Time to Survive and Nexus Supplier Index: New Measures of Supply Chain Risk Management

Over the past two years, I’ve written extensively about the growing importance of supply chain risk management and supply chain mapping. See for example:

The good news is that researchers and progressive companies are developing new approaches to supply chain risk management and supply chain mapping, as two recent articles in Harvard Business Review illustrate.

In the post Hidden Suppliers Can Make or Break Your Operations, the authors write:

With the size and complexity of supply chains soaring, a daunting challenge is confronting companies: identifying the critical nodes hidden within the vast expanse of their supply networks. These are suppliers, or supplier sites, that might be in the second-tier or lower, which means the big buying companies would ordinarily have no contact and might not even know exist…These “nexus suppliers” could be important [because, among other things,] a disruption of its operation would have a surprisingly huge impact on the original-equipment manufacturer’s production.

The authors go on to describe a process they have developed using the Bloomberg Supply Chain Database (SPLC), which keeps track of about 28,000 companies worldwide, “to identify all of [a buying firm’s] suppliers, its suppliers’ suppliers, and continue iteratively. We can then use the collected supplier-customer relationships to construct an extensive supply network for the focal firm. Then we can integrate complicated mathematical measures of centrality to create a nexus supplier index (NSI), which is an aggregate measure of criticality of a supplier in a buying firm’s supply network.”

In a related post, Find the Weak Link in Your Supply Chain, David Simchi-Levi follows up on the work he and his colleagues have done in this area with companies such as Ford Motor Company:

A central feature of the original model was time to recovery (TTR): the time it would take for a particular node — a supplier facility, a distribution center, or a transportation hub — to be restored to full functionality after a disruption…But we then discovered that suppliers tend to be optimistic about their TTR since they know that a long TTR is not going to be accepted by the manufacturer.

For this purpose, we created a new metric that we call “time to survive” (TTS). It is the maximum duration that the supply chain can match supply with demand after a node disruption. To determine TTS associated with a specific node, we remove the node from the supply chain and calculate how long — using inventory in the pipeline and other available supply sources  —  we can serve customer demand without that node. If the TTS of a specific site is greater than its TTR, this site does not expose the firm to any risk since during the time the site is recovering from a disruption, the firm can still match supply with demand. On the other hand, if the TTS of a specific facility is smaller than its TTR, its disruption will expose the firm to financial and operational problems.

I encourage you to read both articles for all the details.

The bottom line is that leading practices in supply chain risk management continue to be developed and they are well documented in various books and publications, including the articles referenced above. In addition, new software applications are also emerging to help companies manage this process.

The challenge, as I’ve said before, is getting executives to rethink supply chain risk management — that is, getting to the point where thinking and talking about risk (and taking proactive action to mitigate it) is as common and instinctual as talking and thinking about cost and service. And the first step is asking “What are the risks?” whenever you’re discussing supply chain strategy or decisions. Finding the answers will require a lot of data collection and hard work, but the return on investment will be clearly evident the next time a supply chain disruption occurs and you’re able to recover faster and with less financial impact than your competition.