Executive Briefings

Taking Risk Out of Supply Networks     

Global supply networks are becoming more complex at a time when maintaining the integrity of business supply lines has never been more challenging. Companies must deliver product over wider geographical areas while meeting the demands of lean operating principles and fast-changing markets. In such a perilous commercial environment, risk management (RM) is critical to business success, but RM methods are often misunderstood and misapplied. To help companies improve the way they manage risk, MIT's Center for Transportation & Logistics has launched the Global Risk Management Research Project.

The effectiveness of a supply network in meeting customers' demands hinges upon its ability to orchestrate disparate internal functions as well as multiple tiers of external suppliers and customers. RM prepares companies for the disruptions that can paralyze vital supply lines and helps them to recover quickly from potentially catastrophic business interruptions. The ability to manage risk can also be a source of opportunity and competitive advantage.

The Global Risk Management Research Project has partner organizations in Asia, Europe, and Latin America and is supported by a major consumer goods manufacturer. The research is looking at various aspects of RM, including both the qualitative and quantitative assessment of risk, and the role of regional culture and environmental factors in RM. A primary goal of the research is to provide better ways for companies to deal with supply network risk, both conceptually and operationally, and to create a framework that organizations can use to align RM with their business strategies and day-to-day operations.

The first step in the research was a literature review of RM approaches. A number of risk assessment tools and techniques were identified. Failure Mode, Effect and Criticality Analysis, a system-based method for identifying, qualitatively assessing, and categorizing risk, is one of the tools identified by the literature review. Another option revealed by the research, Decision Analysis tools, is used to evaluate decision choices under conditions of uncertainty.

Having reviewed the available tools, the research team looked at how companies are tackling RM. Two significant impediments emerged: a lack of formal, well-developed, and actionable RM concepts, and inadequate tools and techniques to analyze and evaluate risk. For instance, it was found that companies perceive RM primarily as a driver of cost, an attitude that discourages its formal incorporation into the organization's decision-making processes. Also, companies tend to invest in business continuity planning as a proxy for RM, thereby improving crisis management capabilities but unintentionally neglecting potentially beneficial preventative efforts.

Based on the initial research and interviews with executives in the partner company, the research team formulated a basic framework for what constitutes an effective RM approach for a global supply network. Here are some notable ideas from the framework.

Event vs. Effect
Managing risk based on individual events as a potential cause of disruption is not sufficient because it is impossible to identify and include all such events. Recognizing that classes of events lead to similar effects is the solution to this dilemma. Planning in the context of effects allows organizations to prepare for a broader range of disruptions.

Lack of Insight
It is typical for senior business executives to spend a relatively small fraction of their time dealing with disruptions and crises that are labeled 'under control.' Although defensible, this practice has serious repercussions at a strategic level for risk learning. Without a deeper involvement in and appreciation of managing operational risk, such strategic decisions may inadvertently result in greater number of operational disruptions in the future.

Risk Monitoring
Effective supply network RM requires the organization to monitor network risk, and responsibility for this task should be assigned to a corporate-level team. Furthermore, supply network management processes should be redesigned to integrate this group into different process steps.

The first phase of the Global Risk Management Research Project is complete, and the project will move into its second phase in late 2008. In Phase II, the focus will shift to the quantitative assessment of risk to better inform strategies for addressing supply network risk.

For further information on the Global Risk Management Research Project, including a copy of the white paper "Building Resilient Global Supply Networks," contact the head of the project, Dr. Mahender Singh.
MIT Center for Transportation & Logistics

Global supply networks are becoming more complex at a time when maintaining the integrity of business supply lines has never been more challenging. Companies must deliver product over wider geographical areas while meeting the demands of lean operating principles and fast-changing markets. In such a perilous commercial environment, risk management (RM) is critical to business success, but RM methods are often misunderstood and misapplied. To help companies improve the way they manage risk, MIT's Center for Transportation & Logistics has launched the Global Risk Management Research Project.

The effectiveness of a supply network in meeting customers' demands hinges upon its ability to orchestrate disparate internal functions as well as multiple tiers of external suppliers and customers. RM prepares companies for the disruptions that can paralyze vital supply lines and helps them to recover quickly from potentially catastrophic business interruptions. The ability to manage risk can also be a source of opportunity and competitive advantage.

The Global Risk Management Research Project has partner organizations in Asia, Europe, and Latin America and is supported by a major consumer goods manufacturer. The research is looking at various aspects of RM, including both the qualitative and quantitative assessment of risk, and the role of regional culture and environmental factors in RM. A primary goal of the research is to provide better ways for companies to deal with supply network risk, both conceptually and operationally, and to create a framework that organizations can use to align RM with their business strategies and day-to-day operations.

The first step in the research was a literature review of RM approaches. A number of risk assessment tools and techniques were identified. Failure Mode, Effect and Criticality Analysis, a system-based method for identifying, qualitatively assessing, and categorizing risk, is one of the tools identified by the literature review. Another option revealed by the research, Decision Analysis tools, is used to evaluate decision choices under conditions of uncertainty.

Having reviewed the available tools, the research team looked at how companies are tackling RM. Two significant impediments emerged: a lack of formal, well-developed, and actionable RM concepts, and inadequate tools and techniques to analyze and evaluate risk. For instance, it was found that companies perceive RM primarily as a driver of cost, an attitude that discourages its formal incorporation into the organization's decision-making processes. Also, companies tend to invest in business continuity planning as a proxy for RM, thereby improving crisis management capabilities but unintentionally neglecting potentially beneficial preventative efforts.

Based on the initial research and interviews with executives in the partner company, the research team formulated a basic framework for what constitutes an effective RM approach for a global supply network. Here are some notable ideas from the framework.

Event vs. Effect
Managing risk based on individual events as a potential cause of disruption is not sufficient because it is impossible to identify and include all such events. Recognizing that classes of events lead to similar effects is the solution to this dilemma. Planning in the context of effects allows organizations to prepare for a broader range of disruptions.

Lack of Insight
It is typical for senior business executives to spend a relatively small fraction of their time dealing with disruptions and crises that are labeled 'under control.' Although defensible, this practice has serious repercussions at a strategic level for risk learning. Without a deeper involvement in and appreciation of managing operational risk, such strategic decisions may inadvertently result in greater number of operational disruptions in the future.

Risk Monitoring
Effective supply network RM requires the organization to monitor network risk, and responsibility for this task should be assigned to a corporate-level team. Furthermore, supply network management processes should be redesigned to integrate this group into different process steps.

The first phase of the Global Risk Management Research Project is complete, and the project will move into its second phase in late 2008. In Phase II, the focus will shift to the quantitative assessment of risk to better inform strategies for addressing supply network risk.

For further information on the Global Risk Management Research Project, including a copy of the white paper "Building Resilient Global Supply Networks," contact the head of the project, Dr. Mahender Singh.
MIT Center for Transportation & Logistics