Factors Influencing Tier 2 Supply Chain Risk Data Collection ARCIrI&S
by
Stephanie Ann Buscher
Bachelor of Science, Management, Boston College, 2010
JUL 16 2015
and
LIBRARIES
Angel Poyato Ayuso
Bachelor of Engineering, Industrial and Telecommunications Engineering, University of Jaen, 2009
Master in Business Administration, Indian School of Business, 2014
SUBMITTED TO THE ENGINEERING SYSTEMS DIVISION
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF ENGINEERING IN LOGISTICS
AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
JUNE 2015
C 2015 Stephanie Buscher and Angel Poyato Ayuso. All rights reserved.
The authors hereby grant to MIT permission to reproduce and to distribute publicly paper and electronic
copies of this thesis document in whole or in part in any medium now known or hereafter created.
Signature of Author ..
........................
Signature
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re.a te
Stephanie Buscher
Master of Engineering in Logistics Program, Engineering Systems Division
May 8,2015
........
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Mastlt.of E
Certified by....
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Signature/. redacted
Signature of Author
ring in Logistics Program, Engineering Systems Division
................................ May 8, 2015
Signature redacted
Dr. Bruce C. Arntzen
Executive Director, Supply Chain Management Program
/
Accepted by.............
natatrd
Signature redacted
L' V Dr. Yossi Sheffi
1~
Thesis Supervisor
...........................................
Director, Center for Transportation and Logistics
Elisha Gray II Professor of Engineering Systems
Professor, Civil and Environmental Engineering
1
Factors Influencing Tier 2 Supply Chain Risk Data Collection
by
Stephanie Buscher
and
Angel Poyato Ayuso
Submitted to the Engineering Systems Division
on May 8, 2015 in Partial Fulfillment of the
Requirements for the Degree of Master of Engineering in Logistics
ABSTRACT
Natural disasters such as the earthquake and subsequent tsunami that hit Japan in 2011
can have catastrophic effects on businesses. This type of unexpected event can cause millions of
dollars in damages, lost sales and can impact company stock performance. With 39% of supply
disruptions occurring at indirect suppliers, companies can no longer ignore their supply networks
when determining supply chain risk. Unlike measuring risk within a single company, measuring
the risk of a network requires collaboration amongst all players. This research aims to mitigate
the complexity of data collection through the understanding of the factors that influence supply
chain risk data collection.
Factors vary throughout different players in the networks. Internally, supply chain
transparency must be indoctrinated in the culture of the executing company. Necessary parties
must be well informed and incentivized to take part in this labor intensive exercise. By
indoctrinating transparency into the culture, companies legitimize this initiative to both
employees and suppliers. Through a series of conversations held with suppliers, the research
conducted in this thesis identifies the internal and external factors that determine success in
supply chain risk data collection.
Keywords: Supply chain risk management, supply chain transparency, data collection, vendor
collaboration
Thesis Supervisor: Dr. Bruce Arntzen
Title: Executive Director, Supply Chain Management Program
2
ACKNOWLEDGEMENTS
Thank you to my amazing support system: my family. Mom, Dad, Rita. I could not have asked
for more amazing role models in school, work, and life. Th, ik you as well to our esteemed
classmates. You all are amazing sources of support, inspire on, and encouragement. These past
10 months would not have been half as inspiring without, :h of you.
-Stephanie Buscher
Thank you to every professor, faculty member and classmate for enlightening every day of this
fabulous journey of postgraduate education. Thank you to my parents and sister for your
unceasing love and support. Thank you to my wife Isabel for sharing the belief, both in the
distance and closeness, that dreams are possible.
-Angel Poyato Ayuso
We extend our unending thanks to Dr. Bruce C. Amtzen for providing us with continual
guidance and support over the past 10 months in regards to both this project and our time in the
SCM program. We also extend our sincere thanks to our focal company sponsors for providing
us an opportunity to learn and grow through studying their company.
3
Table of Contents
ABSTRACT
......................................................... 2
LIST OF FIGURES ....................................................
5
LIST OF TABLES .....................................................
5
1.
INTRODUCTION
2.
LITERATURE REVIEW
.................................................. 6
............................................. 7
2.1 Quantifying Supply Chain Disruption's True Costs ......................................................
8
2.2 Communication of Proprietary Data in Risk Analysis .................................................
10
2.3 Qualifying V endor R elationships ..................................................................................
12
2 .4 C on clu sion .......................................................................................................................
13
3. M E T HO D O LO GY ................................................................................................................
13
3.1 Understanding Successful Supply Chain Transparency Initiatives..............................
16
3.2 Understanding the Role of Procurement in Data Collection ........................................
18
3.3 Conversations with Suppliers ......................................................................................
18
3.3.1 Understanding How Relationship Factors Affect Data Collection ..........................
19
3.3.2 Explanation of the Project ........................................................................................
21
3.3.3 Understanding Information Sensitivity and Willingness to Participate .................... 21
3.3.4 A fter-Interview A ctions.............................................................................................
22
4. DATA ANALYSIS AND RESULTS...............................................................................
23
4.1 Analysis of Interviews Reviewing Supply Chain Transparency Initiatives ................
24
4.2 Analyzing Supplier Base Characteristics ...................................................................
25
4.3 Analyzing the Procurement's Supplier Selection Process and Supplier Participation.... 26
4.4 Relationship Quality Measurement Analysis ...............................................................
5. D ISCU S S IO N .......................................................................................................................
5.1 Internal Company/Supplier Factors Influencing Data Collection ...............................
36
38
38
5.1.1 The Importance of Company Buy-In and Alignment with Company Strategy......... 38
5.1.2 Procurement as Influencing Factor in Data Collection ............................................
39
5.1.3 Relative Risk of Manufacturers and Distributors as Suppliers..................................
40
5.2 External Factors Influencing Data Collection .............................................................
41
5.3 Relationship Factors Influencing Data Collection......................................................
42
6. C ON C LU SIO N S ...................................................................................................................
6.1 Potential Im provem ents...............................................................................................
A P P EN D IC ES ...........................................................................................................................
4
43
44
45
Appendix A - Project Summary Document to Suppliers for Phone Calls.........................
45
Appendix B - Example Questionnaires for Phone Interviews...........................................
46
Appendix C - Relationship Quality Measures Associated Questions................................
47
Appendix D - Tier 2 Supplier Data Collection Template..................................................
49
R EFER EN C E S ..........................................................................................................................
50
LIST OF FIGURES
Figure 1- Supply Chain Risk Visualization SourceMap ..........................................................
Figure 2 - Supplier Breakdown ................................................................................................
Figure 3- Supply Checklist Results ..........................................................................................
14
26
27
LIST OF TABLES
Table 1- Requested Supplier Information.................................................................................
Table 2 - Key Questions for Supply Chain Transparency Conversations ..................................
Table 3- Relationship Quality Measures....................................................................................
Table 4- Proprietary Information Requested from Suppliers .......................................................
Table 5- Supplier Contact Checklist ..........................................................................................
Table 6- Procurement Selection Rationale ..............................................................................
Table 7- Reasons for Not Participating......................................................................................
T able 8- Supplier Profiles .............................................................................................................
Table 9- Willingness to Provide Information ............................................................................
Table 10- Relationship Quality Measure by Supplier................................................................
15
17
20
22
28
30
31
33
33
37
5
1. INTRODUCTION
Geographic disruptions, even deep into the supply chain, can level businesses. Historically,
companies have assessed only their immediate tier 1 suppliers. As the world globalizes, the need
to expand this supply chain risk assessment to tier 2 suppliers and beyond is evident. The 2011
earthquake in Japan exemplifies this need. Companies around the globe have suffered from
production breakdowns that resulted from suppliers based in the region. The earthquake affected
715 industries in all and cost over $209 billion in lost sales. (Dun and Bradstreet, 2009)
A study conducted by the Business Continuity Institute in 2011 revealed that while 61% of
supply chain disruptions originated in an immediate supplier, 39% came from an indirect
supplier. Much research in the field of supply chain risk management has explored the risks and
mitigation strategies through tier 1 suppliers. Unsurprisingly, 75% of companies only monitor
their direct tier 1 suppliers. These companies do not possess information about the origin of two
of every five disruptions. A well-integrated approach to measuring risk beyond tier 1 supplies
remains absent.
Our research expands upon Diwei Xia and Kaiye Lu's research on the application of
value-at-risk calculations in supply chain risk management (Lu and Xia, 2014) by exploring a
company's indirect supply chain. Our focal company is the same multi-national producer and
seller of chemical products as in Xia and Lu's research. While the research was conducted in the
chemical industry, there are significant parallels to be drawn to any industry.
Our research aims to help companies become less vulnerable to disruptions deep in their
supply chains. Before data on tier 2 suppliers can be collected, it is necessary to understand what
factors influence data collection. We focus specifically on identifying which factors influence the
collection of data from tier 1 suppliers.
6
Throughout our research, we will refer to the following four players:
-
Focal Company - The company under analysis
-
Procurement - Focal company's department in charge of buying materials
from suppliers
-
Tier 1 Suppliers - The direct suppliers from which the focal company
sources materials
-
Tier 2 Suppliers - The focal company's indirect suppliers (The direct
suppliers of tier 1 suppliers.)
The relationships between companies and suppliers are complex. Our thesis focuses on
understanding the hesitancies and dynamics that determine the success or failure of information
sharing projects for supply chain risk assessment. We segment our analysis into three portions:
characteristics specific to the focal company and/or its suppliers, specific to the relationship
between company and supplier, and external industry factors. We envision this thesis as the first
step towards establishing a comprehensive supply chain risk management tool incorporating tier
2 suppliers and beyond.
2. LITERATURE REVIEW
As supply chains receive continual pressure to become leaner and more cost effective, the
vulnerabilities associated with increasingly complex and interconnected networks grow. Supply
chains gain value from what Schmenner and Swink (1998) describe as the "Theory of Swift,
Even Flow." This theory suggests that productive and efficient supply chains are characterized
by processes that ensure a swift and even flow of products. The disruption of this even flow
7
detracts from the over-all value of the firm (Schmenner and Swink, 1998). Disruptions caused by
vulnerabilities reduce a company's ability to meet demand. Supply chain weaknesses and
disruptions have been identified by the World Economic Forum as one of four risks emerging
over the next decade that could alter the world's economy (Hiiner, Larsoon, Wagner, and Christ,
2014). We review here the current research and literature surrounding the effects of a disruption
as well as some mitigation strategies to offset disruption costs. Our research aims to extend this
previous work in identifying the factors that affect information collection from suppliers in
regards to supply chain risk management.
2.1 Quantifying Supply Chain Disruption's True Costs
A review of literature regarding supply chain disruptions highlights the significant cost
associated with such occurrences. Supply chain disruptions can cost tens of millions of dollars
(Mitroff and Alpasan, 2003). In 1997, Toyota lost $325 million in unsold cars and had over $195
million in damages from a fire closing down its manufacturing plant for 18 days (Converium,
2006). Preventing the effect of disruption can mean huge competitive advantage. A 2011 tsunami
in Japan disrupted Toyota and caused it to lose its position as the largest car manufacturer to GM
and Volkswagon (Hilner et al., 2010). This reaction is not limited to the car industry as a downed
Phillips semiconductor plant cost Ericsson over $400 million in missed sales. Phillips'
competitor, Nokia, was able to mitigate the disruption by contracting alternative suppliers
quickly. They did not experience the impact of the disruption (Latour, 2001).
The impact of supply chain disruptions can be significant although variable in severity.
Severity is defined as the quantity of nodes or entities whose ability to ship or receive goods
within a network has been affected by a disruption (Craighead, Blackhurst, Rungtusanatham, and
8
Handfield, 2007). In a three-phase study using multiple data collection methods and analyses,
Craighead et al. identified three major contributors to the severity of a disruption. First, the
density of a network or geographic clustering of nodes was positively correlated to disruption
severity. Second, supply chain complexity or the total number of nodes was also positively
correlated to the severity of disruption. The complexity was directly tied to the interdependency
of nodes which augmented any disruption. Complexity ties into the final factor on severity: node
criticality. Node criticality is the importance of a node within a supply chain. The more critical
(whether in supplying one vital part or several important components) a node, the more severe
the disruption will be. (Craighead et al., 2007)
The costs of a disruption are not limited to the immediate time surrounding the
disruption. Further studies have identified the long-lasting costs of supply chain disruptions.
Reviewing over 827 cases of supply chain disruption from 1989 to 2000, Hendricks and Singhal
(2005, 2008) were able to see the lasting effects of disruptions on a company's reputation. The
disruption in supply also affected companies' credibility and reputations in the marketplace. The
disruption caused a loss in future revenues and long-term contracts. Companies who planned to
grow through acquisition faced delays or cancellation of their acquisitions. Regardless of the
industry, supply chain disruptions had a negative impact on 100% of the companies studied
though the extent varied by industry.
The goals of risk management are twofold: reduce the frequency and severity of risks and
increase capacity of the supply chain to sustain additional risk (Keindorfer and Saad, 2005).
Several researchers have dedicated time to determining the best way to mitigate supply chain
disruptions. Analyzing a supply chain as a whole is vital when analyzing risks. One most focus
on both supply and demand risks at once (Manuj, Esper, and Stank, 2014). Often a demand-side
9
mitigation technique may not be sufficient due to supply-side risks. Manuj et al. measured the
effect of hedging (i.e. globally diversifying suppliers), assuming (i.e. vertical integration of
supply, utilizing economies of scale), postponement (i.e. delaying final product until demand is
more certain), and speculation (i.e. maintaining finished product inventory) in both high/low
demand/supply scenarios. In high-risk supply scenarios, hedging performed best in reducing
costs. The assumed methodology only performed highly in situations where both supply and
demand risk were low. Given the simulation used, Manuj et al. were limited in the variables they
could include. The key to success, however, laid in the flow of information between two
companies.
2.2 Communication of Proprietary Data in Risk Analysis
Previous research has argued that time should be better spent on internal process
improvements to mitigate risk (Chen, Sohal, and Prajogo, 2013). Process risk was identified as
the internal processes that drove supply chain management in a company. Also identified by
Chen et al. were demand risk (the risk in accurately predicting demand) and supply risk (or the
risk associated with outsourcing to or procuring from suppliers). The effect of supply risk was
masked by process risk. Using a survey methodology with an 8.4% response rate over 25,000
manufacturing firms, Chen et al. identified that supply risk was three times more likely to affect
process risk than demand risk. The study has limitations, however, as Chen et al. only extend to
tier 1 suppliers where disruption information is more readily available. Disruption from vendors
further upstream may create larger effects as information is delayed up the supply chain.
10
Information sharing is key in mitigating supply chain risk. The collection of information
is dependent on the amount of trust in the relationship between supplier and customer.
Information dissemination between vendor and customer has been positively linked to network
performance (Yang, 2013). In a review of Chinese companies, Yang found that collaborative
relationships generated more disseminated information and performed better. Both suppliers and
customers benefit from information dissemination. Customers benefit from information for
purchasing purposes while suppliers can mitigate the bullwhip effect. Wakolbinger and Cruz
(2011) furthered this conclusion through modeling the effect of risk-sharing contracts on
performance. Suppliers who reduced the cost of information sharing shared higher profits with
their retailers than those who did not (Wakolbinger and Cruz, 2011).
Globalization is playing a key role in shaping the present and future of supply chains.
Multinationals currently benefit from worldwide, multi-tier supply chains that achieve
competitive advantages through faster product innovation cycles, joint collaboration and
technology that generates significant cost savings. These strong ties can also result in
counterproductive outcomes when lower tier suppliers are disrupted. Chunxing, Olorunniwo,
Jolayemi, and Xiaoming (2013) suggest that organizations should not focus exclusively on
obtaining visibility of their most immediate tier 1 suppliers; they should instead extend their
visibility to lower tier suppliers, especially if critical components are involved.
Studies have typically analyzed risks coming from tier 1 suppliers, but there is limited
research in the importance of identifying risks coming from lower tier suppliers. Only a few
scholars emphasize on the relevance of recognizing risks in end to end supply chains. Tse and
Tan (2011) recommended monitoring sub-tier suppliers, enhancing supply chain risk visibility,
and adjusting the supplier evaluation process with the learnings obtained. Supply disruptions
11
constitute a tangible evidence of a lack of appropriate mechanisms at the enterprise level to
control end-to-end visibility across the supply chain. To explore supply chains through deeper
levels of suppliers, we reviewed literature exploring what relationship characteristics facilitate
information sharing in supply chain management.
2.3 Qualifying Vendor Relationships
Information sharing improves performance in supply chain management yet not all
companies willingly exchange information with vendors and customers. Several studies have
attempted to identify which characteristics in a relationship best qualify strong relationships.
Svennson and Mysen (2011) identify satisfaction, commitment, trust, cooperation, coordination,
dependence, and continuity expectance as drivers of relationship quality. Skarmeas, Katsikeas,
Spyropoulou and Selhi-Sangari. (2008) and Walter, Helfert, and Ritter (2003) listed a simpler list
of just satisfaction, trust and commitment. While trust, cooperation, and commitment appear
universal, each study has developed unique characteristics that they say define lasting
relationships. Kuhne, Gellynck, and Weaver (2013) diverged from these studies by including
reputation, dependency, governance, power, and conflict. Woo and Ennew (2004) proclaim that
cooperation, adaption, and atmosphere are key to defining relationship quality. Kumar, Scheer,
and Steenkamp (1995) believe that willingness to invest in the relationship is also key. Opinions
on these characteristics can vary within the relationship itself. As Ambrose, Marshall, and Lynch
(2010) states that opinions on adaptability, power, dependence and performance will vary
between supplier and customer while trust is universal between the two bodies.
12
2.4 Conclusion
As we have discussed, supply chain disruptions have substantial impacts on a firm,
risking tens of millions of dollars per disruption and affecting a company's reputation. Mitigation
strategies proposed have varied, but together promote the universal sharing of information
between primary suppliers and customers. Information sharing is not easy, as many relationships
face distrust and the fear of opportunism. While analysis on how risk- and information-sharing
contracts highlight benefits to vendors, much distrust prevails in corporate relationships. Our
research closes the gaps in how to identify what factors affect information sharing in
relationships. Our research extends further into pursuing secondary suppliers in research. This
methodology allows greater transparency within the supply chain and promotes stronger
relationships and better risk mitigation practices.
3. METHODOLOGY
The original design of our thesis expanded the work of Lu and Xia by identifying
techniques for approaching tier 1 suppliers about tier 2 suppliers. This allowed us to generate a
value-at-risk for each tier 2 supplier. Lu and Xia defined value-at-risk was as:
((Probability of Disruption due to Natural Disaster * Yearly Revenue Tied to Supply Chain
Node)/365) * Days Node is Disabled
The probability of disruption is the cumulative probability of damage caused by seven disruption
disaster types: cyclones, storm surges, earthquake, winter storms, severe thunderstorms,
wildfires, and terrorism at varying intensities. Xia and Lu's researched used insurance
13
information to calculate probability of disruption. They calculated the revenue tied to each
component through the bill of materials and sales data.
The number of days that each node is disabled is defined as:
Days to Replace Supplier - Days of Inventory On Hand
This information was collected from the procurement team at our focal company.
Once collected, this information was to be incorporated into SourceMap.com to create a
supply chain risk visualization. Impact was measured by the value-at-risk at each node and
severity was indicated by the size and color of the node. An example map is provided below.
Figure 1- Supply Chain Risk Visualization SourceMap - This graphicdemonstrates the desired
end result of our research. Represented in this graph are all ofthe supply chain nodes for a
company. Their associatedvalue-at-riskand probabilityof disruption determine the size and
color of the node.
Our goal was to collect the following information from each supplier based on the
components sourced to our focal company. The information requested is outlined in Table 1.
14
Table 1- Requested Supplier Information - The information necessary to calculate value-at-risk
for a supply chain node.
Information
Key Component 1 Key Component 2
Key Component 3
Name/Description
Supplier Factory City(ies)
Factory Country(les)
Days of Inventory of Hand
Recovery Time if Supplier
Lost
Tenure of Time Working
With Supplier
Given the timeline of our project, we limited our research to three product lines and 33
tier 1 suppliers. The proprietary nature of supplier identity and location altered the scope of our
thesis. We faced hesitancies from the procurement team and from suppliers. Procurement was
sensitive to the relationships with suppliers and their willingness to participate in our
conversations. We then faced additional hesitancies from the suppliers themselves. Many
suppliers were uninterested in speaking with us about supply chain risk. It was evident that
exploration of these hesitancies was our first priority.
The goal of this research changed to understand the factors that influence tier 2 supply
chain risk data collection. We focused our research on three areas: internal company
characteristics, external industry factors, and the relationship between companies. We conducted
formal and informal interviews with industry leaders, focal company employees, and strategic
suppliers to gather information. The following chapter chronicles the methodology used to
identify what factors influenced tier 2 supply chain data collection.
15
3.1 Understanding Successful Supply Chain Transparency Initiatives
Prior to conducting interviews of the focal company's suppliers, we initiated
conversations with several companies who underwent supply chain transparency initiatives.
Present at the discussions were leaders of the transparency initiative at the interviewed company,
members of supply chain management team at the focal company, and ourselves. The discussion
covered the project from conception through completion. Companies were interviewed to
identify common trends, strengths, or limitations in their supply chain transparency initiatives.
We identified three criteria to characterize a company suited for these interviews.
*
Have more than >250 suppliers - We hypothesized that a truly homogenous supplier
base was rare in any industry. By selecting industry leaders with a more heterogeneous
and complex supplier network, we could identify how our methods had to evolve with
different sets of suppliers
" Have explored the supply chain through tier 2 suppliers - Extensive exploration was
necessary to identify how companies worked with their suppliers to capture key
information.
*
Have limited or no vertical integration in the supply chain. By selecting companies
with limited vertical integration, insight was gathered about the particular challenges of
working with external companies.
Given a limited timeframe, we identified two available companies that fulfilled these criteria:
an innovative semiconductor chip manufacturer and a networking equipment manufacturer.
We geared these conversations to understand the origin and challenges of each initiative.
The key questions used to frame the discussion are outlined below. They focused on four major
16
sections: understanding how the project came about, understanding what resistance they
encountered, how they approached suppliers, and finally project execute and results.
Table 2 - Key Questionsfor Supply Chain Transparency Conversations- This table reflects the
baseline questions asked during interviews on supply chain transparencyinitiatives. These
conversationsserved as the basisfor conversations, but is not exhaustive of those used.
Key Questions for Supply Chain Transparency Conversations
Origin of Project
0 What problem made supply chain transparency a required initiative at your company?
Resistances to Project
* What internal resistance (if any) did you receive for this project?
" How did you acquire internal approval to proceed with this project?
" What external resistance (if any) did you receive for this project?
Relationships with Suppliers
" How do you categorize relationships with your suppliers?
" How did you first approach suppliers regarding this topic?
* What kind of suppliers did you approach for your pilot testing?
" How did you relay information about this project to your suppliers?
Project Execution and Success
" How did you scale your data collection outwards?
" How successful were you in collecting information from suppliers?
" How often do you refresh the information from this initiative?
These questions framed our discussion, but the actual interviews with industry leaders
were free-flowing. Each company's experience was unique. Each company provided example
literature of communications with suppliers to illustrate their initiatives. Our next stage was to
begin interviews with our focal company's suppliers.
17
3.2 Understanding the Role of Procurement in Data Collection
The procurement department proved to be an important partner in our data collection.
They served as an entryway to conversations with suppliers. Understanding their perspectives
proved key to understanding how factors within a company affect data collection
We originally restricted suppliers to three product lines. We first sought "collaborative"
suppliers or those with friendly relationships with the company. We expanded to all suppliers in
the bill of materials. The procurement department decided which suppliers to approach.
Procurement reached out via phone and e-mail using a pre-written script. (Appendix A)
To keep track of suppliers reached, we created a tracking document for the procurement
team at the focal company. The bill of materials of a particular chemical product was pulled. All
suppliers who provided components for these materials were listed. Procurement was asked to
identify which suppliers had been contacted and to explain the rationale for either contacting a
supplier or not. The supplier's decision to speak with us was also recorded. We then recorded
suppliers' willingness to provide the requested information. This data was used to understand
how unique company characteristics affect tier 2 supplier risk data collection.
3.3 Conversations with Suppliers
The phone calls from section 3.1 generated areas of focus for us. Prior to large-scale
execution of data collection, we aimed to gather qualitative feedback from the focal company's
tier 1 suppliers. These conversations would highlight the unique concerns tier I suppliers had in
sharing proprietary information about their suppliers.
18
We designed a questionnaire to determine the sensitivity of the requested information.
The questionnaire had three parts: analysis of the sensitivity of questions, the willingness to
supply requested information and approaches to improving willingness, and general questions
pertaining to requirements in approaching these conversations. (Appendix B)
Based on the interviews conducted in section 3.1, two sets of sub-categories emerged as
relevant to the chemical industry: commodity suppliers/specialized product suppliers and
distributors/manufacturers. We added additional questions specific to the kind of supplier and
relationship the supplier had with the focal company (e.g. it was not relevant to ask a distributor
about the location of its manufacturing plants).
Conversations with suppliers occurred between October 2014 and April 2015.
Procurement initiated the preliminary contact with suppliers before stepping back from the
conversation. Procurement was chosen for this task as they maintained the primary relationships
with suppliers. Representatives from the focal company were absent from conversations with
suppliers. This absence helped suppliers feel more comfortable discussing any points that could
affect their relationship with the focal company. Interviews lasted approximately 60 minutes.
The interviews were broken up into three parts: Measuring relationship characteristics,
explanation of the project, and either collecting the desired information or understanding
sensitivity/hesitancy to provide the desired information.
3.3.1 Understanding How Relationship Factors Affect Data Collection
Later interviews began by exploring the relationship between our focal company and the
supplier. Many tier 1 suppliers declined to speak with us. Suppliers stated that aspects of the
19
current relationship with our focal company prevented them from sharing this information. We
added a relationship qualifying section to identify common threads in their relationships with our
focal company to learn more. We compiled examples of characteristics present in successful
supplier relationships as outlined in existing cases and literature. The exploration spanned
multiple industries including manufacturing, technology, service, automotive, and chemical to
harness the expertise of several industries. The pattern in literature and conversations from
industry leaders identified several key components necessary for strong relationships with
vendors. The following criteria were identified as relevant to the potential framework.
Table 3- Relationship Quality Measures - The characteristicswe determined as indicative of the
quality and type of relationshipbetween a company and its suppliers. This list was compiled
through extensive research and conversations with ourfocal company.
1.
2.
3.
Relationship Quality Measures
Trust
5.
Relative Cost
Expectation of Continuity / Commitment
6.
Satisfaction
Value- Add
7.
Communication / Feedback
4.
Information Sharing
To avoid potential bias and ensure accurate data, we created indirect questions that dealt
with the theme of each attribute. (Appendix C) Each sub-question identified actions or
agreements in supply chain management most closely related to each characteristic. Many
questions addressed more than one of the relationship attributes. Follow-up questions regarding
how the status of each question compared to the rest of their customers were asked to gauge the
relative performance of the focal company. Beyond information collection, this method stressed
to the supplier their unique importance to this research.
20
3.3.2 Explanation of the Project
Once a better understanding of the supplier's relationship was revealed, we provided
further elaboration of the project to the supplier. The elaboration included actual numbers
regarding supply chain disruptions (See section 2.1) as well as a method for calculating value-atrisk using hypothetical catastrophe data. It was stressed that no supplier information need be
collected in these meetings. These initial phone calls were for understanding the hesitancy or
willingness of a supplier to participation in part or in full. We answered any additional questions
the suppliers had regarding the purpose of the project or what information would be collected.
3.3.3 Understanding Information Sensitivity and Willingness to Participate
Once the supplier's questions had been answered, research moved on to the discussion
involving data collection. The information we requested from the supplier is outlined in Table 4.
Suppliers provided feedback regarding their ability to access this information and their
willingness or ability to share it with the focal company. If a supplier was unable to access that
information, questions regarding the potential to access this information was explored. If a
supplier proved hesitant to provide the information, we followed up with a set of additional
questions. (Appendix B) These questions revolved around how the focal company could improve
their willingness to participate. These questions explored how different members of the focal
company's team (procurement, supply chain risk management, executive leadership) may sway
the decision. The questions also explored how additional incentives (long-term contracts,
preferred vendor status, a personal risk assessment) may influence the supplier to share this
information. If a supplier proved unwilling to share the information at all costs, we focused
questions on identifying what drove the concerns of the company.
21
Table 4- ProprietaryInformation Requestedfrom Suppliers - This lists the desired information
needed to assess supply chain risk
Information
Tier 2
Name/Description
Tier 2 Supplier
Key Component 1
Key Component 2
Key Component 3
Address
Tier 2 Supplier
Factory City(ies)
Factory Country(Les)
% of Component
Sourced From Tier 2
Supplier
Days of Inventory on
Hand
Recovery Time if
Tier 2 Supplier Lost
Tenure of Time
Working With Tier 2
Supplier
I
Many companies unwilling to share supplier information were happy to engage in
conversations regarding their individual risk mitigation strategies. Current strategies and those
waiting approval were discussed to determine how each supplier was mitigating their own risk of
disruption.
3.3.4 After-Interview Actions
Our contact with suppliers didn't end after our interviews finished. Several suppliers
interviewed proved willing to provide information to the focal company. After the interview, we
sent over an excel template to collect the requested information. The Excel document had a tab
designed for each of the products provided by that supplier. The tabs were ordered by importance
22
according to the focal company's procurement team. An example is given in (Appendix D). Each
supplier returned to their procurement team to gather the information.
After interviewing each supplier, we met with the procurement officer to discuss the
focal company's view on that supplier. We asked the procurement officer the same relationship
qualifier questions as we did the supplier without informing him of their answers. The
verification process granted us insight into the comparative status of the focal company to the
supplier. Upon completion of each interview, we processed the data to determine if any trends
could be determined. The next section outlines the data analysis process and associated results.
4. DATA ANALYSIS AND RESULTS
Data analysis evolved as data was collected from October 2014 and April 2015. The
means of data collection was through qualitative interviews with suppliers, procurement agents,
and companies that successfully completed supply chain transparency initiatives. The
information collected from each interview added clarifying questions for future interviews. Our
data analysis first aimed to understand what factors influenced success in previous initiatives.
We then analyzed the logic for procurement's supplier selection and the rationale for a company
declining to participate or provide information. Finally, the data analysis identified if there were
any trends in relationship quality measures and willingness to provide information.
23
4.1 Analysis of Interviews Reviewing Supply Chain Transparency Initiatives
Two companies were interviewed to explore the origin, roll out, and success of their
supply chain transparency initiatives. The first was a chip manufacturer. The second was a
networking equipment manufacturer.
The origins of the initiatives varied between the two suppliers. The networking
equipment manufacturer began their transparency initiative to mitigate disruption risks. This
followed events like the 2011 earthquake and tsunami in Japan. The chip manufacturer's senior
management had declared an initiative to be "conflict-mineral" free. It was the job of the supply
chain to ensure this was the case.
There was a common thread in both interviews: corporate buy-in. Both companies had
full corporate buy-in for their initiatives. Supply chain transparency was made a top priority in
the organization. Each company put out significant literature. Each educated their suppliers on
the importance of transparency. The networking equipment manufacturer referenced the
disruptions to supply chains like Apple and Nokia. The chip manufacturer used its promise to be
conflict-mineral free as the basis for their campaign. By the time actual data were collected,
suppliers knew that supplier information was a requirement for doing business with them. Each
company created an interactive and secure platform where suppliers could enter information.
This formalized method added legitimacy to the initiative.
A second common thread was time. Each initiative was the product of years of internal
collaboration and unification. Once the message was uniform, conversations with suppliers still
took three years for the networking equipment manufacturer. They reached out to certain
suppliers to alleviate concerns and anticipate hesitancies. The networking equipment
24
manufacturer used feedback from these meetings to design their data collection. They held
multiple conversations with suppliers before an official database was constructed for mass
distribution. We modeled our preliminary methodology off of this method.
4.2 Analyzing Supplier Base Characteristics
Armed with qualitative insights from our conversations in 4.1, we began analyzing our
focal company's supply chain. In 2014, Xia and Lu selected three product lines to explore with
their value-at-risk analysis. We continued using these three product lines. The bill of materials
included the component name, sub-components, supplier name, and percentage of component
sourced from each supplier. The bill of materials for the three products contained 24 unique
products and 37 unique suppliers.
Vendors were classified into two main distinctions: manufacturer/distributor and
commodity goods/distinguished or specialized goods. Manufacturer/ distributor information was
collected through self-identified information using supplier literature or provided by the focal
company's procurement team. There were no situations where these two sources of information
conflicted.
A component was identified as either commodity or specialized by the supplier and then
verified by the focal company's procurement team. Commodities were seen as common products
easily purchased on the open market. Specialized products were those customized to our focal
company or monopolized by a few suppliers. We found many suppliers valued their goods as
specialized while the focal company viewed them as a commodity. The difference of opinion
was noted in our research.
25
The majority of suppliers proved to be manufacturer or distributors of commodity goods.
We did identify two trends that complicated this classification: 1) suppliers were "specializing"
commodities to custom-fit our focal company's needs and 2) certain specialized goods were
becoming commoditized. Figure 2 reflects the suppliers as they stood in April 2015.
Manufacturer - Commodity
Distributor - Commodity
Manufacturer - Specialized
Distributor - Specialized
Figure 2 - Supplier Breakdown - The categorizationofsuppliers into four distinctgroups. The
large majority ofsuppliers were manufacturers or distributorsof commodities. The numbers
represent the total number of suppliersfrom the bill of materials categorizedby this label
4.3 Analyzing the Procurement's Supplier Selection Process and Supplier Participation
Once the classification of vendors was complete, procurement was given a check list of
suppliers from the three designated product lines. (Table 5) Procurement used this checklist to
schedule interviews with suppliers. Procurement provided the following information for each
supplier: if that supplier was contacted, why a supplier was not contacted, if the supplier agreed
to speak with us, and if not what were the reasons for not doing so. Of the 37 unique suppliers,
26
20 suppliers were contacted. Six suppliers agreed to speak with us while 14 declined. The full
breakdown is shown in Figure 3.
7 Contacted
Contacted - Agreed to speak
Contacted - Did not agree to speak
Not Contacted
14
Figure 3- Supply Checklist Results - The breakdown of procurementselection of suppliers and
supplier willingness to participatein our research. The numbers represent the number of
suppliers.
Procurement provided rationale for why a supplier may not be contracted. The
procurement selection process was the primary reason a supplier was not contacted. Procurement
stated limited resources as the leading reason. The time of collection proved particularly busy for
the procurement team so they could not initiate many conversations with suppliers. Three of the
suppliers were internal manufacturing plants of the focal company, so supplier information was
already known. The full list provided by procurement is below. While exhaustive of our
conversations, this list is not exhaustive of all potential reasons.
27
Table 5- Supplier Contact Checklist - The template used by procurementto systematically contact suppliers. This checklist was used
to understandthe rationalebehindprocurement'ssupplier selectionprocess. It also was used to understandthe reasons behind a
supplier'sacceptance or declination to participatein our research. Information was collection in part for all 37 unique suppliers
Component14
Component5
Component14
Component27
ComponentlO
Component5
Component33
Component9
Component31
Component10
Supplier 1
Supplier 2
Supplier 3
Supplier 4
Supplier 5
Supplier 6
Supplier 7
Supplier 8
Supplier 9
Supplier 10
28
*
Supplier had a previous hesitancy to share sensitive information.
*
Supplier had worked with focal company for a long time and provided this information.
*
Supplier is a competitor or it suppliers to a major competitor.
"
Supplier is not a big enough player to have an effect on the supply chain.
" The focal company plans to withdraw sourcing from this supplier in the short term.
" The relationship is too sensitive at this moment.
" The procurement team did not want to confuse suppliers with this additional information
request with concerns it may affect current negotiations.
"
Supplier is an internal company location, so information is already known.
"
Supplier is undergoing significant internal changes and cannot commit time.
The total count of suppliers not approached for each reason is outlined in Table 6. A supplier
was not approached for one or more reasons. Not all the reasons provided originally applied to
this base of suppliers. (Count was zero.) Given our limited supplier base, we cannot confirm the
statistical significance of our results.
Of the participating procurement officers, the largest reason given was that the procurement
department did not believe the supplier played a big enough role in the supply chain.
Procurement used revenue spend to determine role in the supply chain. This is a common
misconception as even inexpensive components can have substantial impacts on revenue if they
are vital to manufacturing or design. Upon further inquiry, procurement revealed they were
changing how they sourced a component. Our focal company was consolidating suppliers for a
main component. This explains the second largest reason: the focal company plans to withdraw
sourcing from this supplier or is cutting back business. This rationale explains why they did not
reach out to many of those suppliers.
29
Table 6- ProcurementSelection Rationale - The rationalebehind why procurementchose not to
reach out to a supplier.
1. Supplier had a previous hesitancy to share
sensitive information
2. Supplier had worked with focal company
for a long time and provided this information.
3. Supplier is a competitor or it suppliers to a
major competitor.
4. Supplier is not a big enough player to have
an effect on the supply chain.
5. The focal company plans to withdraw
sourcing from this supplier or is cutting back
business.
6. The relationship is too sensitive at this
moment.
7. The procurement team did not want to
confuse suppliers with this additional
information request with concerns it may
affect current negotiations.
8. The procurement team did not respond to
the request
9. Supplier is an internal company location, so
information is already known.
10. The supplier is undergoing significant
change and would not be able to invest time
into the project.
3
18%
0
0%
0
0%
6
35%
5
29%
2
12%
1
6%
8
47%
3
18%
1
6%
Of the 20 suppliers contacted, 14 declined to speak with us. All were manufacturers or
distributors of commodity products. The suppliers provided the following reasons when
declining to speak with us:
*
Uncomfortable discussing the nature of their supplier base
" Unable to readily procure the information we sought
30
" Undergoing significant changes in their business (delicate financial situation or being
acquired)
" Concerned that this conversation may affect relationships with their suppliers
The primary reason provided was discomfort in discussing the nature of their supplier base.
More than 50% of suppliers listed this as their only or main reason. Several of the suppliers were
unable to easily access that information. One supplier was uncertain how the conversation may
affect his relationship with his suppliers. The breakdown of suppliers for each reason is outlined
in Table 7. This table is not statistically significant due to limited sample size and some suppliers
were unwilling to elaborate beyond stating discomfort.
Table 7- Reasonsfor Not Participating- This table outlines the reasonssuppliersprovidedfor
not participatingin the research. It includes the total suppliers who listed each reason.
1. Uncomfortable discussing the nature of their
supplier base
2. Unable to readily procure the information
we sought
3. Undergoing significant changes in their
business (delicate financial situation or being
acquired)
4. Concerned that this conversation may affect
relationships with their suppliers
5. Concern with how focal company would use
this information
11
5%
3
15%
2
10%
1
5%
2
10%
Six companies were willing to speak to us regarding supply chain risk management. The
characteristics of the six companies we interviewed are summarized in Table 8.
31
Suppliers varied in what information they were comfortable sharing with our focal company.
(Table 9) Two suppliers proved willing to provide all of the requested information. One supplier
was only willing to provide information on inventory on hand and recovery time if a supplier
was lost.
We asked suppliers to explain the reasons behind their hesitancy to provide information. This
list is exhaustive of our conversations with suppliers, but due to a smaller sample size, may not
be exhaustive of all suppliers. Suppliers showed hesitancy or unwillingness to provide
information because of:
" Concern that their customer will source directly from their suppliers
*
Concern that the customer will see their cost structure and increase price pressure
" Industries regulated by exchanges did not reveal the lower level suppliers
*
Inability to change supplier base to match changing needs of industry
*
Concern that focal company will take this information as guaranteed and
constant
*
Desire to source materials as supplier sees fit
*
Desire to maintain integrity of their supplier relationships
" Knowledge that sharing this information may cause confidentiality issues with
suppliers
" Variance in days of inventory, resulting in no clear answer to this question.
" Difficulty of determining days of recovery, could only give approximations.
" Concern that the focal company will demand approval of all vendors before use
" History of not sharing that level of information in written form
32
Table 8- Supplier Profiles This figure summarizes information about the 6 suppliers interviewedfor this research.
Suunnier 1
1950
11/10/2014
5
Distributor
Commodity
Yes
Supplier 2
1990
12/25/2014
10+
Manufacturer
Yes
Supplier 3
Supplier 4
1970
1950
2/25/2015
2/18/2015
4
10+
Manufacturer
Manufacturer
Supplier 5
1940
3/31/2015
10+
Distributor
Specialized
Specialized
Commodity
Specialized
Specialized
Commodity
Supplier 6
1930
4/10/2015
10+
Manufacturer
Commodity
No
No
Yes
No
Table 9- Willingness to Provide Information - The willingness of each supplier to provide each requesteddata to the focal company.
Information
Name/Description
Supplier Factory City(ies)
Factory Country(Ies)
% of Component Sourced From
Supplier
Days of Inventory on Hand
Recovery Time if Supplier Lost
Tenure of Time Working With
I
Supplier
Spplier 4
SupplierS Supplier
Supplier 6
Supplier 5
Willing
Unwilling
.
Willig
Willing
Unwilling
Unwilling
Willing
(in some cases)
Unwilling
Willing
Willing
Willing
Unwilling
Unwilling
Willing
Unwilling
Willing
Willing
Unwilling
Unwilling
Willing
Willing
Unwilling
Unwilling
Unwilling
Willing
Willing
Willing
Willing
Willing
Willing
Willing
Willing
Willing
Unwilling
Willing
Willing
Willing
Willing
Willing
Willing
Willing
Unwilling
I
I
33
.
Belief that customers should trust the supply chain resiliency of their suppliers
The biggest areas of concern for most suppliers were the fear of the focal company
directly sourcing from their suppliers and the fear of procurement increasing price pressure. All
suppliers mentioned this as the two main concems for their company. Suppliers revealed that
customers continually pushed for lower prices. The ability to see their supplier base meant the
focal company could determine their pricing structure and push to reduce prices.
Freedom was also incredibly important to suppliers. Sixty-six percent of suppliers
interviewed stated that desired freedom in sourcing prevented them from providing this
information. Many suppliers actively vetted new suppliers to add to their portfolio. By providing
the focal company with supplier names, suppliers feared being forced to continually source from
these suppliers. One supplier directly stated a concern that the focal company may demand
approval of all vendors. This would limit their ability to adapt to changes in the industry.
Thirty-three percent of supplier stated sharing this information violated agreements with
their suppliers. Contractual obligations limited their ability to share a component's composition,
terms of agreement, or relationships with their suppliers. Even without contractual obligations,
suppliers believed revealing this information could impact relationships with their own suppliers.
Sixty-six percent of suppliers stated that this information was not clear cut. Exact
component percentages per supplier would be impossible to obtain. Days of inventory on hand
and recovery time were not constant. If a disaster were to occur mid-cycle, the supplier would
have less inventory that indicated. Similar concerns occurred with recovery time of a supplier.
A unique reason given for the chemical and industrial industries was the use of metal
exchanges. Aluminum was regulated by the London Metal Exchange. While a supplier could
34
provide this information, they had no insight into where the actual aluminum came from. This
was the case for multiple components in the bill of materials.
Suppliers agree on most reasons for their unwillingness, but there were some unique
reasons. One supplier was adamant that a customer should trust the resiliency of their supplier.
His company, he revealed, did extensive supply chain risk management. There was no need for
the focal company to understand his supplier base. Supplier 6 acknowledged that the willingness
to provide information may change depending on the plant. When looking at international
companies, it was important to understand how if facilities operated independently.
Once we better understood their hesitancies or unwillingness to supply the requested
information, we asked what may alleviate these concerns.
Supplier 5 sourced mainly from tropical areas and was very interested in understanding
the value-at-risk formulation. If the focal company was to offer a copy of their risk analysis,
Supplier 5 stated they'd be more willing to share information.
Supplier 2 did not believe there were ways to change his unwillingness. While Supplier 2
could not supply geographic information, he was willing to provide this information to a third
party to calculate the probability of disruption. Sixty-six percent of suppliers believed a third
party would help alleviate hesitancy in many suppliers. This third party would be used to collect
information and formulate a value-at-risk. The focal company would never see the actual
supplier base. They would just understand the value-at-risk of each component in their supply
chain.
Confidentiality or some written agreement was key in reducing hesitancy from suppliers.
Supplier 6 required full secrecy from anyone privy to the information. Thirty-three percent of
35
suppliers believed stated that putting this request into long term contracts may increase a
supplier's hesitancy to commit.
Sixty-six percent of suppliers agree that a more company-wide message from the focal
company was key. No supplier had heard of this initiative prior to procurement's phone call.
Having this initiative as a company objective or strategy would help suppliers understand the
motivation and importance. Conversations with suppliers initiated by senior management
promoted a sense of legitimacy to the supply chain data collection. Otherwise, Supplier 6
believed suppliers would just see this as a regional campaign to get a price advantage.
4.4 Relationship Quality Measurement Analysis
The next area of focus for our team was how the relationship measures we outlined
correlated with a willingness to submit information. Data was collected through interviews with
suppliers and then verified with the procurement team to determine if there were any outliers.
Each attribute was measured by a variety of questions. Examples of these questions are
outlined in Appendix C. Using these questions, we assigned a value of "high, medium, or low" to
each vendor. The assignment of these values was mostly subjective as not all questions were
applicable to each supplier. A value of high was assigned to suppliers who demonstrated a high
presence of a value in the relationship. A value of medium was assigned to a company who
demonstrated the presence of that value in moderate amounts. A value of "low" was assigned to
those whose relationship was not characterized by this attribute. The results are outlined in Table
10.
36
Table 10- Relationship Quality Measure by Supplier - The results of the relationshipquality assessment. Companies were measured
againsta set ofpre-determined questions. Those with high levels of a measurement indicatedabove average responses. Suppliers with
a label of low demonstrated below average responses
Supplier 1
Mediu
m
Medium
Low
Low
Low
High
Low
High
High
Medium
Low
Medium
High
Supplier 3
Low
Mediu
m
Medium
Medium
Low
Low
Medium
Medium
Supplier 4
High
High
High
High
High
High
Supplier 5
Mediu
m
High
Medium
High
Medium
High
Medium
Supplier 6
Mediu
m
High
High
Medium
Medium
High
Medium
Supplier 2
37
5. DISCUSSION
As we have seen from our interviews, the success of tier 2 supplier risk information data
collection initiatives is influenced by a variety of factors. These factors come from internal
sources, external industry realities, and how the focal company and supplier interact. In this
discussion, we will dive deeper into how each of these areas influence how and if tier 2
information is collected.
5.1 Internal Company/Supplier Factors Influencing Data Collection
It goes without saying that the internal workings of a company determine how business
will be conducted within it. This is no different when determining how tier 2 supplier risk data
collection initiatives are undertaken. Our study identifies three main internal factors that affected
data collection: alignment with corporate strategy, procurement buy-in, and whether a supplier
was a manufacturer/distributor.
5.1.1 The Importance of Company Buy-In and Alignment with Company Strategy
The cohesiveness of the data collection initiative with the company's strategy and
corporate message are vital. This concept permeated our conversations with successful
transparency initiatives, with suppliers, and with our focal company's procurement team. Supply
chain risk management must be a strategy approved and promoted from senior management
down. Both of the successful supply chain transparency initiatives we analyzed actively educated
their employees and their suppliers for years prior to actual data collection. The collection of tier
2 data became analogous with doing business with the company.
38
The synergy between supply chain risk data collection and company strategy is necessary
for suppliers. In our interviews discussing successful initiatives, interviewees stressed the
importance of senior management buy-in. With senior buy-in, companies can dedicate
significant resources to the initiative. This allows for a cohesive and extensive message to
suppliers. Suppliers hear about transparency from multiple sources: their direct buyers, company
management, and external publications or advertisements. Our initiative had not yet received
management buy-in. Our conversation with a supplier was the first time many had heard about
this initiative from our focal company. Most suppliers we contacted believed the initiative was a
positioning tactic to gain more power over price. When they hear of transparency initiatives from
multiple sources, it legitimizes the cause more with the suppliers. When the initial stage of
conversations was supported by senior management, suppliers regarded the initiative with a
sense of more importance and urgency and subsequently feel more likely to participate in the
project.
5.1.2 Procurement as Influencing Factor in Data Collection
Supply chain transparency's cohesion with corporate strategy is also necessary for buy-in
internally. We had originally hypothesized that tier 1 suppliers would be the first to resist
participation. This proved incorrect. Internally, we first faced resistance from our focal
company's procurement department. Our research was only known to our contact in the
procurement team. This contact did not have responsibility over any other procurement
specialists. Procurement, therefore, had no incentive to participate which lowered the priority of
this project. This initiative was an additional task on top of our procurement team's busy
39
workload. While we did receive significant help from procurement, 47% of our requests for data
went unanswered.
In any industry, the procurement team is vital to any initiative involving suppliers. They
serve as the gate-keepers to a company's supplier base. During our supplier selection process,
they held the knowledge of and power to speak with suppliers. Without their help, a company
cannot contact their tier 1 suppliers to gather information. Therefore, the first objective in a data
collection initiative should be to educate and incentivize the procurement team. By having part
of their objectives or metrics aligned with this program, procurement can prioritize the initiative.
Our conversations show that tier 1 suppliers are more comfortable offering information
when they are contacted by individuals with whom they already hold a long-lasting professional
relationship. Buyers, procurement professionals and risk management teams tend to obtain more
and better quality inputs. These professionals have a better understanding of the decision-making
processes within the contacted suppliers and know how to better frame the request. This
reinforces the need for full procurement buy-in.
5.1.3 Relative Risk of Manufacturers and Distributors as Suppliers
There are unique factors of suppliers that also influence how supply risk data is collected.
Whether a supplier is a manufacturer or distributor affects the need to collect and the manner in
which data is collected. The main advantage of working with manufacturing suppliers as
compared to distributors is that long-term agreements allow for procedural efficiency and
customization. Manufacturers are riskier supply chain nodes. Even with dual sourcing,
companies can be susceptible if multiple manufacturers are located in the same geographic
40
region. It is therefore important to geographic diversify suppliers to reduce this risk. In regards to
data collection, manufacturers often expressed concern that they would become obsolete.
Manufacturers are concerned that customers will pursue their suppliers directly or exert
excessive price pressure if suppliers are known. It is necessary to build trusting relationships
with these suppliers to collect information.
Distributors do not allow as high a level of customization. Distributors inherently help
mitigate risk. Distributors do this through dual sourcing and a strong network of storage
facilities. If a geographic disruption occurs in one area, distributors have already identified
additional vendors. They can also serve clients from distribution centers located outside the
disrupted zone. The time to replace a supplier is significantly lower. The collection of data with
distributors is often limited by availability or consistency of information. Distributors' networks
can change often so they require more frequent updating of information.
5.2 External Factors Influencing Data Collection
Once an initiative has received internal approval, there are still many factors that
influence the success of data collection. Data collection can be limited by these factors. Two
such factors discovered were regulating bodies and the creation of byproducts.
Conversations with manufacturers revealed the prevalence of exchanges in the chemical
industry. Exchanges were primary used for metals. The most frequent one we encountered was
the London Metal Exchange. The London Metal Exchange oversaw the sale of aluminum for all
of the bill of materials. Suppliers must purchase through the London Metal Exchange. The
London Metal Exchange sourced aluminum from all around the world, but did not share where a
particular source of aluminum originated. Suppliers who sourced aluminum were unable to
41
identify where each shipment of aluminum originated. As the origin may vary depending on the
shipment, they could not provide information they could guarantee. The positive side to
exchanges like the London Metal Exchange was their inherent risk management. They sourced
from around the world and could replace a disrupted supplier with more ease than a typical
supplier.
Information is not always limited by governing bodies or restrictive laws. The actual
nature of the product can influence the complexity of information. Supplier 1 brought a unique
consideration to our analysis: the effect of byproducts. In the chemical industry, the byproducts
of chemical reactions can significantly impact product availability. For instance, in the
production of caustic soda, chlorine is produced. If a company cannot sell its byproduct, it
cannot produce the main component. This occurred in 2010 and shut down the production of
caustic soda for several months. This complication adds a significant layer to supply chain risk
management. To perform proper risk management, one must understand the full nature of its
suppliers.
5.3 Relationship Factors Influencing Data Collection
Given the limited sample size, our findings were inconclusive of how relationship
measures may influence a company's willingness to contribute information. The only attribute
that provided a difference was "trust." Companies with high or medium trust were willing to
provide more information. The company marked with low trust was unwilling to provide any
information. There was no significance between a company rated as "low" versus a company
rated as "high" for any of the other attributes.
42
Through interviews, we did identify two additional criteria that seemed to have an effect
on participation. Four of the six companies were actively growing their business with our focal
company. They stated the purpose for their participation was to show a "willingness to commit."
The expectation of fostering more businesses in the future seemed to trigger willingness in the
suppliers. The more priority the supplier assigned to the focal company the more willingness
there was to participate.
6. CONCLUSIONS
Companies can no longer ignore their networks of customers and suppliers when
determining supply chain risk. Unlike measuring risk within a single node, measuring the risk of
a network requires collaboration amongst all players. Our research aimed to understand the
complexity of supply chain risk data collection. To do so, we focused our research on
understanding the factors that influence data collection.
Factors vary throughout different players in the networks. Internally, supply chain
transparency must be indoctrinated in the culture of the executing company. Necessary parties
must be well educated and incentivized to take on this labor intensive exercise. By indoctrinating
transparency into the culture, companies legitimize this initiative to both employees and
suppliers. Through our research, we also identified external factors that have an influence on
data collection. Regulatory bodies and laws can make information sharing illegal. Derivative
products can also have a drastic effect on the ability of a company to share information.
Obtaining a thorough understanding of the hesitancies that shape the execution of an
information sharing project is the first step towards an integrative strategy for supply chain risk
management. We envision our thesis as the first stage to build a complemental business
43
relationship between companies and suppliers that seek to engage in the share of proprietary
information.
6.1 Potential Improvements
Further research at our focal company will require stronger company buy-in. Incentives
must be aligned with participating parties to ensure there is time and willingness to participate.
Supply chain risks require interdisciplinary efforts within a company. This combined effort
across departments also creates a comprehensive and exhaustive message to suppliers. By
creating an exhaustive message, a company enforces participation as a requirement for doing
business with a company.
A further improvement would be a more exhaustive analysis of the supplier base. Given
time limitation, we explored 6 suppliers in depth. A much more representative population would
be needed to analyze the results of a company's business on data collection.
Our research has established the foundations for understanding and managing hesitancies
that may arise in a project of this type. The complexities of today's supply chains force
companies to identify vulnerabilities of their tier 2 suppliers and beyond if they wish to remain
competitive.
Having understood these factors, a company must begin incorporating transparency into
its corporate strategy. This requires senior management buy-in so that incentives can be aligned
with action. A natural extension of our study is identifying the sources of risks in the supply
chain, visualizing supply chain exposures, and designing and executing effective risk mitigation
strategies to build a more resilient end-to-end supply chain.
44
APPENDICES
Appendix A - Project Summary Document to Suppliers for Phone Calls
Identifying and Visualizing Risk Associated with Tier 2 Suppliers
The costs of supply chain disruptions manifest in the costs of the disruption of
manufacturing and the loss of sales. The 2013 World Economic Forum reported that supply
chain disruptions can drop a company's share prices by an average of 7%. It is vital to determine
an integrated and unbiased approach to identifying risk at individual nodes and how they affect
the full supply chain to mitigate the risk of disruptions. That is why we have teamed up together
to create an unbiased identification and visualization protocol for companies to evaluate their
risk along global supply chains. In 2014, we successfully completed the risk identification and
visualization of their refined catalyst product lines through their tier 1 suppliers. To generate a
comprehensive visualization tool, we are pursuing tier 2 supplier information. Doing so will
allow us to properly set inventory levels to account for potential natural disasters that would
disrupt production and to also mitigate risk overall.
To successfully complete this visualization exercise, MIT will need to gather from your
company the following information from [focal company]'s tier 1 to determine and map their tier
2 suppliers for key components.
Table A]- Supplier In/ormation Request - The informnation as requested to the suppliers.
Information
Key Component I
Name/Description
Supplier Factory City(ies)
Factory Country(Ies)
Days of Inventory of
Hand
Recovery Time if Supplier
Lost
Tenure of Time Working
With Supplier
45
Key Component 2
Key Component 3
Appendix B - Example Questionnaires for Phone Interviews
1. Do you have the following information available for your product XXXXX?
Table BJ- Data Collection Table - The input data table used when speaking with suppliers
Information
Name/Description
Supplier Factory
City(ies)
Factory Country(Ies)
% of Component
Sourced From
Key Component 1
Key Component 2
Key Component 3
Supplier
Days of Inventory on
Hand
Recovery Time if
Supplier Lost
Tenure of Time
Working With
Supplier
2. Of the main components listed, which do you feel are the riskiest?
3. How comfortable would your company be in sharing this information with [focal
company] for risk analysis?
4. What would make you feel more comfortable with sharing this information with [focal
company]?
5. Do you think other companies such as yourself would feel less/as/more comfortable
sharing this information?
6. What would you/they need to share this information?
7. Would a copy of the risk assessment of your suppliers incentivize you to share this
information?
8. Who from [focal company] would you want to be on the calls discussing this
information?
a. Procurement?
b. Risk Management?
c. Just MIT?
9. Do you currently have a risk management strategy?
10. Has your supply chain ever been disrupted?
a. How did you get out of it?
b. What caused the disruption?
11. Have any other of your customers begun conversations about supply chain risk
management?
12. We will need to gather additional information from tier 2 suppliers, can you confirm if
you would prefer to initiate this contact?
46
Appendix C - Relationship Quality Measures Associated Questions
Table C] ] I- Relationship Quality Measures Associated Questions - A summary of some of the
questions used to measure relationshipsbetween the focal company and its suppliers.
Relationship Quality Measures Associated Questions
Trust
Expectation of
Continuity /
Commitment
" Do you modify the [focal company]'s forecast?
0 Do you feel you are a valued member of [focal company]'s supply
network?
" Would you describe your relationship with [focal company] to be open?
* Do you have a long term contract with [focal company]?
" Can you count on the orders for [focal company] with regular
frequency?
* How large is [focal company] in terms of your business?
0 How long has your company been working with [focal company]?
e How long have you been in the position and working with [focal
company]? How often does someone rotate into this position?
0 How long have you been working with your purchaser?
0 Have you made any adapted any operation protocols to make working
with [focal company] more efficient?
0 Do you make visits to [focal company]'s sites or facilities?
0 Does [focal company] make visits to your sites or facilities?
0
*
*
*
Value-Add
"
*
"
*
Do you engage in joint quality or advanced planning with [focal
company]?
Has [focal company] met the standards required to do business with
your company? (storage facilities, transportation docks, etc)
Does your company and [focal company] work together to add value to
your supply chain?
Does your company and [focal company] work together to develop
products or services?
Does your company offer VMI services to [focal company] or able to
offer them?
Do you offer any value-add offerings to [focal company]? Have they
accepted?
Have you done any specific production development with [focal
company]?
Have you encountered any product problems in the past 5 years?
47
" Do you share significant information related to cost with [focal
company]?
" Are there significant information flows between your company and
[focal company]?
* Is [focal company] aware of the makeup of the components you source
from them?
" Does [focal company] have insight into your suppliers?
" Do you share more or less information than average with [focal
company]
" Do you have insight into proprietary information of [focal company]?
" Does [focal company] give you sufficient notice before an order is
placed?
* How do your prices compare to those in the market? (Below average,
average, we are a premium product)
*
How are prices determined in your company?
* Have you recently changed costs with [focal company]? Upwards or
Information
Sharing
Relative Cost
downwards?
*
How effective would you gauge your relationship with [focal
company] to be?
*
Do you see your business staying the same or growing during the
next 5 years?
*
Has [focal company] responded to any concerns you've had?
* Do you receive quarterly performance updates from [focal company]?
* Did your company and [focal company] work together to define quality
performance metrics or service levels?
" Have you made great strides to improve any issues pointed out by [focal
company]?
* Has [focal company] addressed any concerns you've had?
" How do you communicate to or receive feedback from [focal
company]?
" If you picked up the phone, could you reach your contact at [focal
Satisfaction
Communication
/ Feedback
I
company] quickly?
48
Appendix D - Tier 2 Supplier Data Collection Template
Table Dl- Tier 2 Supplier Data Collection Template - The template sent to suppliers willing to provide information.
ISOURCED COMPONEN4
7.p
CAUSTIC SODA 50%
Xep Componint 2
C7.7.ta
Comonent Name
Component Description
Supplier Name
Nm
Component Description
Supplier Name
Suppler Address
Suppler City
Suppler Region
Suppher Country
X of Component Sourced From
Copoen
Supplier1
Suppler
Supplier Address
Supplier City
Supplier Region
Supplier Country
X of Component Sourced From
_Supplier
I Days of Inventory on Hand
Recovery Time if Supplier Lost
Days of nwenorp on Hand
Recovery Time if Suppher Lost
Tenure of Time Working With
Tenure of Time Working With
Supplier
Component Name
SMReO
Component Name
Component Description
Supplier 2
Component Description
Suppher Name
SuppNer Address
Supplier Name
Suppler City
Suppler Region
Supplier Country
V of Component Souroed From
Days of Inventory on Hand
Recovery Time if Suppher Lost
Tenure of Time Working With
Supplier City
Component Name
Cc"
I
Name9
Supplier Address
Supplier Region
Supplier Country
V_of Component Sourced From
Days of Inventory on Hand
Recovery Time If Supplier Lost
Tenure of Time Working Wth
Component Name
4ne
49
I
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