Interpretive structural modeling

of supply chain risks

Hans-Christian Pfohl, Philipp Gallus and David Thomas
Technische Universita t Darmstadt, Darmstadt, Germany
Abstract
Purpose The aim of this paper is the structural analysis of potential supply chain risks. It will
demonstrate how interpretive structural modeling (ISM) supports risk managers in identifying and
understanding interdependencies among supply chain risks on different levels (e.g. 3PL, rst-tier
supplier, focal company, etc.). Interdependencies among risks will be derived and structured into a
hierarchy in order to derive subsystems of interdependent elements with corresponding driving power
and dependency.
Design/methodology/approach ISM was used to identify inter-relationships among supply
chain risks and to classify the risks according to their driving and dependence power. The theoretical
ndings of the modeling and the applicability for practical use has been tested in two case studies with
two German industry and trade companies.
Findings ISM was proven as a useful methodology to structure supply chain risks in an easy and
distributed approach that can also be carried out in a step-by-step process on several manufacturing
stages. The input to the algorithm has to be well-dened to give the user an exact understanding of all
risks that have to be assessed, i.e. the better the input to ISM is prepared the better the outcome and
representation will be. Finally, when applying the method, a moderated process proved to be more
reliable than an assessment based on paper questionnaires only.
Originality/value This models insight would assist supply chain (risk) managers in the effective
allocation of risk management resources in the subsequent risk management phases.
Keywords Germany, Supply chain management, Risk management, Decision making,
Cause-effect relations, Interpretive structural modeling, MICMAC
Paper type Research paper
1. Research objective
Growing competition demands industry to widen the concentration on core
competencies and the reduction of the vertical range of manufacture, leading to a new
dimension of cooperation of numerous companies in formof value-added chains (supply
chains). Todays supply chains are very complex inter-dependable structures, due to the
multitude of (partly globally) participating suppliers, service providers and customers.
Understanding and managing risk shifting around supply chains is an important issue
in business and a complex problem. Identication of supply chain risks is the rst step in
the risk management process. But transparency across the risk potential along the
supply chain is not the only prerequisite for a successful (in the sense of effective) risk
management. The selection of appropriate (mitigationor prevention) measures builds on
the structural assessment andthe impact area of the various types of risks (Chopra and
Shodhi, 2004). Even though there is a rich stream of (empirical) literature that deals
with supply chain risks and their management (Svensson, 2000; Juttner et al., 2003;
Zsidisin et al., 2004; Pfohl et al., 2008b), and conceptual literature dealing with the new
concept of supplychainrisk management (SCRM) (Hauser, 2003; Norrmanand Lindroth,
2004; Ju ttner, 2005; Faisal et al., 2007; Franck, 2007; Pfohl et al., 2008a), there has been
little research about the interconnectedness of supply chain risks.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0960-0035.htm
ISM of supply
chain risks
839
International Journal of Physical
Distribution &Logistics Management
Vol. 41 No. 9, 2011
pp. 839-859
qEmerald Group Publishing Limited
0960-0035
DOI 10.1108/09600031111175816
This papers objective is the structural analysis of potential supply chain risks by
applying interpretive structural modeling (ISM). It will demonstrate how ISM supports
risk managers in identifying and understanding interdependencies among supply chain
risks on different levels (e.g. 3PL, rst-tier supplier, focal company, etc.).
Interdependencies among risks will be derived and structured into a hierarchy in order
to derive subsystems of interdependent elements with corresponding driving power and
dependency. The point for departure for ISMmethodology is the identication of relevant
elements, in our case supply chain risks. The remainder of this paper is organised as
follows. The paper sets out to discuss denitions and classications of supply chain risks
in Section 2. Next, the concept of SCRMis emphasized and the elements to be modelled are
identied. Section 3 contains the methodology and provides the results of the ISM,
followedbya concludingSection4 of the major ndings. Section5 contains the description
and results from two case studies conducted for testing the theoretical ndings and the
practical applicability of the methodology. Section 6 highlights the practical use of the
methodology. Finally, further research questions are provided in Section 7.
2. SCRM and identication of elements
Generally, each business activity is connected with risks. The focus on just-in-time
production, lean manufacturing, single sourcing and offshoring implies a certain
vulnerability of supply chains (Peck, 2006). Similarly, outsourcing and offshoring result
in geographically more diverse supply chains, which are therefore exposed to all sorts of
risks. To minimize potential negative effects or even avoid them, a systematic and
comprehensive risk management process is essential. An SCRM approach for the
identication, assessment, treatment/control and monitoring of supply chain risks has
gained in importance over the past few years (Hauser, 2003; Norrman and Lindroth,
2004; Juttner, 2005; Faisal et al., 2007; Franck, 2007; Straube and Pfohl, 2008). The focus
of SCRM is broader than normal risk management. The unit of analysis represents a
dyadic relationship(buyer-seller) or a supply chain of three or more companies. Owing to
the high interconnectedness of todays supply chains, supply chain risks can be
manifold, may be difcult to identify and could consist of difcult to analyze cause-effect
relations. A structured and detailed collection of all risk potentials including their
interdependencies is of crucial importance for the subsequent phases. Identifying
cause-effect correlations between individual risks is important, because hidden
inuences of a certain risk in connection with other risk(s) may cause substantial
damages (Chopra and Shodhi, 2004).
The literature offers most different denitions as to what is to be understood by
supply chain risks (Ziegenbein, 2007; Li and Hong, 2007; Kajuter, 2007). This paper is
based on the following denition:
Supply chain risks cover risks that are related to disturbances and interruptions of the ows
within the goods-, information- and nancial network as well as the social and institutional
networks and may negatively effect the objective accomplishment of the individual company,
respectively, the entire supply chain, in regards of end-user advantage, costs, time or quality.
Not only the denition of supply chain risks turns out to be difcult, but their
categorization proves difcult as well. Potential risks in the supply chain are categorized
in different ways in the literature ( Juttner et al., 2003; Spekman and Davis, 2004; Gotze
and Mikus, 2007). Based on the cause-oriented risk categorization, risks can be divided
IJPDLM
41,9
840
into three areas related to their point of origin (Gotze andMikus, 2007; Juttner et al., 2003):
risks within a focal company, risks outside of this company and within the supply chain
as well as risks outside the supply chain (Figure 1).
Risks originating within a focal company can be differentiated between process and
control risks. Process risks describe disruptions within the value-increasing activities of
a company, like production delay or loss of operating resources. Control risks include
disturbances of the management systems as well as imprecise and wrong decision
guidelines, with which the company co-ordinates its own processes and those of the
suppliers and customers. These include, e.g. wrongly planned lot sizes or even missing
and/or not practicable instructions for the co-workers. Additionally, risks rooting
outside of a company but within the supply chain and with an impact on the focal
company are differentiated according to their effective direction, namely into supply and
demand risks ( Juttner, 2005). Supply risks are based on disturbances, respectively, loss
of keysuppliers, whereas demandrisks are mostly related to the customer, and exhibited
in fashionable or seasonal demand uctuation. Risks outside the supply chain are
so-called external or environmental risks and are exemplied by natural disasters,
terrorist attacks and/or changes in federal guidelines (Kersten et al., 2006).
This paper uses the results of a study of German logistics service providers and
industrial and commercial companies supply chain risks (Straube and Pfohl, 2008;
Pfohl et al., 2008b), to show the utility of ISM to structure risks and highlight
interdependencies between them. To remain within the scope of this paper, the relevant
part of the survey, which pertains to the ranking of the most important supply chain
risks, has been used in this paper. The showcase underlying this research uses a
virtual supply chain consisting of a focal industrial company, its rst-tier supplier and
the rst-tier suppliers 3PL which is responsible for the transportation on the rst-tiers
supply side. Only downstream risks will be considered.
Risks in the focal companys sphere
Accordingtothe riskcategories andthe virtual supplychain, the relevant risks are process
and control risks as well as supply risks. Within the company, long-term production
downtimes (1), IT breakdowns (2) and short-term production downtimes (3) are critical
risks. Long-term production downtimes last longer than three days whereas short-term
downtimes are everythingbetween a couple of hours to three days. On the supply side, the
company is facing primarily capacity variances/bottlenecks on the supply market (4),
dependency on suppliers (5) and delayed deliveries (6). Dependencies on suppliers can be
caused by single sourcing as well as by a lack of alternative suppliers (e.g. monopolies).
Risks in the rst-tier suppliers sphere
Along the lines of the virtual supply chain, the rst-tier supplier is exposed to mainly the
same process and control risks as the focal company, namely long-term production
Figure 1.
Supply chain risk
categorization
Supply Chain Risks
Supplier
Focal Company
Control risks
Process risks
3 PL 3 PL Customer
Supply risks Demand risks
External risks
ISM of supply
chain risks
841
downtimes (7), ITbreakdown (8) and short-termproduction downtimes (9), respectively.
On the supply side, the relevant risks are different which we call logistics risks. As
regards the relationship to its 3PL, the rst-tier supplier is facing primarily theft (10),
poor delivery quality (11) and a lack of sufcient equipment, staff or
transport/warehouse capacity (12). In contrast to delayed deliveries, poor delivery
quality means deviance in quantity, sort and condition.
Risks in the 3PLs sphere
Process and control risks within the 3PLs company are hauling claim (13), unqualied
staff (14) and IT breakdown (15). Unqualied staff is a potential risk to the 3PLs
operations. The supply risks could in this case also be called resource risks and are
primarily poor performance of subcontractors (16), lack of transport capacities (17) and
a general shortage of staff (18). Poor performance of subcontractors is a relevant risk
because 3PL regularly source certain services, e.g. from carriers.
External risks from outside of the supply chain
Besides the above-described risks, a potential danger arises from external risks such as
terrorist attacks (19), natural disasters (20) or employee strikes (21). Theses risks have
a direct impact on all stakeholders in the virtual supply chain and can cause severe
disruptions.
3. ISM methodology and model development
ISM is a qualitative and interpretive method which generates solutions for complex
problems through discourses based on the structural mapping of complex
interconnections of elements (Malone, 1975; Watson, 1978). A structure of the
elements results within the context of the ISMdepending ona certainrelationtype which
describes the connections of the elements to each other (Wareld, 1994). The method
supports the identication and order of the complex relations between the elements of a
systemso that the inuence can be analysed between the elements. ISMhas been applied
to various problems (Saxena and Sushil, 1990; Mandal and Deshmukh, 1994; Singh et al.,
2003; Jharkharia and Shankar, 2005; Thakkar et al., 2005).
Figure 2 shows the basic logic of the ISM. A complex problem or the dependencies
between elements to be examined are interpreted as a (badly or not at all structured)
complex system (object system) (Szyperski and Eul-Bischoff, 1983). The modeling
converts the object system into a well-dened and representative system consisting
of directed graphs (digraph). An interpretation of the object system as regards content
is also carried out besides the structural one, i.e. the digraphs are completed with
context (information). The object system mapped as digraphs becomes the basic
structural model. The expansion with content nally leads to an interpretive
structural model.
The ISM is described as interpretive since a group discussion is deciding, whether
and how the elements are related. Thus, the methodology is appropriate for use by
experts who are knowledgeable of the problems context. The method is structuring
since it produces (on the basis of the relations) a comprehensive structure of all
the complex elements by considering all possible pairwise interactions of the
elements. The method is modeling since the complete structure and the individual
relations of the elements are illustrated in digraphs (Agarwal et al., 2007).
IJPDLM
41,9
842
Primarily, in complex systems, indirect relations are of great importance, which at times,
greatly inuence the system under consideration.
3.1 Steps involved in ISM methodology
The various steps involved in ISM technique are as follows:
(1) Selection of elements relevant to the problem. Starting point is the identication of
elements relevant to the problem. This can be done by secondary research (desk
research) or primary research techniques (survey, group problem solving).
(2) Establishing contextual relation type. Next, the contextual relation must be
cogently stated as a possible statement of relationship among the elements. Relations
may be of several types like comparative, inuence, neutral or temporal relations
(Austin and Burns, 1985; Wareld, 1994).
(3) Construction of structural self-interaction matrix (SSIM) by pairwise comparison.
Phase (3) of ISMis the most tedious and demanding. During this phase, the participants
must decide upon the pairwise relationship between the elements. Keeping in mind the
contextual relationship for each element, the existence of a relation between any two
sub-elements (i and j) and the associated direction of the relation is questioned. Four
symbols are used to denote the direction of the relationship between the elements i and j:
V for the relation from i to j but not in both directions;
A for the relation from j to i but not in both directions;
X for both direction relations from i to j and j to i; and
O if the relation between the elements does not appear to be valid.
(4) Developing a reachability matrix from the SSIM and checking for transitivity. Phase
(4) is concerned with the construction of the reachability matrix M. It is a binary matrix
since the entry V, A, X and O of the SSIM are converted into 1 and 0 as per the
following rules:
Figure 2.
ISM-logic
Set of Elements
Basic Structural
Model
Context Relations
Structure
Interpretive
Structural Model
Structure and
Content
Representative Model
Note: Possible iterations are shown as dashed lines
Source: With kind permission from Springer Science + Business Media: ISM-Logik
(Szyperski and Eul-Bischoff (1983))
Object System
Complex
problem
Structure and
Content
ISM of supply
chain risks
843
.
If the (i, j) entry in the SSIM is V, then the (i, j) entry in the reachability matrix
becomes 1 and the ( j, i ) entry becomes 0.
.
If the (i, j) entry in the SSIM is A, then the (i, j) entry in the reachability matrix
becomes 0 and the ( j, i ) entry becomes 1.
.
If the (i, j) entry in the SSIM is X, then both the (i, j) and ( j, i ) entries of the
reachability matrix become 1.
.
If the (i, j) entry of the SSIM is O, then both the (i, j) and ( j, i ) entries of the
reachability matrix become 0.
Transitivity is a basic assumption in ISM that leads to the nal reachability matrix.
It states that if element A is related to B and B is related to C, it may be inferred that
A is related to C. If element (i, j) of the nal reachability matrix is zero, there will not be
any direct as well as indirect relationships from element i to element j. The initial
reachability matrix may not have this characteristic because when there is no direct
but an indirect relationship from element i to j, entry (i, j) is also zero. Indirect
relationships can be found by raising the initial reachability matrix (with diagonal
entries set to 1) to successive powers until no new entries are obtained (Malone, 1975).
That is until the steady-state condition is reached such that M
n21
, M
n
M
n1
.
(5) Level partitioning of reachability matrix. The fth phase involves extraction of a
hierarchical ordering from the reachability matrix by level partitioning (Wareld,
1977). The purpose of this phase is to facilitate the construction of the digraph from the
reachability matrix. The level partition makes use of sets associated with each element
s
j
in s. The reachability set R(s
i
) consists of the element itself and other elements which
are reachable from s
i
. Similarly, there may be some elements which can reach the
element s
i
constituting the antecedent set A(s
i
). Thereafter, an intersection of the
reachability set and antecedent set (R(s
i
) > A(s
i
)), i.e. the common elements in both
sets, is derived for each element. The element for which R(s
i
) R(s
i
) > A(s
i
) is the
top-level element in the ISM hierarchy. The top-level element has no relation to any
other elements above their own level. Once top-level elements are identied, they are
separated out from the other elements. Then, the same process undergoes iterations till
the level of all elements is achieved. These identied levels help in building the digraph
and nal ISM model.
(6) Drawing of digraph with removed transitivity links. An initial digraph including
transitivity links is obtained from the conical form of the reachability matrix. The
conical matrix is achieved from the partitioned reachability matrix by rearranging the
elements according to their level, which means all the elements having the same level
are pooled, i.e. with most zero (0) elements in the upper diagonal half of the matrix and
most unitary (1) elements in the lower half. For the sake of simplicity, transitivity links
are removed to obtain the nal digraph. If there is a relationship between risk i and j,
this is shown by an arrow which points from i to j.
(7) Conversion of digraph into an ISM and checking of conceptual inconsistency. The
resultant digraph from step (6) is converted into an ISM by replacing element nodes
with statements. Finally, the ISM model is reviewed to check for incompatibilities.
3.2 Formation of the SSIM
The relevant elements have already been discussed in Section 2. A contextual relation
of affects type is chosen, meaning that one risk affects another risk. For example,
IJPDLM
41,9
844
capacity variances/bottlenecks on the supply market will have a (negative) effect on
the focal companies production resulting in short-term production downtimes.
Keeping in mind the contextual relationship for each risk, the existence of a relation
between any two sub-risks (i and j) and the associated direction of the relation is
questioned. The inter-relationships are analysed based on group discussions between
the authors and fellow researchers. Table I describes the pairwise relationship existing
between two sub-elements.
3.3 Reachability matrix and level partitioning
The SSIM is transformed into a reachability matrix as described in step (4) of the ISM
methodology. After incorporating the transitivities, the nal reachability matrix is
achieved which is presented in Table II (1
*
denotes transitivity).
The nal reachability matrix depicts the driving and dependence power of each risk.
Driving power of each risk is the total number of risks (including itself) which it affects,
i.e. the sumof interactions in the rows. Conversely, dependence power of each risk is the
total number of risks (including itself) by which it is affected, i.e. the sumof interactions
in the columns. Depending on their driving and dependence power, the risks will later be
classied into autonomous, dependent, linkage and independent risks.
The nal reachability matrix leads to the reachability and antecedent set for each
risk. The reachability set R(s
i
) of the element s
i
is the set of elements dened in the
columns that contain 1 in row s
i
. Similarly, the antecedent set A(s
i
) of the element s
i
is
the set of elements dened in the rows which contain 1 in the column s
i
. In the present
case, the risks along with their reachability, antecedent and intersection set as well as
resulting levels are shown in Table III. The process (as described in step (4) of ISM
methodology) is completed in ten iterations.
3.4 Development of digraph and formation of ISM
Based on the reachability matrix, a conical matrix (lower triangular format) is
developed by arranging the elements according to their levels (Table IV).
Based on the conical reachability matrix, the initial digraph including transitive
links is obtained. After removing indirect links, the nal digraph is obtained. Next,
the elements descriptions are written in the digraph to call it the ISM (Figure 3).
The developed ISM has no cycles or feedbacks. Elements are related in pure
hierarchical pattern.
3.5 MICMAC analysis
Identication and classication of the various supply chain risks are essential to develop
the ISM under study. Comparing the hierarchy of risks in the various classications
(direct, indirect, potential) leads to rich source of information. MICMAC is an indirect
classication method to critically analyze the scope of each element. The objective of the
MICMAC analysis is to assess the driving power and dependence of supply chain risks
(Mandal and Deshmukh, 1994; Saxena and Sushil, 1990). In Table II, the sum along the
rows and the columns indicates the driving power and dependence, respectively.
All elements are divided into four groups of risks (autonomous, dependent, linkage
and independent). Group I includes autonomous elements that have weak driver power
and weak dependence. Group II consists of dependent elements that have weak driver
power and strong dependence. The third group includes linkage elements that have
ISM of supply
chain risks
845
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Table I.
Structural self-interaction
matrix
IJPDLM
41,9
846
both strong driving and dependence power. In group IV, all independent elements are
clustered that have strong driving power, but poor dependence power. Figure 4 shows
the classication of the analysed risks based on their driving power and dependence.
3.6 Fuzzy MICMAC analysis
The analysis can be further improved by considering the strength of relationships
instead of the mere consideration of relationships so far. By strength of relationship, we
mean the strength of risk is impact (given its occurrence) on risk js probability of
occurrence. This strength of impact can be dened by qualitative consideration on a
0-1 scale, as shown in Table V.
These values are superimposed on the initial reachability matrix from step (4) in
ISM methodology. The resulting fuzzy direct relationship matrix is shown in Table VI.
According to Zimmermann (1991), there are three types of fuzzy compositions in
order to determine the strength of the fuzzy indirect relation from element i to j:
max-min, max-product and max-average. In the context of this research, the max-min
composition is the most suitable, since the fuzzy relations represent the strength of
relations. That means, that the minimal strength has to be the maximum of all possible
minimal impacts from i to j. If the fuzzy relations represent the probability of relations,
the max-product approach seems to be the most suitable. In order to obtain indirect
relationships, the fuzzy direct relationship matrix is modied based on the
computational steps given in Yenradee and Dangton (2000). The resulting direct and
indirect fuzzy relationship matrix with driving power and dependence is given in
Table VII.
Elements 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Driving
power
1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1
2 1 1 1 1
*
0 1 1
*
1 1
*
1
*
1
*
1
*
1
*
0 1
*
0 0 0 0 0 0 13
3 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1
4 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2
5 1 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3
6 0 0 1
*
1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3
7 0 0 1
*
1 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4
8 1
*
1 1
*
1 0 1 1 1 1 1
*
1
*
1
*
1
*
0 1 0 0 0 0 0 0 13
9 0 0 1
*
1 0 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 4
10 0 0 1
*
1
*
0 1 0 0 1 1 1 0 0 0 0 0 0 0 0 0 0 6
11 0 0 1
*
1
*
0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 5
12 0 0 1
*
1 0 1 0 0 1 1 1 1 0 0 0 0 0 0 0 0 0 7
13 0 0 1
*
1
*
0 1
*
0 0 1 0 0 0 1 0 0 0 0 0 0 0 0 5
14 1
*
1
*
1
*
1
*
0 1
*
1
*
1
*
1 1
*
1 1
*
1 1 1 0 0 0 0 0 0 14
15 1
*
1
*
1
*
1
*
0 1
*
1
*
1 1
*
1 1 1 1 0 1 0 0 0 0 0 0 13
16 0 0 1
*
1
*
0 1
*
1 0 1
*
1
*
1 1 1 0 0 1 0 0 0 0 0 9
17 0 0 1
*
1
*
0 1
*
0 0 1
*
1
*
1 1 1
*
0 0 1 1 0 0 0 0 10
18 1
*
0 1
*
1
*
0 1
*
1
*
0 1
*
1
*
1 1 1
*
0 0 1 1 1 0 0 1 14
19 1 1 1 1 0 1 1 1 1 1
*
1
*
1 1
*
0 1 1
*
1 0 1 0 0 16
20 1 1 1 1 1 1 1 1 1 1 1
*
1 1 0 1 1 1 0 0 1 0 17
21 1 0 1 1 0 1 1 0 1 1 1
*
1 1
*
0 0 1 1 1 0 0 1 14
Dependence 10 6 20 18 2 17 9 6 15 12 13 11 11 1 6 6 5 2 1 1 2
Table II.
Final reachability
matrix with driving
and dependence power
ISM of supply
chain risks
847
4. Discussion and conclusion
Figure 4 clearly shows that the highest driving power lies with terrorist attacks (20),
natural disasters (19) and employee strike (21), which all fall in the category of external
risks. The occurrence of external risk cannot be inuenced by risk management, which
makes it even more important to asses the relationship of those risks to other supply
chain risks. Short-term production downtimes at own facilities (3), capacity
variances/bottlenecks on the supply market (4) and delay in delivery (6) were
classied as highly dependent risks followed by short-term production downtimes of
supplier (9). The operating levels of the focal company depend on these risks
substantially. They have minor driving power and are at the top of the ISM hierarchy.
Besides, assigning high priority to these risks, the management should understand the
dependence of these risks on lower level risks, in achieving the SCRM goals and
objectives. But that means, putting high priority to the linkage risks (group III), too.
Elements Reachability set R(si) Antecendent set A(si) Intersection Level
1 1 1, 2, 5, 8, 14, 15, 18, 19, 20, 21 1 I
2 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12, 13,
14, 15
14 14 VIII
3 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12, 13,
15
2, 8, 14, 15, 19, 20 2, 8, 15 I
4 3 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14,
15, 16, 17, 18, 19, 20, 21
3 II
5 3, 4 2, 4, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15,
16, 17, 18, 19, 20, 21
4 II
6 1, 3, 5 5, 20 5 III
7 3, 4, 6 2, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16,
17, 18, 19, 20, 21
6 IV
8 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12, 13,
15
2, 8, 14, 15, 19, 20 2, 8, 15 VIII
9 3, 4, 6, 7 2, 7, 8, 14, 15, 18, 19, 20, 21 7 IV
10 3, 4, 6, 9, 10, 11, 12 2, 8, 12, 14, 15, 16, 17, 18, 19, 20, 21 12 VI
11 3, 4, 6, 9, 10, 11 2, 8, 10, 12, 14, 15, 16, 17, 18, 19, 20,
21
10 V
12 3, 4, 6, 9, 13 2, 8, 13, 14, 15, 16, 17, 18, 19, 20, 21 13 VII
13 3, 4, 6, 9, 11 2, 8, 10, 11, 12, 14, 15, 16, 17, 18, 19,
20, 21
11 V
14 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12, 13,
15
2, 8, 14, 15, 19, 20 2, 8, 15 IX
15 3, 4, 6, 9, 10, 11, 12, 13, 16 16, 17, 18, 19, 20, 21 16 VIII
16 3, 4, 6, 9, 10, 11, 12, 13, 16, 17 17, 18, 19, 20, 21 17 VIII
17 3, 4, 6, 9 2, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17,
18, 19, 20, 21
9 IX
18 1, 3, 4, 6, 7, 9, 10, 11, 12, 13, 16, 17,
18, 21
18, 21 18, 21 X
19 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12, 13,
15, 16, 17, 19
19 19 X
20 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13,
15, 16, 17, 20
20 20 X
21 1, 3, 4, 6, 7, 9, 10, 11, 12, 13, 16, 17,
18, 21
18, 21 18, 21 X
Table III.
Levels of supply chain
risks
IJPDLM
41,9
848
The MICMAC analysis indicates that these are IT-related risks (2), (8) and (15),
respectively, poor performance of subcontractors (16) and lack of transport capacities
(17) which both originate from 3PL provider and nally theft (10), poor delivery quality
(11), lack of sufcient equipment, staff or transport/warehouse capacity (12) and
hauling claim (13) which are in the rst-tier suppliers sphere. These linkage risks have
relatively strong driving power as well as strong dependence. Therefore, these form the
middle level of the model. Though the lower level risks induce or affect these risks,
these also have signicant driver power to inuence some other risks, which are at the
top of the model.
Another insight from driver power and dependence gure is that dependency on
suppliers (5) is the only autonomous risk. Autonomous risks are weak drivers and
weak dependents and do not have much inuence on the system.
Further insights can be gained from the ISM model shown. First of all, the graph
depicts the risks and their dependencies. In this conguration, the ISM model,
in contrast to the digraph built from the initial reachability matrix, is clearly arranged
but still contains all dependencies. The initial reachability matrix indicates only the
direct relationships between any two elements. By building the ISM model, plenty of
these edges can be removed while the information is still represented by a set of
indirect dependencies. Thereby, the complexity of the visualization is reduced. So this
mapping of inter-relationships is a useful method for supply chain risk managers to
evaluate supply chain risks and learn about the impact chains of these risks. It can also
be used to communicate and explain these dependencies within the company and
within the supply chain, to enable an effective management which deals with the most
important risks, not only from a company perspective, but primarily from an overall
supply chain perspective.
Elements 1 3 4 5 6 7 9 11 13 10 12 2 8 15 16 14 17 18 19 20 21
1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
3 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
4 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
5 1 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
6 0 1 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
7 0 1 1 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
9 0 1 1 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0
11 0 1 1 0 1 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0
13 0 1 1 0 1 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0
10 0 1 1 0 1 0 1 1 0 1 0 0 0 0 0 0 0 0 0 0 0
12 0 1 1 0 1 0 1 1 0 1 1 0 0 0 0 0 0 0 0 0 0
2 1 1 1 0 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0
8 1 1 1 0 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0
15 1 1 1 0 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0
16 0 1 1 0 1 0 1 1 1 1 1 0 0 0 1 0 0 0 0 0 0
14 1 1 1 0 1 1 1 1 1 1 1 1 1 1 0 1 0 0 0 0 0
17 0 1 1 0 1 0 1 1 1 1 1 0 0 0 1 0 1 0 0 0 0
18 1 1 1 0 1 1 1 1 1 1 1 0 0 0 1 0 1 1 0 0 1
19 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 0 1 0 1 0 0
20 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 0 0 1 0
21 1 1 1 0 1 1 1 1 1 1 1 0 0 0 1 0 1 1 0 0 1
Table IV.
Conical form of
reachability matrix
ISM of supply
chain risks
849
Besides the potential as a structured and simple communication tool among supply
chain risk managers, the ISMmodel also supports the chosen risk categorization shown
in Figure 1. With an exception of the IT risks (2), (8) and (15), the resulting structure
illustrates the same hierarchy of categories. On level I are only the focal companys
process and control risks, followed by its supply risks (4)-(6). On level IVare the rst-tier
Figure 3.
ISM-based model
Long term
production downtimes
(focal company)
Capacity
variances/bottlenecks on
the supply market
Delay in delivery
Long term production
downtimes
(1
st
-tier supplier)
Short term production
downtimes
(1
st
-tier supplier)
Poor delivery quality
(1
st
-tier supplier)
Hauling claim
(3 PL)
Theft
(1
st
-tier supplier)
Lack of sufficient
equipment, staff,
transport/warehouse
capacity
(1
st
-tier supplier)
IT breakdown
(1
st
-tier supplier)
IT breakdown
(3 PL)
IT breakdown
(focal company)
Poor quality of staff
(3 PL)
Lack of sufficient transport
capacities
(3 PL)
Terrorist attacks
(external)
Natural desasters
(external)
Employee strikes
(external)
General staff
shortage
(3 PL)
Poor performance of
subcontractors
(3 PL)
Short term
production downtimes
(focal company)
Dependency on supplier
(i.e. oligopoly)
IJPDLM
41,9
850
suppliers process and control risks (7) and (9), followed by its supply risks (10)-(12).
Finally, on level V and below are the 3PLs risks (13) and (14), followed by its resource
risks (16)-(18). The external risks, which have a direct impact on all players, are at the
bottom of this digraph. Risks (2), (8) and (15), i.e. IT breakdown on all levels (focal
company, rst-tier supplier, 3PL), are exceptions because these risks have an inuence
both on risks on higher levels (upwards the supply chain) as well as on lower levels
within the hierarchy. Risk management should carefully assess the causes behind those
risks which could be either technical or relationship related. The former involves
interruptions in data communication. The latter deals with risks of not getting relevant
information about the development within the partners company (e.g. forecast of
volume changes, availability of transport capacities).
Although these results provide a lot of information about the dependencies between
supply chain risks, the ISM model cannot be used to identify a direct (critical) link
between two risks, that, when eliminated, would have no longer any effect. The resulting
ISM model shows overall impact chains but removes links, if the information is still
contained, to keep track of the dependencies at the expense of detailed information about
all direct links. Furthermore, the ISM model shows only that there is a connection
between two risks without any information if the impact of this connection is signicant
Figure 4.
Driving power and
dependence diagram
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
22 22
21 Group IV Group III 21
20 20
19 19
18 18
17 17
16 16
15 15
14 14
13 13
12 12
11 11
10 10
9 9
8 8
7 7
6 6
5 5
4 4
3 3
2 Group I Group II 2
1 1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
D
r
i
v
i
n
g

p
o
w
e
r
Dependence
3
4
6
9
1
10
11
7
15
2
20
14
18
19
21
17
16
12
13
5
8
Strength of impact No Weak Medium Strong Very strong
Numerical value 0 0.25 0.5 0.75 1
Table V.
Fuzzy scales of impact
ISM of supply
chain risks
851
E
l
e
m
e
n
t
s
1
2
3
4
5
6
7
8
9
1
0
1
1
1
2
1
3
1
4
1
5
1
6
1
7
1
8
1
9
2
0
2
1
1
1
0
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0
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7
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7
5
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2
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5
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2
5
1
9
0
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5
0
.
2
5
0
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7
5
0
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5
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5
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5
0
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2
5
0
.
7
5
0
0
0
.
2
5
0
0
0
.
2
5
0
0
.
2
5
0
1
0
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2
0
0
.
7
5
0
.
7
5
1
0
.
7
5
0
.
5
1
0
.
7
5
0
.
7
5
1
0
.
2
5
0
0
.
5
0
.
2
5
0
0
.
7
5
0
.
2
5
0
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2
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2
1
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5
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2
5
0
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7
5
0
1
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2
5
0
0
.
2
5
0
0
0
0
.
2
5
1
1
0
0
1
Table VI.
Initial fuzzy direct
relationship matrix
IJPDLM
41,9
852
E
l
e
m
e
n
t
s
1
2
3
4
5
6
7
8
9
1
0
1
1
1
2
1
3
1
4
1
5
1
6
1
7
1
8
1
9
2
0
2
1
D
r
i
v
i
n
g
p
o
w
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r
1
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Table VII.
Final fuzzy relationship
matrix
ISM of supply
chain risks
853
or negligible. To get more detailed information about the strength of the relation
between risks, fuzzy ISM has been applied and subsequently, driver power and
dependencies were derived. The main advantage of the fuzzy digraph is its clustering of
the edges. The scale used is shown in Table V. In Figure 5, the fuzzy digraph contains all
edges, the direct and indirect dependencies, which have a very strong impact of 1.
Figure 5.
Digraph based on
reachability matrix with
relation strength 1
1 3
4
6
5
9 7
11
10
12
2 8
15
16
21
20
17
14
18
19
13
IJPDLM
41,9
854
The less signicant edges are hidden to reduce the complexity. In this diagram, a supply
chain risk manager can point out directly, which risks have signicant impact on other
risks and yet he can identify which linkage risks should be managed rst to reduce a
potential series of impacts on other, mostly downstream, risks. After having dealt with
the most signicant dependencies in a next step, the edges with a relation strength of 1
will be hidden and those with a strength of 0.75 will be shown. This approach ensures a
structured treatment of the risks depending on the strength of impact on other risks
while keeping the complexity in the diagram on a manageable level. This research
contributes to the eld of managerial decision-making literature as it emphasizes the
usefulness of integrating ISM in the identication phase of SCRM.
5. Case study
To test the above theoretical ndings and ISMs applicability for practical use, two case
studies with a German industry and a trade company, respectively, were conducted. The
conclusions in the previous chapter were drawn from results of group discussions
between fellow researchers in the eld of logistics and supply chain management. The
two case studies aimed to showthe methodologys ability to structure supply chain risks
that originate within a real company or from one of this companys suppliers. On this
account, a questionnaire with preselected process, control, supply and environmental
risks was handed to executives and senior managers with the two companies to collect
their assessment of the risks dependencies.
In the rst case study (company A), the ISM evaluation was conducted in a
well-guided process, i.e. the participants had the opportunity to clarify the meaning of
every risk during the assessment process and they were reminded by the moderator to
concentrate on the direct linkages between each pair of risks. As a result of the case
study A, the analysis gave the participants a hierarchy as well as a digraph that
showed the risk paths and their interdependencies. To conclude whether the
ascertained results showed practical use and were representative for company As risk
situation, the digraph was discussed with the participants in a second round during
which the supply chain experts were asked to interpret the linkages and importance of
all risks from the questionnaire and draw a risk map based on their experience. The
results of the second discussion with the supply chain experts (A) were positive and
showed great similarity between the risk map of the total risk situation based on expert
judgement and the outcome of the ISM algorithm.
The second case study (company B) was less guided with the participants
answering the questionnaire after a brief instruction without any further support.
Thus, the outcome of this second case study was less positive and showed several
cycles in risk linkages. Also the comparison with risk maps based on the experts
experience showed far less similarities than in case study A. A subsequent analysis of
this result with the participants showed two reasons why the risk map and the digraph
had less in common than in the rst case:
(1) the assessment of the dependencies between the risks did not focus solely on
bidirectional linkages but also included knowledge of transitive connections;
and
(2) the risks were described less specically in their denitions without the
possibility to clarify the exact meanings during the evaluation process.
ISM of supply
chain risks
855
Hence, the ndings of the case studies can be summarised as described below:
.
First, ISM was proven as a useful methodology to structure supply chain risks in
an easy and distributed approach that can also be carried out in a step-by-step
process on several manufacturing stages.
.
Second, the input to the algorithm (risks) has to be well-dened to give the
participants an exact understanding of all risks that have to be assessed, i.e. the
better the input to ISM is prepared the better the outcome and representation
will be.
.
Third, the participating experts have to be instructed to focus solely on
bidirectional linkages between two risks. There must not be any transitive
dependencies considered when the linkage between two risks is assessed.
Otherwise, the algorithm will produce too many cycles and therefore will not
derive a hierarchy based on the input.
.
In addition, a moderated process proved to be more reliable than an assessment
based on paper questionnaires only. Thus, a possibility for all participants to
post questions and clarify their understanding of the risks has to be considered
in any application.
6. Practical use of ISM in SCRM
In this paper, an attempt has been made to apply ISM to uncover interdependencies of
supply chain risks. The ISM creates conditions for rational decision making in that
complex issues are structured. The pairwise analysis of risks in a group of experts
from different functional areas encourages contributions from those who understand
the issues being discussed, but may not understand all issues related to the overall risk
management process. Thus, the present model will help to increase the awareness of
decision makers, whilst assisting them to better understand the mutual inuence
among different supply chain risks and the consequences this implies for decisions
about risk mitigation strategies. Substantial discussion of the identied risks among
the experts lead to signicant learning about the inter-relationship and total risk
exposure of the company or supply chain under study.
The ISM steps could be implemented in software. Input to this software would be
the list of identied risks. The decision about the pairwise relationship between the
risks (step 2) can be done by using a voting screen (interface) that displays every
relationship between risks upon the users have to vote. Use of such software will help
to keep track of all the relationships and to ensure that all necessary comparisons are
made, which form the basis for the SSIM. The following steps will be calculated and
the nal graph will be drawn automatically. Furthermore, it reduces the chance of
human errors and shortens the overall process considerably. We propose to use such
an ISM software as a complementary tool with other risk management (identication)
tools. Moreover, the software could also be used in a collaborative environment with
suppliers and customers to share risk information across company boundaries.
7. Future orientation
The application of ISM showed its practicability as an analysis and decision-support
tool in order to facilitate thorough understanding of a complex problem. The complex
problem studied was the inter-relationship of supply chain risks. The process
IJPDLM
41,9
856
of building an ISM develops subject matter knowledge throughout the discussion and
analysis. In the present work, only 21 risks have been used for modeling. More risks
can be identied to develop ISM. In addition to the identication of critical risks with
high driver and dependence power (linkage risks) and chains of dependent events in
terms of the consequences, it is important to consider the probability. Using this
approach, the rst risk to manage would be the one with the highest probable impact
onto the supply chain. Future research should integrate the probability in the model
and combine it with the results derived from fuzzy MICMAC in order to provide
decision makers with a more precise basis for the effective allocation of risk
management resources. Moreover, the model has not been statistically validated.
Testing of the validity of this model can be another area of future research. Structural
equation modeling has the capability of testing the validity of an already developed
theoretical model.
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About the authors
Hans-Christian Pfohl studied Industrial Management and Engineering from 1962 to 1968 at the
Technische Universitat (TU) Darmstadt where he graduated as Dr rer. pol. From 1975 to 1982, he
held the Chair of Business Administration with responsibility for Organization and Planning,
at the University of Essen. From1982 until 2010, he held the Chair in Management &Logistics at
the TU Darmstadt. In 1996, he received an honorary doctorate degree from the University of
Veszprem, Hungary. Besides general management, logistics is Professor Pfohls main research
interest. He contributes very actively through his basic research activities to new developments
in general management and to the development of the logistics concept.
Philipp Gallus is a Research Associate and Doctoral student at the Chair of Management &
Logistics. He studied Industrial Management and Engineering from 1999 to 2006 at the TU
Darmstadt, where he graduated as Diplom-Wirtschaftsingenieur. He also holds a Masters degree
in Manufacturing Management from Linkopings Universitet in Sweden. His main research areas
are supply chain risk management, logistics and transportation.
David Thomas is a Research Associate and Doctoral student in the Supply Chain and Network
Management Group at the TU Darmstadt. He studied Economics and Computer Sciences from
2001 to 2008 at TUDarmstadt, where he graduated as Diplom-Wirtschaftsinformatiker. His main
research areas are supply chain risk management and business intelligence.
ISM of supply
chain risks
859
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