MITIGATE SUPPLY RISK IN SUPPLY CHAIN
Xiaoyu Yang and Shaochuan Fu
Schoole of Economics and Management, Beijing Jaotong University, Beijing, China
Keywords: Disruption Risk Management, Supply Chain, Supply Risk, Multi-supplier.
Abstract: As one of the most important part of supply chain, the supply disruption has more influence than other
disruptions. Once the supply disruption occurs, that may lead to serious consequences; even break the whole
supply chain. This paper analyses the composition of supply risk, addresses an effective method to mitigate
supply risk, i.e., dual-supplier or multi-supplier supply model. In order to choose suppliers for the whole
supply chain, a mathematical model is developed and verified by a numerical example.
1 INTRODUCTION
With the developing of business model, such as
procurement of corporate globalization, outsourcing
non-core business, single-source supply and lean
supply, the supply chain gets longer in the space,
while shorter in time. These changes increase the
possibility of disruption. And the growing
perturbations of external elements like natural
disasters, terrorism, war, epidemics, computer
viruses, economics fluctuations, makes the supply
chain more fragile, and the probability of disruption
higher.
Procurement is the leading force of “upstream
control” overall supply chain. Supply disruptions
may bring great loss to the enterprise and the whole
supply chain. Take the year 2000 lightning incident
in Albuquerque, New Mexico as an example (R.
Eglin, 2003).The incident catastrophically destroyed
a Phillips Electronics semiconductor plant, which
was Ericsson’s single supplier. As a result, when the
plant had to shut down after the fire, Ericsson had no
other sources of microchips and ultimately lost $400
million in sales. Due to such negative influence of
supply disruptions, large numbers of researchers
have started to investigate how to mitigate disruption
risks in a supply chain
Most supply chain disruptions can be broadly
classified into three categories, supply-related,
demand-related, and miscellaneous risks (Oke and
Gopalakrishnana, 2009). Supply disruptions can be
defined as unforeseen events that interfere with “the
normal flow of goods and (/or) materials within a
supply chain” (Craighead et al., 2007). Supply
disruption occurs when suppliers could not fill the
orders placed with them. Supply risks could affect or
disrupt the supply of products or services that the
supply chain offers to its customers potentially.
Supply disruptions has various causes, including
natural disasters, equipment breakdowns, labor
strikes, political instability, traffic interruptions,
terrorism and so forth(S. Chopra, M. Sodhi,2004).
Supply disruptions may cause immediate or delayed
negative effects on procurement firm performance
over the short and (/or) long-term, depending on the
severity of the disruption and the recovery
capabilities of procurement firm (Sheffi and Rice,
2005). While revenue loss from supply disruptions
may stem from the inability to meet demand and
inventory mark-downs, “expediting, premium
freight, obsolete inventory, additional transactions,
overtime, storage and moving, selling, and penalties
paid to customer” make operating costs higher
(Hendricks and Singhal, 2003).
Recently supply disruption management received
increasing attention from both industry and
academia. There are a number of literatures about
supply disruption management. Jian Li, Shouyang
Wang investigated the sourcing strategy of a retailer
and the pricing strategies of two suppliers in a
supply chain under an environment of supply
disruption( Jian Li, Shouyang Wang,2010). Tomlin
went beyond the existing literature by explicitly
modelling the trade-off sand limitations inherent in
mitigation and contingency strategies (Tomlin,
2005). Then he considered a model that a firm may
order from a cheap but unreliable supplier and (/or)
an expensive but reliable supplier. He examined the
544
Yang X. and Fu S..
MITIGATE SUPPLY RISK IN SUPPLY CHAIN.
DOI: 10.5220/0003608105440549
In Proceedings of the 13th International Conference on Enterprise Information Systems (IAST-2011), pages 544-549
ISBN: 978-989-8425-55-3
Copyright
c
2011 SCITEPRESS (Science and Technology Publications, Lda.)
firm’s optimal strategy is to manage supply
disruption. He also investigated the influence of the
firm’s attitude towards risk on mitigation and
contingency strategies for managing supply
disruption risk (Tomlin, 2006). Suppliers’ responses,
such as their pricing strategies, are also crucial
factors that impact the supply chain. The wholesale
price setting problem has been extensively studied in
the literature. Recent literatures gave the optimal
pricing strategies of the suppliers under different
scenarios (Lariviere and Porteus 2001; Wang and
Gerchak 2003; Tomlin 2003; Bernstein and DeCroix
2004; and Cachon and Lariviere 2001). Game
analysis of supply chains is another direction of the
study about supply risk management. Papers using
cooperative game theory to study supply chain
management are much less prevalent, but are
becoming more popular (Cachon and Netessine,
2004). Scott C. Ellis, Raymond M. Henry, Jeff
Shockley, operationalized and explored the
relationship between three representations of supply
disruption risk: magnitude of supply disruption,
probability of supply disruption, and overall supply
disruption risk. They also showed that both the
probability and the magnitude of supply disruption
are important to buyers’ overall perceptions of
supply disruption risk (Scott C. Ellis, Raymond M.
Henry, Jeff Shockley, 2009). Xueipng Li, Yuerong
Chen, developed a simulation model for such an
inventory system and investigated the impacts of
supply disruptions and customer differentiation on
this inventory system. (Xueipng Li, Yuerong Chen,
2009).Due to the complexity of supply risk
management, in this paper we talk about a method to
mitigate the risk, i.e., dual-supplier or multi-supplier.
Furthermore we apply a mathematical model to
choose the right suppliers. We believe the model
developed within this paper may serve as the basis
for future research about supply risk management.
The remainder of this paper is organized as
follows. Section 2 introduces the composition of
supply risk and one method to mitigate the supply
risk, i.e., supply mode of dual-supplier or
multi-supplier. Section 3 presents a mathematical
model for buyers to choose the right suppliers, and
numerical results are presented to illustrate the
theoretical results. Conclusions are given in Section
4.
2 SUPPLY RISK
Supply risk is the probability of supply accident. It
stems from the upstream enterprises of the supply
chain member companies, including potential or
actual disruption of raw materials, spare parts, and
information flows in supply chain. Supply risk can
be led to by individual suppliers, or by the elements
of whole market. Problems of individual supplier
may be caused by natural disaster, failure respond to
fluctuations of demand, quality problems in the
production process, failure to keep up with the
requirements of technological development and so
on. Problems of whole supply market may relate to
patent issues or market capacity constraints.
2.1 The Composition of Supply Risk
Supply risk consists of supply disruption risk and
supply delay risk.
Supply disruption risk mainly comes from
exogenous variables in the supply chain system.
Natural disaster: earthquake, hurricane, flood,
snowstorm, epidemic, lighting;
Operational incidents: supplier’s bankruptcy,
equipment trouble, information infrastructure
close to collapse;
Political instability: labor disputes, war,
terrorism;
Single-source supply risk: dependence on
single source supply and optional alternative
suppliers’ capacity and responsiveness.
The larger the network is and the longer the
route is in the supply chain information system, the
greater the threat of supply disruption is. In addition,
due to the high use of resources or the lack of
flexibility, the delayed flow of materials and supply
delay risk often occurs when a supplier can not
respond to changes in demand.
Supply delay risk caused by the inherent
uncertainty of supply of the system, mainly comes
from production risk, inventory risk, product service
level risk, technology risk, production quality
problems and systemic risk.
Production risk: capacity utilization, capacity
cost, capacity flexibility, production and
technology lags behind competitors;
Inventory risk: lot quantity, mixed changes in
species, stock retirement rates, holding cost
and uncertainty of supply;
Product service level risk: products can not
meet the needs of the number of shipments,
transportation or distribution, lead time and so
on;
Quality risk: poor quality of supply resources;
Technology risk: changes of manufacturing
technique and product design lead to
MITIGATE SUPPLY RISK IN SUPPLY CHAIN
545
production and technology lags behind
competitors;
Systemic risk: risk of system network
expansion and data security of information
(hacker, virus, non-involvement).
Since production can only increase or decrease
over time, one strategic choice could be build excess
capacity. However, excess production capacity will
damage the financial performance, generate
production capacity risk. Inventory risk comes from
the customers’ the fluctuation in demand of the
suppliers’ lot quantity and product variety, out of
stock and excess inventory obsolescence for
example. Product service risk comes from that
products can not meet the needs of the number of
shipments, transportation or distribution and the lead
time. Risk about quality includes the maintenance of
assets, the damage occurred in transit, and the lack
of quality principle and technical training.
Technology risk includes the risk of improvement of
current technology and giving up development
efforts.
2.2 Methods to Mitigate Supply Risk
There are several methods to mitigate supply risk,
such as design a robust supply network, improve the
flexibility of suppliers, ant alter the procurement
path, flexible logistics (transportation of multi-mode
or multi-carrier or multi-route). One proven method
is supply mode of dual-supplier or multi-supplier.
A single source of supply means the buyer
define, discuss and purchase services with single
service supplier. This is a very popular approach,
because it is simple and quick, and can reduce the
purchase cost. And companies can get the best price
when companies and suppliers achieve a close
working relationship. But a single source of supply
will lead to supply security problems in many ways.
For example, if suppliers met special evens like fires
and other accidents, that will lead to supply
disruption; if suppliers shorted of production
capacity or can not product timely, that will lead to
supply disruption. Enterprises adopt a single source
of supply, some because of low cost, and some
because of the lack of qualified alternative suppliers.
When people noticed the importance of prevent
the influence of short supply, walkout and other
emergency, dual-supplier or multi-supplier
procurement becomes an acceptable choice. There
are some advantages of multi-supplier procurement.
First is a reserve of resources available to ensure the
companies can maintain their competitiveness. The
second is the company will no longer restricted by a
single supplier. The third is that the quantity of
supply can be greater guaranteed. When suppliers
competed with each other, buyer can get more
advantages, such as lower costs, promotion of
service and quality.
Dual-supplier or multi-supplier procurement
means there are two or more than two suppliers. The
first supplier is the main supplier with high
efficiency and low transaction cost to satisfy the
demand. The second (and others except the first one)
supplier is used to satisfy the demand variation to
adapt the restrictions of low or high capacity, with
higher price. Flexible procurement strategy enables
enterprises to cope with a temporary supply chain
disruption. But the development of suppliers is often
difficult, managers should recognize the long-term
strategic significance of development of suppliers,
then choose the right suppliers.
3 CHOOSE THE RIGHT
SUPPLIERS
3.1 Model
Here we consider the situation where multiple
suppliers supply for one enterprise. As the buyer, we
use decision theory to choose the main supplier and
the second or other suppliers.
Encode the suppliers and the risk indicators. Let
S
i denote the optional supplier i, Ei denote the risk
indicator i, and P
i denote the weight of Ei. Define
summation of P
i is 1. If choose supplier i, each risk
indicator’s evaluation score is a
ij.
Define six risk indicators:
Probability of supply risk: the smaller the
probability of risk, the better;
Harmful levels of supply risk: the smaller the
harmful level of risk, the better. Indicators
evaluated by five levels: very serious, severe,
general, not too serious, and not serious ;
Financial support: the more financial support,
the better. For example received financial
support based on national or industry policy
and investment guidance;
Allowable time to deal with risks: it denotes the
time how long be allowed to respond to
reduce the damage of risk. The longer, the
better;
Number of affected units: the less the affected
units after the risk occurred, the better;
ICEIS 2011 - 13th International Conference on Enterprise Information Systems
546
Risk management mechanism: the more perfect
a risk management mechanism, the better.
Indicators evaluated by five levels: very well,
perfect, general, not sound, very sound.
Quantitative indicators directly obtained from
data, qualitative indicators rely on experts’
judgments. Generally, subjective judgements can be
reasonably distinguished to five grades. So we use
five-judge in this paper. The value corresponding to
each level is shown in table 1.
Table 1: Corresponding value of five-judge.
Grade Value
Very high 10
High 8
General 6
Low 4
Very low 2
In order to unify the indicator, transform the
indicators which “the more, the better” into “the less,
the better” indicators. So define the three “the more,
the better” indicators evaluation score is the opposite
number of their value. Setting different P
i can
highlight the indicators which the buyer is more
concerned about. The more important the indicator
to the buyer, the higher the weight of E
i i.e., Pi is.
Choose the right suppliers:
First normalize the evaluation score a
ij, let aij’ be
the normalized score of E
i,
ij
[−1,1]
, then compute
each supplier’s expectancy evaluation:
p
j
a′
ij
, i = 1,2,, n
j
(1)
Then choose the minimum one from these
expectancy evaluations, the corresponded supplier is
the best supplier for buyer.
min
i
p
j
a′
ij
j
→S
k
(2)
3.2 Numerical Example
In a manufacturing supply chain, one automobile
producer, namely A, is the core firm. In order to
mitigate supply risk, the firm A considers choosing 2
suppliers as its main supplier and second supplier
from six alternative suppliers.
S
1-S6 represents each of the six suppliers, and
E
1-E6 represent six indicators, i.e., probability of
supply risk, harmful levels of supply risk, financial
support, allowable time to deal with risks, number of
affected units, and risk management mechanism.
The data of all the six suppliers’ indicators is shown
in table 2.
Table 2: Data of suppliers’ indicators.
Ej
Si
E1 E2 E3 E4 E5 E6
S1 0.25 8 2.1 25 23 8
S2 0.1 8 1.8 20 9 4
S3 0.12 6 2.6 14 15 4
S4 0.18 10 2.8 17 12 8
S5 0.24 6 1.9 19 25 6
S6 0.16 8 1.5 12 7 4
The firm A firstly requests his main supplier
should have low probability of supply risk, and it is
better if the number of affected units could be fewer.
Then it cares about the harmful levels of supply risk,
allowable time to deal with risks, and the risk
management mechanism, and financial support is the
last one to be considered. For his second supplier,
firm A firstly requests the financial support should
be enough, second the harmful levels of supply risk
better be lower. The probability of supply risk, the
number of affected units, and the risk management
mechanism are on the third place. The harmful
levels of supply risk are considered last.
Based on the firm A’s requirements of supply,
evaluate P
i. For the main supplier: let Pi be 0.25,
0.15, 0.10, 0.15, 0.20, and 0.15. For the second
supplier: let P
i be 0.15, 0.10, 0.25, 0.20, 0.15, and
0.15.
The decision matrix is showed in table 3 and
table 4.
Choose the minimum one from the last row of
the two decision matrixes, the corresponded supplier
is the most suitable supplier for buyer.
Table 3: Decision matrix of the main supplier.
Ei
Pi
Si
E1 E2 E3 E4 E5 E6
0.25 0.15 0.10 0.15 0.25 0.15
S1
0.24 0.17 -0.17 -0.23 0.25 -0.24 0.06
S2
0.10 0.17 -0.14 -0.19 0.10 -0.12 0.01
S3
0.11 0.13 -0.20 -0.13 0.16 -0.12 0.03
S4
0.17 0.22 -0.22 -0.16 0.13 -0.24 0.03
S5
0.23 0.13 -0.15 -0.18 0.27 -0.18 0.08
S6
0.15 0.17 -0.12 -0.11 0.08 -0.12 0.04
MITIGATE SUPPLY RISK IN SUPPLY CHAIN
547
Table 4: Decision matrix of the second supplier.
Ei
Pi
Si
E1 E2 E3 E4 E5 E6
0.15 0.10 0.25 0.20 0.15 0.15
S1 0.24 0.17 -0.17 -0.23 0.25 -0.24 -0.03
S2 0.10 0.17 -0.14 -0.19 0.10 -0.12 -0.04
S3 0.11 0.13 -0.20 -0.13 0.16 -0.12 -0.04
S4 0.17 0.22 -0.22 -0.16 0.13 -0.24 -0.05
S5 0.23 0.13 -0.15 -0.18 0.27 -0.18 -0.01
S6 0.15 0.17 -0.12 -0.11 0.08 -0.12 -0.02
In this example, firm A should choose the fourth
supplier S
2 as its main supplier, and the fifth supplier
S
4 as its second supplier.
If a firm considered more factors when it chooses
suppliers, such as distance, methods and price of
transportation, exchange rate fluctuations, changes
in demand and raw materials cost, etc, these factors
can be transformed to special risk indicators, and use
this model to choose the suitable suppliers.
4 CONCLUSIONS
As one of the most important part of supply chain,
supply disruption may bring great loss to the
enterprise and the whole supply chain, even break
down the whole supply chain. This paper analyses
the composition of supply risk, and methods to
mitigate supply risk, addresses dual-supplier or
multi-supplier supply model may be an effective
method. In order to choose suppliers for the whole
supply chain, a mathematical model is developed
and verified by a numerical example.
ACKNOWLEDGEMENTS
Our thanks go to everyone who supported our work,
and who provided us lots of material. We also thank
the team members from the company who sponsored
this work, whose support is greatly appreciated.
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