assessment programme motivate a firm to developcontingency plans, it can also be used to meet certain legal requirements such as theSarbanes-OxleyAct of 2002 and KonTraG.
Having multiple suppliers for strategic parts is the most common approach for reducingsupply chain risks.
Owing to few data points, good estimates of the probability of the occurrence of anyparticular disruption and accurate measure of potential impact of each disaster are difficultto obtain.
3. Apprehension without action
Rice and Caniato (2003) and Zsidisin
et al.
(2000, 2004) also revealed an interesting phe-nomenon. They commented that most companies invested little time and few resources inmanaging supply chain risks, even though they conducted supply chain risk assessment exer-cises. Two surveys confirm this perplexing dichotomy. First, according to a study conductedby Computer Sciences Corporation in 2003, 43% of 142 companies, ranging from consumergoods to health care, reported that their supply chains are vulnerable to disruptions, and 55%ofthesecompanieshavenodocumentedcontingencyplans(cf.PoireirandQuinn2003).Next,
Lee and Whang (2003) developed a model to show how firms can reduce inventory due to less inspection time.
The Sarbanes-Oxley Act of 2002 requires US companies to inform shareholders of their risk profile and theirapproach to managing risk. The reader is referred to http:
sarbanes_oxley_summary.htm fordetails. KonTraG is a German law implemented in 1998 that is analogous to the Sarbanes-Oxley Act. The reader isreferred to http:
622 for a detailed description of KonTraG.
Both Sheffi (2001) and Kleindorfer and Saad (2005) suggested the use of multiple suppliers as a way to reducesupply chain risk.
(2004)developedasimulationof a stochastic process to estimate the probability distribution of supply chain losses caused by the disruptions.

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