Rethinking Resilience in Global Supply
Chains
Attempts to diversify may make
supply chain disruptions more damaging when they occur.
The increasingly
global and complex nature of supply chains carries elevated risk of costly
disruptions caused by a variety of unpredictable factors – natural disasters,
industrial accidents, political shocks, etc. At the same time, an intensifying
emphasis on efficiency has removed nearly all the slack from most firms’ supply
chains. In response to both pressures, many managers have been diversifying
their supplier networks – fearing that relying too much on any one
supplier would enhance exposure to potential disruption, and would also grant
that supplier a dangerously advantageous bargaining position in price
negotiations.
Other common
strategies for reducing the risk and potential impact of supply chain
disruptions include investing in long-term relationships with
suppliers (since long-term partners presumably receive more responsiveness from
suppliers in case of disruption, including preferential access to services as
they come back online), and partnering with suppliers in logistically
efficient locations where possible. Anecdotal evidence suggests the
above three strategies as the best practices for managing supply chain
uncertainty.
However, while
managers mostly worry about the prospect of big, sudden shutdowns, it’s the
everyday snags – logjams at the local customs office, for example – that could
end up costing the most in the end. Viewing disruption as a low-level constant
spiking infrequently into outright disaster, rather than solely as a risk to be
minimised, may lead to a different prescription for resilience. In this
analysis, diversification, in particular, has decided disadvantages, as
spreading the same amount of money across numerous suppliers gives firms less
leverage in influencing the day-to-day behaviour of each one. Conversely,
having fewer partners allows managers to monitor more easily how each one copes
with minor mishaps, thereby allowing for a more informed selection.
Given that there are
advantages and disadvantages on both sides, well-rounded consideration of the
issue could leave managers at an impasse. A firmer sense of how sourcing
strategies might affect disruption recovery time has been elusive, due to
limited availability of data. My recent working paper “Recovering from Supply
Interruptions: The Role of Sourcing Strategy” (co-authored with Serguei Netessine and Nitish Jain
of London Business School) is the first large-scale academic attempt to gauge the
success of specific resilience-building strategies using empirical data.
Taking the measure of
disruptions
The United States
Department of Homeland Security requires U.S.-based firms to provide
comprehensive transit information on all sea imports (including supplier’s and
buyer’s name and address, as well as description and quantity of cargo), via a
document known as the bill of lading. We employed a “supplier intelligence data
service” to obtain more than 45 million bills of lading for the period from
June 2006 to June 2011, which we then narrowed down to slightly more than two
million transactions tied to 1,549 buyer firms.
Through the bills of
lading, we tracked fluctuations in the quantity of goods each firm imported. We
then compared firms’ actual deliveries to desired quantities, with the aid of
research-verified models of inventory management. This method allowed us to
pinpoint supply chain interruptions (by noting when shipments apparently fell
short of the intended quantity) and measure the length of time it took for them
to be resolved.
Drawing once again
upon the bills of lading, we assigned each firm a value for supplier
diversification, long-term supplier relationships, and sourcing from
logistically efficient locations – so as to determine what, if any, perceived
connection there might be between the three best practice sourcing strategies
and the firms’ supply chain resilience.
The advantages of
narrowness
Our results make a
convincing case for the virtues of narrowness in supply chains. We find a
statistically strong correlation between the extent of diversification and
longer recovery times following supply chain disruptions. Put plainly, all else
being equal, for an average firm it takes longer to
untangle snags in more dispersed supply chains. While these findings are strong
and hold across many importing sectors, managers should be careful in applying
these findings to their own firms, as much may depend on their unique situation
in trading-off the benefits of diversification and any disadvantages in
lengthening recovery of supply chains. That is perhaps our most
counter-intuitive finding.
More
in line with received wisdom, we conclude that a supply chain with more
long-term relationships will bounce back faster after a disruption.
We could find no
statistically significant correlation between logistically efficient sourcing
locations and recovery outcomes. Thus, based on our evidence, it is impossible
to say whether supplier location matters for supply chain resilience. Please
note, however, that in quantifying supply chain disruptions we controlled for
sourcing lead time, which could have artificially dampened the effect of
geographical location upon the results.
Strength in numbers
Nowadays, supply
chains are threaded through with sophisticated data collection tools funnelling
actionable information back to managers. Yet, our paper suggests that managers
should also be looking outside their own network, using publicly available
information such as bills of lading to benchmark performance against industry
peers. In our results, for example, there were clear differences in outcomes
for retailers as compared to manufacturers (though these were less significant
than the cross-industry averages). In their greed for ever more granular data
on their own supply chains, managers should not overlook the efficacy of
external, industry-focused approaches.
Karan Girotra is the Paul
Dubrule Chaired Professor of Sustainable Development and an Associate Professor
of Technology and Operations Management at INSEAD.
Read more at http://knowledge.insead.edu/operations/rethinking-resilience-in-global-supply-chains-5626?utm_source=INSEAD+Knowledge&utm_campaign=cc605e3518-EMAIL_CAMPAIGN_2017_04_06&utm_medium=email&utm_term=0_e079141ebb-cc605e3518-249840429#fMum5dOWfGzoBR5b.99
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