ADDRESSING SUPPLY CHAIN RISKS THROUGH AGILE STRATEGIES Richard W. Monroe and P. Richard Martin, Wall College of Business, Coastal Carolina University, Conway, SC 29528, (843) 349-2527, [email protected] ABSTRACT In recent years ‘supply chain design’ has been a primary research topic. Another important topic is ‘supply chain risks’. This paper proposes a framework for supply chain design taken from a risk perspective. Once the supply chain is viewed from the risk perspective we offer agile supply chain approaches as prescriptive strategies for mitigating supply chain risks. Introduction Today’s global business environment is characterized by shorter product life cycles, more demanding customer requirements and a variety of supply chain risks. In this environment, organizations seek new strategies to address risks and to enhance supply chain performance. The supply chain is characterized by many exchanges that occur in the overall process of planning, sourcing, making and delivering products, services and the related supply chain information. As these exchanges occur and the material moves through a series of providers and ultimately reaches consumers, the efforts of several parties need to be aligned – this is referred to as the supply chain . The following definition for “supply chain management” offers further clarification: “Supply chain management is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders” . By viewing supply chains from a systems perspective, many of the observations from Jay Forrester will become very relevant. According to Forrester , a complex system is a “high order, multiple loop, nonlinear feedback structure.” Feedback and nonlinearity are important keys that may result in “counter intuitive behavior” in the complex system . Today, most supply chains are global in nature which makes them large and complex systems by virtue of the way they have evolved. Conklin  concludes that in today’s global marketplace, it is beyond any single company ability to realize or adjust to market opportunities in a timely manner due in part to a lack of experience and skill sets. As large, complex systems, global supply chains share many of the characteristics associated with global systems models from social and economic research such as those developed by Forrester and his associates . Among these characteristics are concerns regarding the modeling of global systems. Morgan and Henrion offer a list of five shortcomings: “inadequate and incomplete understanding of the systems being modeled and a concomitant lack of attention to model verification; failure to be sufficiently specific about the objectives of the modeling project; failure to examine carefully the implications of uncertainty in input variables and model time constraints; inability to deal with the stochastic elements in the systems being modeled; and difficulties arising from the ideological perspectives of the analysts” [23, p. 297]. The stochastic nature of global systems is further subdivided into: the problem of variability and major changes in the operating environment [23, p. 299-300] “… although a good model of the system may tell you how it will respond to any hypothetical set of events or changes in the operating environment, predicting such events is generally impossible” [23, p. 300]. We believe that the systems observations are entirely appropriate for global supply chains. Supply chain agility is needed to address the complexity of these global supply chain systems and more specifically agility is needed to mitigate (1) problems with variability and (2) major environmental changes which are event-based. This characterization corresponds with the modeling challenges from the global systems perspective as described by Morgan and Henrion . The other lesson we take from systems thinking is the use of risk management which will be discussed further later in the paper. First we look at the literature related to supply chain design and supply chain agility. Supply Chain Design and Agility The concept of Design for Supply Chain Management (DFSCM) and its use by HewlettPackard (HP) was first introduced by Lee and Billington  and further explained by Lee . Based on these references, the idea of DFSCM was well-established at HP in the early 1990s. The primary issues that were addressed dealt with inventory issues and were based on a global supply chain inventory model . Embedded within DFSCM at Hewlett-Packard were many different supply chain strategies aimed at various supply chain issues that HP was attempting to address. Included among the list of supply chain strategies are: Delayed product differentiation Commonality Standardization Process steps switching And Postponement . Many of these strategies or principles are aimed at flexibility, agility and logistics cost reduction. First among the issues addressed by HP were the combined factors of product design, inventory placement and design for localized markets . DFSCM is also characterized by the formation of analysis teams and the use of academic researchers to guide or to supplement the resources within HP . One DFSCM team is described as being composed of members from “finance, marketing, manufacturing, distribution and engineering” . This cross-functional collaboration is a key factor for achieving internal integration within supply chain functions. Internal integration is suggested as a key requirement to support supply chain agility. Allowing sufficient time for analysis is another significant factor which makes the HP DFSCM approach unique . Among the academic participants, Dr. Hau Lee from Stanford University has been the most prominent participant in the various HP initiatives but other academics have also participated. The benefits from this industry-academia collaboration should not be underestimated. The academic may bring a particular expertise in one or more analytical technique and more importantly the academic may bring lessons learned from other business organizations which may not be accessible by HP management. Those examples are the main benefits anticipated while individual cases may lend other benefits from industry and academia working together. While the intent of many of these supply chain initiatives at HP has been to provide flexibility and to move towards being more agile, the success of agility tends to be exposed when there is an adverse condition related to either supply or demand. There are several excellent examples of supply chain agility where the agile firm succeeded while the firm that lacked agility failed. Nokia and Ericsson were faced with a supply chain disruption due to a fire at a facility a radio frequency (RF) chip in New Mexico in March 2000. Nokia executed design changes, quickly worked with alternate suppliers and implemented their contingency plan within a five day period after the fire. Ericsson was caught without a plan and was in the midst of eliminating alternate suppliers. They lacked a coherent contingency plan, experienced drastically reduced production levels for months and delayed a new product introduction. Nokia gained market share through their agile response and at the expense of Ericsson . In 1999, an earthquake in Taiwan disrupted the supply of computer components to the United States and significantly impacted major computer makers including Apple, Gateway and Compaq. While those companies were unable to make computers, Dell changed prices and altered their offerings to promote those computer configurations that could be made without the components sourced from Taiwan. This agile response to the disruption by Dell also led to an increase in market share at the expense of the competitors who were not agile . Lee offers the following list of characteristics or “six rules of thumb” for designing agility into the supply chain: “Provide data on changes in supply and demand to partners continuously so they can respond quickly. … Ensuring that there are no information delays is the first step in creating an agile supply chain. Develop collaborative relationships with suppliers and customers so that companies work together to design or redesign processes, components, and products as well as to prepare backup plans. Design products so that they share common parts and processes initially and differ substantially only by the end of the production process. I call this strategy “postponement.” … This is often the best way to respond quickly to demand fluctuations because it allows firms to finish products only when they have accurate information on consumer preferences. Keep a small inventory of inexpensive, non-bulky components that are often the cause of bottlenecks. Build a dependable logistics system that can enable your company to regroup quickly in response to unexpected needs. (this can be accomplished through an alliance with a third-party logistics provider). Put together a team that knows how to invoke backup plans” . We agree with Dr. Lee’s suggestions but we believe that there needs to be a few additions to this list. From our research and synthesis of many sources we offer the following supplemental ideas: Foster and reinforce internal integration through cross-functional teams working on supply chain issues. This is based on the HP DFSCM teams and this may supplement or overlap with the team for “backup plans” suggested by Dr. Lee. We suggest this because we believe that firms that lack agility are very likely to lack internal integration. Rationalize and select the method for integration with key suppliers. Potential options for external integration include: Information Sharing, New Product Development or Relationship . The nature of the supplier-buyer relationship requires very different resource involvement and very different approaches to achieve the desired integration. Agility and Risk Agility in the supply chain is described as being able to “respond to sudden and unexpected changes in markets. Agility is critical, because in most industries, both demand and supply fluctuate more rapidly and widely than they used to. Most supply chains cope by playing speed against costs, but agile ones respond both quickly and costefficiently” . Clearly, a one dimensional response by an organization is not acceptable and does not constitute agility. Common sources of supply chain risk to performance have previously been investigated; location, logistics, order processing, purchasing, quality, supply lead time, supply availability, and demand . Competitiveness from an agility perspective, depends upon companies be able to adapt their supply chains efficiently while building strong relationships with customers and suppliers quickly . Supply chain agility becomes the key to adapting to market variations more efficiently by integrating with suppliers more effectively . As more companies pursue production capability ability by outsourcing or off-shoring, explicit risk factors increase. The connection between agility and risk is implied in many different references. We suggest that the use of agility as a response to risk needs to be addressed in a more explicit manner. We also suggest that many of the scenarios in existing supply chain agility research can be more appropriately characterized as risk management. Extended supply chains increase the risk factor for operational and inter-firm linkages. Companies attempt to manage this risk by agile practices. A case can be made that the selection, management, and coordination of these suppliers take on the standard problems associated with project management. Olsson  addresses aligning projects with the company’s business strategy through internal and external flexibility where external flexibility is more related to the definition of agility presented by Baker (1996). Extended supply chains need the ability to respond to risk from market and economic changes by choosing the most effective resource (supplier) at the appropriate time just as projects match resources to requirements by becoming temporary extended organizations. Supply disruptions from the various examples constitute what we believe is a greater magnitude of “fluctuation” that goes beyond the fundamental supply fluctuations  that are described in the definition of supply chain agility. The need for backup plans to deal with supply disruptions is one indication of the risk management for the supply chain. We think the risk aspect should be given greater emphasis. Supply chain events are the situations where supply disruptions occur and these events require those backup plans or detailed contingency plans. Some of the details for the planning that is required are provided by Lee , Collin and Lorenzin  and Engelhardt-Nowitzki and Zsifkovits . For the purposes of developing a model for supply chain agility we suggest that risk management is the appropriate framework with sublevels for variability and event-based changes of greater magnitude. The details of the proposed model are presented in the following section. Supply Chain Agility and Risk Model In order to design agility into the supply chain, the cross-functional design team must consider the full range of risks. The full range of risk includes Complexity; Demand fluctuation; Supply fluctuation; and major SC Events (contingency planning and SC event preparedness). This description and earlier discussions in this paper are combined to develop the following model for SC Agility and Risk. Figure 1. Design for Supply Chain Risk Model Source: adapted from Monroe and Martin (22) This model differs from most of the basic supply chain agility discussions in the literature. The various strategies that HP has employed are among the “Appropriate Agile Strategies” but they are primarily “appropriate” only for “SC Variability.” So the proposed model involves drawing strategies from other sources and expanding the risk elements beyond the commonly used definition of the environment where supply chain agility is needed. “SC Major Events” require specific agile strategies and require significant planning, scenario analysis and cross-functional teams to prepare the needed contingency plans. “SC Complexity” is another large risk element that needs to be addressed in a different manner from “SC Variability” and “SC Major Events.” Supply chain rationalization, strategic alliances, long-term “evergreen” contracts are just a few examples of strategies that may be employed to address “SC Complexity” . By subdividing risk and then matching each risk element category with appropriate agile strategies we believe that supply chain issues will be addressed in a more effective manner. This approach of using agility to proactively address the full spectrum of supply chain risk is what we suggest is a framework that we might also call ‘design for supply chain agility.’ Conclusions This paper proposes a “risk-agility” model of the supply chain which takes a very definitive view from a risk management perspective. The model incorporates “Risk Elements” which are further specified as “Supply Chain Complexity”; “Supply Chain Variability”; and “Supply Chain Major Events”. These different categories of Risk require Agile Strategies which must be developed and implemented in a proactive manner. Using this model as a prescriptive approach for supply chain design is suggested as a way to achieve better SC performance, meet customer requirements and do so at a lower overall supply chain cost. 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