Implementing “Time to Recovery” to Mitigate Supply Chain Risk
Categories: Guest Post, Supplier Management, Supply Risk Management | Tags: Process and Best Practice
Spend Matters welcomes a guest post from David Simchi-Levi, Professor at MIT and Chairman of OPS Rules.
There is a question that you need to ask your suppliers that will help both you and your supplier reduce risk and improve performance. The question is “What is the expected time to recovery if the site from which my part is supplied goes down?”
Time to Recovery (TTR) is defined as the time it takes for a supply chain node to fully recover after a disruption. The reason you need to know that is to be able to plan for completely unexpected events. These could be weather related, machine breakdowns, or other reasons that will shut down a plant so it is not able to function for an extended period. The Time to Recovery may be close to zero if the supplier has another plant that can take over, preferably in another region, enough inventory to enable survival through the break, or other backup plans. But in order to mitigate your risk, you need to know what these are and make sure there are no problems with second and third tier suppliers as well.
The Harvard Business Review article From Superstorms to Factory Fires describes a method I developed to manage unpredictable supply chain disruptions. It helps prioritize the financial impact of risk through the Risk Exposure Index (REI). This enables companies to focus their mitigation efforts on the most important suppliers and risk areas instead of ignoring them or using an exhaustive approach. This method was successfully applied at Ford Motor Company.
The article describes the implementation of TTR integrated with a multi-tiered supplier bill of material (BOM), operational and financial measures, inventory levels and demand forecasts for each product.
By removing one node at a time and calculating the response (draw down from inventory, alternate suppliers, etc.), we can calculate the financial impact of the loss of the node. The financial impact on all the nodes is then used to create the Risk Exposure Index (REI). The REI enables prioritization of risk mitigation based on the most critical areas of the supply chain. These are not always the ones that are expected. In the Ford case, many of the suppliers were of low cost spend that were nevertheless very critical.
But how do you know what is the TTR? This information is not easy to find as it requires a comprehensive analysis of an item’s Bill-Of-Material (BOM); first, second, and third tier supplier data; and transportation routes. In the case of Ford, this was done using a questionnaire that is described in the paper and certain assumptions that were used in order to run the models.
I believe that TTR information request will soon become standard in supplier negotiations and drive useful conversations that will reduce the overall risk for manufacturers.