Excerpt
Table of Content
II List of Figures
III Acronyms
1 Introduction
2 Risks in modern supply chains
3 Supply Chain Management Risk Strategies
4 DHL Resilience
4.1 Risk Assesment
4.2 Incident Monitoring
4.3 Risk Response
5 Evaluation of the proposed solution
6 Sources
II List of Figures
Abb. 1 Types of Risks
Abb. 2 Resilient Supply Framework
Abb. 3 SCRM Maturity Model
Abb. 4 Supply Chain Mapping functionality
Abb. 5 Supply Chain Risk Exposure Index
Abb. 6 Incident Monitoring Example
III Acronyms
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1 Introduction
“ The time to repair the roof is when the sun is shining. ” John F. Kennedy
Driven by a high intensity of competition, modern companies have put much effort in reducing costs in their supply chain. Two Important trends on the way to achieve that goal are globalization and lean management. Both have led to complex, highly distributed supply chains and low buffer stocks. Indeed, these mechanisms brought lower costs but at the same time an increase of vulnerability and risk in modern supply chains.1
Unexpected disruptions in supply chains can cause a huge impact on businesses, such as high financial expenses and supply delays on the short-term, but also negative brand reputation and falling investor confidence on the long-term .2 This is why the implementation of the approaches “supply chain risk management (SCRM)” and “business continuity management (BCM)” has become crucial in the sphere of top-level management.3
Digitization is another disruptive trend within the present economic system. The volume of available data for businesses has been increasing exponentially in the last years. But at the same time most companies have failed using these data, essential in decision-making process.4 These unused data offer great potential: With Big Data Analytics they could turn companies’ supply chain risks into a competitive advantage.
This case study deals in virtue of the quote from JFK with the research question:
“ How can IT tools support companies making their supply chains re silient? ”
To this effect, the first chapter describes key risks in modern supply chain in order to create a general awareness of the scope of SCRM and BCM approaches. The next chapter then compares two common supply chain strategies with a focus on resilience in order to evaluate the proposed solution at the end of this case study. Thereupon Chapter 4 answers the research question of this case study by comprising the key components of the SCRM solution “DHL Resilience 360”. The last chapter evaluates the proposed solution based on the output of Chapter 3 on the one hand, and on own practical considerations on the other hand.
2 Risks in modern supply chains
As mentioned in the introduction, the fact that modern supply chains are globally connected and driven by lean management generates new types of risks. By sourcing components worldwide (due to horizontal structures), new locations and paths of the supply chain can end up in regions that are more at risk e.g. for political violence or natural disasters. To make matters even worse, due to low stock levels companies have less time to react before the effects of an incident reach their customers.5 The contract logistic provider DHL Supply Chain has clustered risks in supply chains in the following categories (cf. figure 1):
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Figure 1: Types of Risks (cf. [Har14])
- Operational Risks
These risks occur in the daily business of companies. A survey of the Business Continuity Institute in 2015 found out that IT and telecommunications outages are the most common cause of supply chain disruptions followed by cyber-attacks and data breaches. Both are results of the digitization that has taken place in the last years and both will become even more important in the future (e.g. due to commercially available “botnets”).6 The impact of supplier failure is dramatically increased when companies pursue a sin¬gle sourcing strategy. Capacity Problems of an aircraft seat supplier caused delivery bottlenecks for the major airplane manufacturers Airbus and Boeing.7
- Natural disasters
Natural disasters and extreme weather conditions can also have a huge finan¬cial impact on companies, and their frequency is increasing due to the climate change. The cost of hurricane Katrina’s damage was estimated between 96 and 125 billion US-Dollar.8 The Tohoku earthquake of 2011 and the follow¬ing tsunami and nuclear disaster was the costliest natural disaster in history with nearly 28.000 deaths and an estimated economic damage of 360 billion US-Dollar.9 But even supposedly smaller regional events can cause supply chain disruptions: the German car manufacturer Volkswagen had a shortage of supply after a hailstorm in 2013.10
- Socio Political Risks
These risks often occur in Third World or developing countries. Security is¬sues such as war, terrorism and civil unrest can cause shut downs of transportation routes or production sites, corruption can harm a company’s reputation and strikes can lead to standstill of the supply chain.11
- Transportation Risks
The last type of incidents occur when goods or components are transported along the supply chain. Transportation risks can be a consequence of disrup¬tions from other categories. For example, a strike on ports in the West Coast of the US in 2015 caused a port congestion with huge economic impact.12
The listed types of risks have huge impact on supply chains and lead to a constant change. Furthermore, when talking about supply chain risks one should always consider the characteristics of different economy sectors. The just-in-time approach, for instance, is especially very common in the automotive industry. Additionally, a stop of the production line can be very costly in industry which both leads to the fact that the automotive sector is vulnerable when it comes to operational or transportation disruptions. Technology companies act in highly competitive markets with short product life cycles (=fast clockspeed) and volatile consumer demand, whereas manufacturing of heavy engineering assets such as ships or airplanes have long product life cycles (=slow clockspeed) but in contrast demand for high quality.13 A rule of thumb says: “The faster the clockspeed, the shorter the reign.” That means that competitive advantage is always just temporary, which makes risk management even more critical.
Knowing all these facts it is astonishing that, according to a survey conducted by Price Waterhouse Coopers (PWC), only 40% of the global acting respondents are investing in advanced risk management capabilities.14
3 Supply Chain Management Risk Strategies
A holistic SCRM strategy is crucial for modern businesses to survive in dynamic environments. That is why every major management consulting firm has their own approach to it. This chapter describes the common ground of ways to build a resilient supply chain. Thereby, the approaches of two multinational professional services networks are described. Resilience in this context does not only include avoidance or containment of risks (=Resistance), but also the ability to quickly stabilize and return to daily business when an incident occurs (=Recovery).15 Deloitte developed the “Resilient Supply Framework”16 (see figure 2) that defines key attributes of a resilient supply chain. The Framework describes a resilient sup¬ply chain with the following main pillars:
- Visibility means tracking and monitoring supply chain events in order to proactively take action.
- Flexibility means to recover quickly and without high operational costs when disruptions take place.
- Collaboration means working closely together with supply chain partners.
- Control means the ability to build and execute necessary processes in order to prevent disruptions
These characteristics should be supported by a clearly defined governance and the following key enablers:
- People with the right skills and know-how.
- Processes that ensure resistance and business continuity.
- Technology means working closely together with supply chain partners. es¬pecially in the form of IT tools that support the four pillars.
PWC has developed a maturity model for companies on their way to implement successful SCRM (level 1 lowest, level 4 highest maturity - see figure 3). Referring to that model, companies should align their supply chain with external partners as well as between internal business functions. In particular, that means improving collaboration and information sharing along the whole supply chain on the one hand, and reducing complexity in processes to gain higher visibility on the other
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Figure 2: Resilient Supply Framework from Deloitte (cf. [MO14] p.130 et seq.)
hand.17 A nice side effect of collaboration is that companies can prevent structural supply chain issues such as the “bullwhip effect”.
Another aspect is the proactive character: Technology in the form of sensors and tools should be implemented in order to track and predict incidents. In addition to that, business continuity planning activities should be established.18 The last step in evolution to “maturity” describes a dynamic and fully flexible supply chain that can adapt to dynamic environments and respond to complex dis- ruptions. 19 A buzzword often used in this context is “Supply Chain Segmentation” which means “the dynamic alignment of customer channel demands and supply re¬sponse capabilities optimized for net profitability across each segment”.20 All in all, the approaches from PWC and Deloitte are very similar: both desire to improve collaboration and visibility within the supply chain by implementing processes and tools in order to become flexible and finally resilient.
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Figure 3: SCRM Maturity Model from PWC (cf. [SSLV13] p.13)
4 DHL Resilience360
As shown in the previous chapter, Technology is a key enabler for resilience in supply chains. Companies can ensure business continuity by using Big Data Analytics on a holistic scope. The world leading company in contract logistics21 DHL Supply Chain has developed such a tool called “Resilience360”. This chapter gives answers to the research question “How can IT tools support companies making their supply chains resilient?” by explaining the key components of the DHL solution, namely: “Risk Assessment”, “Incident Monitoring” and “Risk Response”.
4.1 Risk Assesment
With the software “risk assessment”, companies can gain transparency. The tool displays every node of the supply chain on an interactive world map down to third- and fourth-tier suppliers (see figure 4). 22
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Figure 4: Supply Chain Mapping functionality (Screenshot
This simple visualization of transportation routes, production sites etc. can already trigger a Eureka moment for decision makers by giving them a holistic view of their supply chain. Based on this map, the tool evaluates a risk level for each location and identifies risk hotspots.23
For this purpose, the software uses DHL’s unique “Supply Chain Risk Expo¬sure Index”. This methodology is based on 20 different supply chain risks from 4 categories (Natural Disaster Index, Operational Index, Political Violence Index and Socio-Political Index). Figure 5 shows an example of how the risk index can be used. The data come from external sources such as insurance companies, govern¬ment agencies, social media and supply chain partners on the one hand and from internal sources (DHL and the customer) on the other hand. The impact calculation of the risks can be customized matching the customer’s specific characteristics while the default calculation is based on probability and financial impact.24 Furthermore, “risk assessment” allows companies to simulate mitigation strategies or different configurations in the supply chain by comparing risk changes with cost savings. The insights from “risk assessment” can assist decision makers with busi¬ness continuity planning by providing an overview of potential risks and the supply chain in general. Hence, this part of the “Resilience360” solution improves the proactive capabilities of a company.
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Figure 5: Supply Chain Risk Exposure Index developed by DHL (cf. [War16] p.32)
4.2 Incident Monitoring
While “Risk Assessment” is a strategic tool focusing on long-term risks and supply chain configurations, the aim of “Incident Monitoring” is a company’s daily opera¬tions. Using the same data sources as “Risk Assessment”, the tool is able to track multiple risks worldwide. In case of potentially disruptive incidents, relevant deci¬sion makers or supply chain partners will be informed in near real time. With these information, mitigation efforts can be initiated at an early stage and in the best case the disruption can be avoided or contained. For example, components could be sourced from back-up suppliers in order to still meet customer demand. If desired by the customer, follow-up actions like this one can be triggered automatically.25 Again, the interactive global map can be used to get an overview of all incidents worldwide (see figure 6). Every incident has its own record with continuously up¬dated information such as a list of events, a priority level and potentially affected nodes in the supply chain.
The real-time incident monitoring supports a company by making it able to quickly respond to disruptions and is consequently a valuable step for becoming dynamic and flexible.
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Figure 6: Incident Monitoring Example (Screenshot with manually inserted records)
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1 cf. [SSLV13] p. 4
2 cf. [HV05] p. 2
3 cf. [AR15] p. 6
4 cf. [Whi15]
5 cf. [MP13]p. 4
6 cf. [AR15] p.9
7 cf. [Rot15]
8 cf. [Ama16a]
9 cf. [Ama16b]
10 cf.[Sri13]
11 cf.[AR15] p.10
12 cf.[Oye15]
13 cf. [War16] p.23 et seq.
14 cf. [SSLV13] p.2
15 cf. [MCG+15]
16 cf. [MO14] p.130 et seq.
17 cf. [SSLV13] p.11
18 cf. [SSLV13] p.11
19 cf. [SSLV13] p.12
20 cf. [Gar16]
21 cf. [DF14] p.12
22 cf. [War16] p.30
23 cf. [War16] p.32
24 cf. [War16] p.32
25 cf. [War16] p.30