Supply chain risk is readily evident with COVID-19 related plant shutdowns across the country and across the globe. Outsourcing and off-shoring have increased the length of supply chains. Lean Manufacturing has reduced inventories. Just-In-Time / Just-In-Sequence deliveries leave little time for the unexpected. Here is a simple method to assess supply chain risk.
The method is based on the work of Professor David Simichi-Levi of MIT’s Sloan School of Business. While his risk exposure model was developed in the context of global manufacturers with complex networks of suppliers, the concepts are applicable to domestic manufacturers with a single tier of suppliers.
The supply chain risk analysis starts with three basic questions:
(1) How many days will it take a supplier to re-fill the supply chain after a disruption? In the Simichi-Levi model, this factor is Time to Recover (TTR). TTR is driven by the length of the supply chain and on availability of alternative sources.
(2) How many days can production continue without deliveries from that supplier? This is Time to Survive (TTS). TTS is strongly dependent on inventory.
(3) What are the operational and financial costs per day of while waiting for deliveries from that supplier? This is Performance Impact (PI).
The key to the model is the difference between Time to Recover and Time to Survive. If TTR is less than TTS, the supply chain will be re-filled without losing production. If TTR is greater than TTS, then the supply chain will run dry and production will be lost. If TTR and TTS are approximately equal, a supplier disruption can be managed through expediting.
This bubble chart is a visualization of supply chain risk, with the size of the bubble proportional to supplier spend.
There is no risk of a production loss due to a disruption at Supplier C. Even with the largest spend, Supplier A is not at risk for a production loss. Through expediting, the risk of a Supplier E can be mitigated. Supplier B is low risk but with the greatest financial pain. The greatest risk for a production loss is Supplier D, even with the lowest spend.
No one knows how and for how long COVID-19 will be disrupting global and domestic supply chains. Regional peaks and multiple waves could lead to repeated closures and re-openings at key suppliers. This supply chain risk analysis can, at least qualitatively, identify your highest risk suppliers. Actions taken now can reduce risk and minimize the effects on operational and financial performance.
Professor Simichi-Levi has written extensively on supply chains and operations. For more on these topics, his most recent book “Operations Rules: Delivering Customer Value through Flexible Operations” is available through Amazon.
To adapt your business to today’s new operational challenges, click HERE for a post COVID-19 toolkit rolled up from six of my blog posts.