Designing Supply Chains that are both lean AND responsive: Modeling risk elements in Network Design models

Combining the old and the new

More about the sword at the end of the article.

Back to the drawing board

If it has not already, the Coronavirus pandemic should have sent Supply Chain leaders of large organizations that have complex global Supply Chains, back to the drawing board- taking a hard look at their Supply Chain Network design, in the view of this unprecedented disruption.

In order to compete effectively and manage costs organizations must work out how best look for ways to leverage competencies, resources and skills across their supply chains and in my opinion, the first step should always be to identify the optimal SC network design by deciding which products, processes or services to make or buy, where to source them from, how much capacity to build or reserve in each operation and how to distribute goods or services between them.

The Uncertain nature of global Supply Chains complicate SCND

However, as Supply Chains become more decentralized, global and dependent on particular suppliers or supplier hubs (like China) within the chain, they become more vulnerable to supply and demand uncertainties. Managing these uncertainties become increasingly difficult when organizations are also trying to reduce inventory, deliver products with short lifecycles and support customers demanding short lead-times. Some of the information required to manage a SC will always be uncertain, for example market demand, price and available production, distribution, manpower and energy capacity

Common Supply Chain risks

Delay risk – material or information flow can be delayed by a production failure, system breakdown or a supplier’s inability to respond quickly to a change in demand

Disruption risk – material or information flow can be disrupted by unplanned supply, demand or transportation changes within the chain. For example, a natural disaster (such as an earthquake or flood) or a manmade disaster (such as a fire, war, labor strike, terrorist attack or supplier bankruptcy)

Quality risk – for example, products might become damaged in production or transportation(material quality) due to factors such as poor supplier knowledge, capability or decision making within the chain. This can lead to incorrect information flowing through the chain and customer requirements not being met

Forecast Risk – mismatching between the actual demand of the market and a firm’s prediction leads to forecast risk

Common risk mitigation strategies

Emergency stock – to ensure material flow is not disrupted Companies usually hold reserve inventory or redundant suppliers to mitigate the effects of these disruptions.

Excess capacity – holding excess machine, labor or facility capacity within the chain that can be easily initiated or tapped into when a disruption occurs. For example, Toyota employs a special team who can work on all stations.

Substitute supplier or facility – to ensure there are multiple options for particular product or service within the chain. For example, Motorola use a multi-supplier strategy for procuring high value products.

Supplier development – to increase the process stability of suppliers within the chain and the flow of information across the chain.

Profit-sharing – to increase the financial stability of suppliers within the chain.

React quickly – proactive strategies are often very expensive and difficult to implement. Therefore, companies may choose to ‘react quickly’ instead and put in strategies to help them do this such as creating flexible processes and capacities within the chain that can be easily initiated when a disruption occurs.

Incorporate risks in Network Design models

The most common risk management strategy in the world of Supply Chain is inventory holding strategy to resist possible disruptions. These are incorporated in Supply Chain Network design models as well. In these problems, in addition to cyclic stock ordered each period to procure the regular demand and safety stock held to cover probable changes of demand, another kind of inventory is kept which is called emergency reserve or stock.

Yossi Sheffi in one of his books calls this just-in-case inventory, and indicates that firms understand the importance of this inventory after the September 11 terrorist attack. Another strategy is a strategic inventory reserve combined with a back-up supplier to mitigate the effect of disruption in a SC with a predetermined network.

Organizations also need to develop a threat-advisory system and planning responses to adjust inventory level prior to disruption but that is outside the scope of discussion of this article.

Risk management should be considered in the initial stages of designing a SC. There is a gap that exists which leads us to develop models that do not incorporate resiliency or “agility” needed so desparately in today’s world of uncertainity and disruptions.

This approach that we have followed for decades have led us to a mindblock – that we see in discussion where professionals often ask the question – How do we define the boundary between lean and responsive ?

How to incorporate risks in SCND (Multi objective optimization and p-robust)

Few years ago when I had access to a SCND software and badwidth at work to learn, I decided to foray into Multi objective linear optimization and eventually landed into the world of incorporating Supply Chain risks in SCND.

One of the models I created in many of my test models leveraged four different strategies to mitigate against two different risks in a 4-tier SC consisting of suppliers, manufacturers, DCs and retail outlets supplying different markets. The problem setting was for one period, which started when each retailer places an orders with a DC. The DCs then integrate the orders from the retailers and pass them on to the manufacturers who then order materials from their suppliers. Once the manufacturer had received the materials it makes the products and ships them to the DCs who package and label them before sending them to the retailers.

The following four different risk mitigation strategies was incorporated in that model:

Strategy 1 – Emergency stock in the DCs
Strategy 2 – Emergency stock in one DC (which all DCs can access) to pool risk within the chain
Strategy 3 – Excess capacity in the suppliers
Strategy 4 – Substitute suppliers or facilities within the chain.

The two types of uncertainities modeled were:

Demand uncertainty – we consider market demand as known random variable with a defined probability distribution

Supply uncertainty – we define a number of different scenarios to consider various potential supply disruptions that could result from factors within facilities in the chain (such as impairment or overloading) or links between the facilities (such as bad weather, union strike in the ports, closure of entrance borders, custom delays or transport infrastructure repairs).

The two step, or two version model – Lean AND Responsive

The multi objective optimization modeling approach enables you to develop two different models to determine the optimal number, location and capacity of facilities and flow planning in the SC given the performance objectives of the chain:

Lean – first you can develop a lean supply model showing how different risk mitigation strategies can be used to neutralize disruptions and maximize the profitability of the chain using single-objective mathematical model

Responsive – then, you can extend the lean model to be responsive by adding another objective function dealing with minimizing the SC’s lead time. These new parts of the model (constraints of the second objective function) include some uncertain time parameters. Often, the solution of the model may not be robust with respect to the first objective function computing the SC’s profit and in those scenarios, you can usea technique called “revised p-robust” to make the first part of the model (first objective function and it’s including constraints) robust with respect to the possible disruptions considered in the problem.

Background on the sword:
In my family, we have this tradition of keeping a replica of an ancestral family sword, at “the place of business”. This probably comes from a 400+ years old family legacy when our ancestors used to be warriors (and that is probably where the trend to join Indian armed forces comes from 🙂 ).
There is one original ancestral sword kept in the ancestral property and every family that spins off creates a replica to keep at their place for good luck and protection. Since my study is my “place of business” I have kept the sword here. Also, when I ordered the replica (there is a family that has been doing the swordmaking for our family since hundreds of years- now they primarily manufacture commercial aluminum based products but custom design these replicas for us, as a favor), I shared the transcript from the sword in “The last samurai” to get it engraved on it. Engraving Japanese characters was not easy so they had to use Laser engraving equipments that they typically use for their other commercial products.

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