Ford Archives - Supply Chain Institute

Inherent imbalances – from single company to ecosystem

The automotive industry has come a long way since Henry Ford’s Motor Company mke everything that went into its product in-house. Today, 75 percent of automotive parts are not designed or built by car manufactures themselves but by their suppliers.

That means that manufacturing a car is no longer the job of a single enterprise. It’s the job of a complex ecosystem of supply chain partners. And VW is no exception. Indeed, any manufacturer of a complex product such as a car, hi-tech consumer electronics or even clothing relies upon its ecosystem of suppliers far more than the manufacturer may realize.

Supply Chain News: Ford Takes New Approach to Supplier Risk Management

Both general trends and a series of recent events have more and more companies concerned with supply chain risk management.

Research has shown the impact of supply chain disruptions on a company’s share price,market share and/or brand image, for example.

In addition, a series of natural disasters and events, most notably the 2011 earthquake and tsunami in Japan that seriously hampered production at Toyota for months and impacted much of the rest of the global automotive supply chain as well, forced many companies to realize they had major risks in their supply chain of which they were not even aware, let alone had plans on how to mitigate those risks.

Major flooding in Thailand that seriously impacted the high tech supply chain, a volcano in Iceland that caused problems for hundreds or thousands of countries, turmoil in parts of the Middle East – all these and more focused companies on the need for better and deeper risk management strategies.

But there major challenges. How can companies mitigate risks such as natural disasters, or factory damage that simply cannot be predicted or modeled – the “unknown unknowns?”

And what level of investment makes sense to mitigate a given risk, or a series of risks combined? There aren’t many tools available for that, as most companies used a two-by-two type matrix, with likelihood of occurence (low and high) along one dimension, and level of business impact along the other.

The “high-high” quandrant was obviously the one that needed the most attention, and the “low-low” section the areas that could probably be ignored, but what about the other two “low-high” combinations? How much focus should they receive?

And even for the “high-high” areas, you are led back to the question of how much to invest in mitigation, and the lists of risks usually leaves out the tough “unknown unknowns,” naturally enough.

In 2012, Dr. David Simchi-Levi of MIT came up with a model and approach to answer these and other tough risk management challenges. Using what he calls the Risk Exposure Index (REI), the tool enables companies really for the first time to quantify the risks in their supply chain, especially those stemming from the unknown unknowns, such as natural disasters, factory fires, etc.

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