There is no better way to show the impact of major disruptions on supply chains than to convey the level of risk involved through a clear, impactful, visual device.
MIT CTL researchers Ranjana Mary Ninan and Christopher Sean Wang created such a device for their thesis Visualizing and Quantifying Global Supply Chain Risk . They collaborated with two service providers, Sourcemap and AIR Worldwide, to develop an interactive mapping tool that evaluates operational risk, and flags the relative importance of key suppliers and manufacturers to the integrity of a supply chain.
A broader view
As the tsunami that devastated parts of Japan in 2011 and dislocated supply chains worldwide underlined, companies need to be better prepared to respond to a widening array of potential disruptions.
But persuading managers, and notably procurement professionals, to build supply chain risk into their decisions can be an uphill battle. Often procurers are so tightly focused on purchasing costs that they ignore how even low-spend components can incur high financial penalties if supplies are interrupted. A visual representation of the risks is a powerful way to educate procurement managers on the broader implications of their decisions.
Mapping the risks
The company that sponsored the research provides specialized diagnostic, measurement, and other industrial tools. The research team collected data on the bill of materials and suppliers for four products, and other information including the revenue associated with each tool and recovery times in the event of disruptions.
A world map of the supply chain for each tool was plotted, with colored nodes depicting suppliers, manufacturers, and distributors. Details such as parts numbers and the number of components sourced can be retrieved by clicking on a node.
Heat maps show the relative importance of each node in terms of two measurements. The Risk Exposure Index (REI) reflects the revenue to be lost during the recovery time to replace a disrupted supplier. Value at Risk (VAR) is the REI adjusted to account for the probability of a disruption caused by a weather event.
More informed decision-making
By aggregating internal supplier data and adding REI and VAR indices, the team created an interactive, global map of the company’s supply chain. A dynamic zoom-in feature yields more data about each node, and the data can be filtered in a number of ways, for example by component part number.
The tool enables procurement professionals to instantly assess the financial and operational costs involved when specific supply chain nodes are disabled. Also, since the risk profiles are ranked by color, it is easier to make decisions about risk mitigation strategies such as dual sourcing and introducing extra inventory. Each node shows the revenue at stake in the event of a disruption.
This visual representation of a supply chain’s vulnerabilities highlights hidden risks, and helps procurement professionals to build risk management into the supplier selection process. Also, with the benefit of the tool, purchasing departments can be more sensitive to warnings such as weather alerts, and better positioned to take preemptive action to mitigate the negative impacts of impending disruptions.
Importantly, the mapping tool is expected to yield significant financial benefits by making the supply chain more resilient and maintaining the organization’s revenue base in crises situations.