Chapter Newsletters

 

June 2015 Print

APICS Operation Now

New Ways to Measure Risk

By APICS CEO Abe Eshkenazi, CSCP, CPA, CAE

Risk mitigation is a hot topic for supply chain and operations management professionals. Therefore, in case you missed it, I wanted to highlight new and potentially more accurate ways to measure risk. Last week, Harvard Business Review presented information on two metrics: time to recovery (TTR) and time to survive (TTS).

Created by Massachusetts Institute of Technology’s David Simchi-Levi, Cornell’s William Schmidt, and Yehua Wei at Duke, these metrics “help prioritize the financial or operational impact of risk that lets companies focus their mitigation efforts on the most important suppliers and risk areas,” Simchi-Levi writes.

First, let’s look at TTR, which is the time it would take a network point to become fully functional after a disruption. The author describes an example from Ford, which used suppliers’ TTR information combined with its own data to identify risk exposure at each of its network sites. 

“Suppliers tend to be optimistic about their TTR since they know that a long TTR is not going to be accepted by the manufacturer,” Simchi-Levi writes. “Therefore, we realized that we needed a way to identify bottleneck suppliers for which it’s critical to obtain accurate TTR information and distinguish them from other suppliers where even plus or minus 30 percent error in TTR information will have very little impact on the supply chain.”

The researchers created a TTS, which indicates the maximum duration that the supply chain can match supply with demand after a network disruption. Evaluating inventory and other available supply, this metric reflects how long the customer can continue to be served while the network point is down.

So, if the TTS is greater than the supplier’s TTR, risk is low. By contrast, if the TTS is less than TTR, its disruption creates financial and operational complications.

“TTS and TTR metrics can be combined to determine how much strategic inventory the firm needs and where to position this inventory so each site’s TTS is greater than its TTR,” Simchi-Levi writes. “This leads to a robust supply chain, one in which each node has a TTS greater than its TTR and thus a disrupted node will always recover before it exceeds its ability to apply the mitigation strategies the firm has in place.” 

Measuring risk

Think about how sharing information such as TTR and TTS among supply chain partners could improve relationships. Yet, in a 2012 APICS survey, only about half of respondents indicated they ask for risk management plans from their suppliers. Further, only a quarter of organizations ask for risk data from their distribution and logistics partners and third-party service providers. Some survey respondents (65 percent) also indicated that the most substantial benefits of improving supply chain resilience come from enhancing partner relationships.

Are you and your organization ready if a disruption should take a supplier offline? How long could you continue to serve your customers? How much would the disruption cost your business? As supply chains increasingly become more global and complex, APICS offers valuable resources to get professionals on track. Notably, consider the APICS Risk Management Education Certificate, a comprehensive, forward-looking program that prepares professionals to develop a global risk mitigation strategy. 

Whether you are just beginning in the industry or adding to your business knowledge, APICS has the resources to keep you on track. 

 

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