Yacob 

Khojasteh Editor

Supply
Chain Risk
Management
Advanced Tools, Models, and
Developments
Supply Chain Risk Management
Yacob Khojasteh
Editor

Supply Chain Risk

Management
Advanced Tools, Models, and Developments

123
Editor
Yacob Khojasteh
Graduate Program in Business and
Development Studies
Sophia University
Tokyo
Japan

ISBN 978-981-10-4105-1 ISBN 978-981-10-4106-8 (eBook)

DOI 10.1007/978-981-10-4106-8
Library of Congress Control Number: 2017933853

© Springer Nature Singapore Pte Ltd. 2018

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Preface

Supply chains today are vulnerable to disruptions with a significant impact on

firms’ business and performance. The aim of supply chain risk management is to
identify the potential sources of risks and implement appropriate actions in order to
mitigate supply chain disruptions.
This book presents a set of models, frameworks, strategies, and analyses that are
essential for managing supply chain risks. It contributes by combining theoretical
findings and research results with a practical and contemporary view on how
companies can manage the supply chain risks and disruptions, as well as how to
create a resilience supply chain. The book provides the state-of-the-art develop-
ments in managing supply chain risks from various perspectives. It can be used as
an essential source for students and scholars who are interested in pursuing research
or teaching courses in the rapidly growing area of supply chain risk management. It
also provides an interesting and informative read for managers and practitioners
who need to deepen their knowledge on effective supply chain risk management.
Structured in a modular fashion, each chapter in this book introduces and ana-
lyzes a specific topic on supply chain risk management, allowing readers to identify
the chapters that relate to their interests. More specifically, the book is presented in
three sections: (1) supply chain risk management, (2) supply chain vulnerability and
disruptions management, and (3) toward a resilient supply chain.
The first two sections of the book focus on risk and disruption management in
supply chains that provide related concepts, tools, and newly developed models,
while the third section focuses on resiliency in supply chains and a firm’s ability to
return to its original state after a disruption occurs.
In Chap. 1, Zohreh Khojasteh-Ghamari and Takashi Irohara present a compre-
hensive review on supply chain risk management, and investigate recent research
developments in the field. They summarize previous review papers in the field of
supply chain risk management, followed by reviewing the recently published
related works. Also, they develop a framework to categorize those papers, and
present the observed pattern of the research in supply chain risk management. In
Chap. 2, Abroon Qazi, John Quigley and Alex Dickson address the decision
problem of ranking supply chain risk mitigation strategies and introduce a new

v
vi Preface

method for prioritizing those strategies based on associated cost and effectiveness.
They develop a framework using Bayesian Belief Networks and demonstrate its
application via numerical experiments. The proposed framework can help managers
and practitioners select a best combination of strategies considering the efforts
involved in implementing and managing such strategies. In Chap. 3, Kristian
Rotaru and Mehrdokht Pournader develop a model for risk emergence and prop-
agation in buyer–supplier–customer relationships and identify and formalize the
structural and relational patterns. They categorize the identified generic patterns
reflecting the emergence and propagation of potential adverse events and behaviors
within buyer–supplier–customer service triads into a comprehensive typology. By
an example, they illustrate how the methodological approach underlying the pro-
posed typology facilitates risk assessment in service triads and service networks.
Chapters 4 and 5 focus on managing specific types of risks in supply chains that
have not been addressed widely in the literature. In Chap. 4, Fred Lemke and Henry
Petersen address reputational risks in supply chains. They discuss the nature of
reputation and the related risks involved in a supply chain setting from a practical
point of view by pointing out that the understanding, identifying, and mitigating
reputational risks are considered as a key management task. They emphasize on
corporate social responsibility as a mitigation strategy for reputational risks. In
Chap. 5, Barbara Gaudenzi and Giorgia Siciliano focus on information technology
and cyber risks in supply chains. They describe the potential impact of information
technology and cyber risks on the continuity and vulnerabilities of a supply chain.
They propose a theoretical framework that may guide managers to perceive, con-
trol, assess, and manage those risks within the supply chain. The proposed
framework explores how systematic information technology and cyber risk man-
agement may enhance the ability to share information and better manage supply
chain processes.
Chapter 6 presents an overview of supply chain risk management by focusing on
Japanese companies. In this chapter, I first describe the different types of potential
risks in supply chains, and then provide some examples of disruptions in Japanese
supply chains caused by the Great East Japan earthquake in 2011. I also outline
some strategies and developments on how to mitigate supply chain disruptions in
case of a natural disaster. Finally, I introduce a supply chain risk management
software developed by Fujitsu.
The second section of the book continues on managing supply chain risks by
focusing on vulnerability and disruption management. Jyri Vilko and Lauri Lättilä
begin the section with a chapter that analyzes supply chain vulnerability through
simulation. They present a conceptual framework to examine the feasibility of using
simulation methods for analyzing supply chain vulnerability. They develop and test
a discrete event simulation model to reduce the overall vulnerability, and show how
it can be used to gain a more holistic view of supply chain vulnerability. In the next
chapter (Chap. 8) Amit Sonar and Cameron MacKenzie use a dynamic model to
measure the supply chain disruptions preparedness. They analyze different dis-
ruption scenarios by considering the impacts of disruptions at a supplier, the firm’s
production facility, and a firm’s warehouse. They use Wagner–Whitin model to
Preface vii

solve the optimal ordering strategy for each type of disruption. Chapter 9 analyzes
market response when a disruption occurs in the supply chain. In this chapter, Arun
Vinayak and Cameron MacKenzie develop a quantitative model that represents the
way the customer or marketplace reacts to a supply chain disruption. They ana-
lytically interpret the impact of different customer behaviors in such conditions on
the firm’s post-disruption performance.
In Chap. 10, Artur Swierczek develops a framework for risk management in
supply chains that aims at mitigating negative consequences of the transmission and
amplification of disruptions. The framework includes identification of potential and
actual disruptions, estimation of disruptions, evaluation of the most appropriate
approach to deal with those disruptions, and the application of the mitigating
strategy. In Chap. 11, Prasanna Venkatesan and Mark Goh address strategic
sourcing issue under supply disruption risk. They present a mixed integer linear
programming model for supplier selection and order quantity allocation for the
suppliers. By applying the particle swarm optimization technique, the model
minimizes the expected total cost which includes supplier management cost, raw
material purchase cost, and expected supplier loss. In Chap. 12 the last chapter of
this section, Yasutaka Kainuma presents a model that considers disruption risk in
designing and evaluating global supply chains. He addresses an important issue in
supply chain risk management since disruptions caused by natural disasters have
become a serious problem in global supply chains. A mathematical model is
developed with the objective function of maximizing total profit, and several key
factors are considered and discussed.
The last section in the book focuses on supply chain resiliency which represents
the ability of a firm to return to its original state, within an acceptable period of
time, after a disruption occurs. The first chapter of the section provides a broad
overview of the field of supply chain resiliency. In this chapter, Srinivasan
Radhakrishnan, Benjamin Harris, and Sagar Kamarthi discuss different components
that contribute to the resiliency of a supply chain. The chapter also outlines pro-
cesses that are used for building resilient supply chains, and provides a unifying
exploration of the various aspects and perspectives on supply chain engineering,
including how they can be utilized for developing and measuring the resiliency of a
supply chain. In Chap. 14, Anirban Ganguly, Debdeep Chatterjee, and Harish Rao
discuss the critical phases and attributes of a resilient supply chain along with
discussing important supply chain resiliency strategies. They highlight the advan-
tages of a resilient supply chain through insightful examples from a range of
industries, and discuss how firms can react effectively to negative effects of
disruptions.
In Chap. 15, Sigurd Pettersen, Bjørn Asbjørnslett, and Stein Erikstad present a
methodology for designing resilient service supply chains by combining system
design methods with methods from risk assessment. The proposed methodology
provides decision supports by reducing the vulnerabilities of the service supply
chains through design actions that can increase overall supply chain resilience. In
Chap. 16, Arash Azadegan and Jayanth Jayaram develop a conceptual model for
resilience in supply chains using systems theory and the family resilience model.
viii Preface

They identify a series of organizational characteristics that combine to form supply

chain resilience. Their developed model shows the inter-relationship among the
building blocks of supply chain resilience as well as how they can enhance response
and recovery in the case of supply chain disruptions.
In Chap. 17, Michael Braunscheidel and Nallan Suresh focus on the cultivation
of supply chain agility as a risk management initiative that enables a firm to
anticipate and respond rapidly to marketplace changes and disruptions in the supply
chain. They propose a set of supply chain initiatives as antecedents for cultivation
of agility, and identify drivers for cultivating agility in the supply chain. By con-
ducting an empirical study, they provide a set of managerial practices as a guideline
to address the cultivation of agility for both mitigation and response. In the last
chapter of the book, Paolo Trucco, Boris Petrenj, and Seyoum Eshetu Birkie
address resilience improvement in key resources supply chains by focusing on
assessing the impact of critical infrastructure disruptions on the supply chain, the
economic losses caused, and the potential effectiveness of different strategies. They
use a multilevel modeling approach by combining discrete event simulation and
system dynamics, and assess the economic loss impact of disruptions in critical
infrastructure systems and the potential effectiveness of different strategies to
improve resilience in the supply chain.
I would like to thank all the authors who have contributed to this book. Also, I
would like to express my gratitude to Mr. Yutaka Hirachi and Misao Taguchi of
Springer Japan for their help and support on this project.
I would also like to thank my wife Miya and sons Nima and Yuma for allowing
me to devote the time necessary to complete this book. I dedicate this book to them.

Tokyo, Japan Yacob Khojasteh

July 2017
Contents

Part I Supply Chain Risk Management

1 Supply Chain Risk Management: A Comprehensive Review . . . . . . 3
Zohreh Khojasteh-Ghamari and Takashi Irohara
2 Cost-Effectiveness and Manageability Based Prioritisation of
Supply Chain Risk Mitigation Strategies . . . . . . . . . . . . . . . . . . . . . . 23
Abroon Qazi, John Quigley and Alex Dickson
3 Modeling Risk Emergence and Propagation
in Buyer-Supplier-Customer Relationships . . . . . . . . . . . . . . . . . . . . 43
Kristian Rotaru and Mehrdokht Pournader
4 Managing Reputational Risks in Supply Chains . . . . . . . . . . . . . . . . 65
Fred Lemke and Henry L. Petersen
5 Managing IT and Cyber Risks in Supply Chains . . . . . . . . . . . . . . . 85
Barbara Gaudenzi and Giorgia Siciliano
6 Developing Supply Chain Risk Mitigation Strategies . . . . . . . . . . . . 97
Yacob Khojasteh

Part II Supply Chain Vulnerability and Disruptions Management

7 Analyzing Supply Chain Vulnerability Through Simulation . . . . . . 107
Jyri Vilko and Lauri Lättilä
8 Supply Chain Disruptions Preparedness Measures Using a
Dynamic Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Amit Sonar and Cameron A. Mackenzie
9 A Quantitative Model for Analyzing Market Response During
Supply Chain Disruptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Arun Vinayak and Cameron A. Mackenzie

ix
x Contents

10 Supply Chain Risk Management in the Transmission and

Amplification of Disruptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Artur Swierczek
11 Strategic Sourcing Under Supply Disruption Risk . . . . . . . . . . . . . . 179
S. Prasanna Venkatesan and Mark Goh
12 Design and Evaluation of Global Supply Chain Considering
Disruption Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Yasutaka Kainuma

Part III Toward a Resilient Supply Chain

13 Supply Chain Resiliency: A Review . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Srinivasan Radhakrishnan, Benjamin Harris and Sagar Kamarthi
14 The Role of Resiliency in Managing Supply
Chains Disruptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
Anirban Ganguly, Debdeep Chatterjee and Harish Rao
15 Designing Resilience into Service Supply Chains: A Conceptual
Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
Sigurd S. Pettersen, Bjørn E. Asbjørnslett and Stein O. Erikstad
16 Resiliency in Supply Chain Systems: A Triadic Framework Using
Family Resilience Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
Arash Azadegan and Jayanth Jayaram
17 Cultivating Supply Chain Agility: Managerial Actions Derived
from Established Antecedents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Michael J. Braunscheidel and Nallan C. Suresh
18 Assessing Supply Chain Resilience upon Critical Infrastructure
Disruptions: A Multilevel Simulation Modelling Approach . . . . . . . 311
Paolo Trucco, Boris Petrenj and Seyoum Eshetu Birkie
About the Editor

Dr. Yacob Khojasteh is an Associate Professor of Operations Management at the

Graduate Program in Business and Development Studies, Sophia University,
Tokyo, Japan. He received his Ph.D. in Engineering from the University of
Tsukuba, Japan. He also received his M.Sc. in Policy and Planning Sciences, and in
Industrial Engineering from the University of Tsukuba, and Tarbiat Modares
University, respectively. He has several years of professional experience in industry
and consulting. His first book entitled “Production Control Systems: A Guide to
Enhance Performance of Pull Systems” was published in 2016 by Springer. His
research interests include production and operations management, supply chain
management, systems modeling and optimization, and lean production systems.

xi
 Part I
Supply Chain Risk Management
Chapter 1
Supply Chain Risk Management:
A Comprehensive Review

Zohreh Khojasteh-Ghamari and Takashi Irohara

Abstract The purpose of this chapter is to investigate recent research develop-

ments in supply chain risk management (SCRM) and to provide a comprehensive
outline for researchers and practitioners who are trying to identify the existing state
of research in the SCRM area. The importance of a literature review is to enhance
the understanding of researchers by cataloging previous research in an area and
clarifying the strengths and weaknesses of existing studies and what they might
mean. Since the number of studies on SCRM has increased dramatically, several
review papers of existing papers have been published. By finding significant
number of review papers in the area, we convinced about the necessity of including
summary of review papers. Therefore, we first summarize previous SCRM review
papers. Second, we review recent papers that have not been mentioned in these
review papers. Third, we develop a framework by which to categorize these papers.
We conclude by presenting the observed pattern of SCRM research.

1.1 Introduction

Recently, managing risk has become a crucial challenge for supply chain managers
owing to several factors, such as growing global competition, rising cost pressures,
increasing customer expectations, and ever-increasing complexity (Daultani et al.
2015). Due to the increasing complexity and interrelation of modern supply chains,
the type and nature of uncertain developments and the impact of an action have
become difficult, or even impossible, to predict (Helbing et al. 2006). Risks and
uncertainties frequently interrupt the operational efficiency of the supply chain and
hence adversely impact a firm’s profits (Kumar et al. 2010). A literature survey is an
attempt to clarify important issues and challenges in a given field, including the

Z. Khojasteh-Ghamari (&)
T. Irohara

Graduate School of Science and Engineering, Sophia University, Tokyo, Japan
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 3

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_1
4 Z. Khojasteh-Ghamari and T. Irohara

current status and theory development in that field (Tang and Musa 2011). Initially,
we found that most recent review papers (Ho et al. 2015; Heckmann et al. 2015;
Fahimnia et al. 2015) considered only supply chain risk management (SCRM)
papers published prior to 2014. As such, we herein consider papers published
between 2014 and 2016 and categorize them from different points of view.
Behnezhad et al. (2013) pointed out the trend towards globalization has inten-
sified the exposure to risk and consequently enhanced the likelihood of disruption
in the supply chain. Singhal et al. (2011) mentioned that SCRM is an exponentially
growing area of research, the exploration of literature from a ‘nature of the study’
perspective identifies how the study contributes to the literature and indicates
whether the study describes risk issues and proposes solutions with due analysis or,
as in some cases, whether researchers prescribe solutions based on their experience
and expertise. Lastly, Trkman and McCormack (2009) indicated that the literature
in the field of SCRM is chaotic and disorganized.
From 2000 to 2005, although there was an increase in the number of research
papers on proactively managing risk, the literature consisted of descriptive and
conceptual models rather than quantitative models (Tang and Musa 2011). Sodhi
et al. (2012) declared that, since SCRM is just beginning to exist, the scope of
research in this field has not yet been clearly defined. Paulsson (2004) mentioned
that, while only one paper dealt with SCRM in 1995, that number increased to 23
by 2002. According to Tang and Musa (2011) and Ghadge et al. (2012), a sudden
increase in the number of papers published in SCRM occurred in 2004.
Kamalahmadi and Parast (2015) indicated that the research for papers published in
2004 had been started in 2002 and 2003, after the September 11, 2001 attacks,
which disrupted numerous supply chains around the globe. Finally, any approach to
SCRM must attempt to clarify and reduce vulnerabilities to the supply chain as a
whole, rather than at a focal firm level (Rao and Goldsby 2009). The remainder of
this chapter is organized as follows. Section 1.2 summarizes the existing survey
papers. Section 1.3 provides an explanation of the SCRM concept. Sections 1.4
reviews quantitative approaches to managing risk and categorizes papers from
different point of views. Section 1.5 concludes the chapter.

1.2 Literature Review

In the following, we present a summary of key and important review papers on

SCRM. Tang (2006) reviewed more than 200 papers published between 1964 and
2005 that applied quantitative models for managing supply chain risks. He clas-
sified these papers based on the supply chain management unit that was considered
in dealing with risk (supply, demand, product, or information management). This
review paper is the most cited review paper, with 628 citations by review papers in
the field of SCRM. To the best of our knowledge, no other review paper has this
many citations. In fact, it is the most cited paper over all (by both normal and
review papers), among review papers. Ritchie and Brindley (2007) presented a new
1 Supply Chain Risk Management … 5

framework that helps to integrate the dimensions of risk and performance in supply
chains and provides categorization of risk drivers. Their paper consolidates the
work in an emerging strand of supply chain management. Two key challenges
facing the research community are addressed: the ability to prescribe strategies to
address particular risk drivers, and the interaction of risk management and per-
formance. Rao and Goldsby (2009) reviewed 55 papers on SCRM published
between 1998 and 2008. They identified a gap in terms of research dealing with the
identification of risk resources within supply chains. Subsequently, they developed
a typology of risk so as to enable the identification of vulnerabilities within supply
chains. Narasimhan and Talluri (2009) summarized some key papers on SCRM in
order to highlight it as an important area for investigation in operations and supply
chain management and to present a compendium of articles that break new ground
in addressing methodological and theoretical issues in dealing with SCRM. Tang
and Musa (2011) conducted a literature survey analysis on 138 papers published
between 1995 and 2008 and identified and classified potential risks regarding
material flow, financial flow, and information flow. Sodhi et al. (2012) explored the
characterization of the diversity of risk and identified three gaps: a definition gap, a
process gap, and a methodology gap. In order to analyze the introduction of supply
chain management in the construction industry and the investigation of risk factors
affecting the implementation of supply chain management principles, Aloini et al.
(2012) conducted a literature survey involving the selection and classification of
approximately 140 papers. The results of their work identified a lack of construction
supply chain risk management literature, which is mainly conceptual and descrip-
tive and is focused especially on the risk assessment phase. Colicchia and Strozzi
(2012) conducted a focused literature survey, investigating the process of knowl-
edge creation, transfer, and development from a dynamic perspective within the
context of SCRM. They combined a systematic literature review approach to
identify the most relevant articles and citation network analysis to clarify the
dynamics of the field under study. Then they applied their method to 55 papers
published from 1994 to 2010. Singhal et al. (2011) provided a review that classified
literature according to research approaches and key issues in SCRM. In order to
investigate the fine-grained elements of diversified risks within supply chain, they
presented a multi-layered top-down classification scheme. In the first layer, they
considered the research approach and exploration of risk issues. In the second layer,
they examined the nature of the study, research methods, orientation of risk defi-
nitions, structural elements, and the level of implementation. Finally, in the third
layer, the key discriminating elements of each factor were considered and were
further categorized into detailed attributes. In addition, they used a logical codifi-
cation scheme employing an alphanumeric code, which can be helpful in quanti-
tative and qualitative analysis. They further explored the literature from two very
important and practical standpoints: coordination and decision making in an
uncertain business environment, and implementation of SCRM for various sectors.
The outcomes of these analyses have been presented in the form of propositions. In
addition to describing the contributions of these studies, they also provided new
insights for practical aspects of SCRM. In summary, they studied the pool of
6 Z. Khojasteh-Ghamari and T. Irohara

SCRM literature focusing on coordination, decision making, and sector-wise

SCRM implementation issues and derived relevant propositions. Behnezhad et al.
(2013) conducted a comprehensive literature search in SCRM. Although there are a
variety of risks in the supply chain, they focused on uncontrollable risks, which
they categorized as (1) environmental, (2) political, and (3) economic risks.
Kamalahmadi et al. (2015) investigated studies in supply chain resilience and
undertook a literature survey to review literature on enterprise and supply chain
resilience. They reviewed 100 publications, including journal papers, conference
proceedings, and books from 2000 to 2014. They summarized their findings in
several categories, including enterprise and supply chain resilience definitions,
supply chain resilience principles, and supply chain resilience strategies. Based on
their assessment, they presented a framework for the principles of supply chain
resilience that can be used as a basis for understanding supply chain resilience.
Fahimnia et al. (2015) presented a systematic review of the quantitative and ana-
lytical models (i.e., mathematical programming, optimization, and simulation
modeling efforts) for managing supply chain risks. They used bibliometric and
network analysis tools to generate insights that were not revealed by previous
reviews on the subject. In particular, they presented a systemic mapping of the
literature that identified key research clusters/topics, interrelationships, and gener-
ative research areas that have provided the field with foundational knowledge,
concepts, theories, tools, and techniques. Heckmann et al. (2015) reviewed existing
approaches to quantitative SCRM by focusing on the definition of supply chain risk
and related concepts. As risk considerations are already deeply embedded in other
fields and are partly applied in supply chain management, they conducted a wide
literature analysis of risk concepts in general, and of conceptual as well as math-
ematical supply chain risk approaches in particular. Based on their literature review,
they identified core characteristics used to define, quantify, and model risk, which
can also define supply chain risk. They concluded that the modeling and quan-
tification of supply chain risk remains a real challenge in the field of SCRM. Ho
et al. (2015) reviewed 224 international journal articles on SCRM published
between 2003 and 2013. They categorized all these articles according to definitions,
types, factors, and SCRM methods. They proposed five common risks arising
across various types of supply chains, including macro risk, demand risk, manu-
facturing risk, supply risk, and infrastructural risk (information risk, transportation
risk, and financial risk). Another significant study by Chopra and Sodhi (2004) on
SCRM was published as a book chapter that has been cited more than 1,200 times.
Similar content was presented by Sodhi and Tang (2012). They stated that
understanding various threats, alone and collectively, is the starting point of prac-
tical SCRM. They also mentioned the necessity of stress testing of the supply chain
and tailoring reserves to improve the bottom line while confronting numerous types
of supply chain risk. Upon reviewing these papers, we determined that the majority
of papers published in the last decade have applied quantitative methods. As a
result, we decided to concentrate on papers that employed quantitative methods.
1 Supply Chain Risk Management … 7

Fig. 1.1 Conceptual Supply Chain Management Risk Management

description of SCRM
(Paulsson 2004)
SCRM

1.3 Supply Chain Risk Management (SCRM)

Although numerous discussions and studies have considered the definition of

SCRM, there is still no consensus on the definitions of ‘supply chain risk’ and
‘SCRM’ (Sodhi et al. 2012; Diehl and Spinler 2013). SCRM can be described as
the intersection of supply chain management and risk management (Fig. 1.1).

1.3.1 Supply Chain Management

The term “supply chain management” is relatively new in the literature, first
appearing in 1982 (Oliver and Weber 1982) and used to describe connecting
logistics with other functions. The term was also used by Houlihan (1985, 1988) to
describe the connections between logistics and internal functions and external
organizations (Ellram and Cooper 2014).
A supply chain consists of all activities associated with the flow and transfor-
mation of goods from raw materials to end users. According to Ganeshan and
Harrison (1995), a supply chain is a network of facilities and distribution options
that performs the function of procurement of materials, transformation of these
materials into intermediate and finished products, and the distribution of these
finished products to customers.

1.3.2 Risk Management

Ritchie and Brindley (2007) pointed out three dimensions of risk as follows:
1. Likelihood/probability of the occurrence of particular events/outcomes;
2. Consequences/severity of the occurrence of particular events;
3. Causal pathways leading to these events (detection).

Risk ¼ Likelihood  Severity  Detection

In practice, the amount of risk is usually categorized into a small number of

levels because neither the probability nor the impact of the risk can typically be
8 Z. Khojasteh-Ghamari and T. Irohara

Fig. 1.2 Probability-impact

High
matrix

Impact of the risk

Low
Low High
Probability of occurrence

estimated with accuracy and precision. A risk matrix defines the various levels of
risk, considering both risk probability and risk impact. This is a simple mechanism
to increase the visibility of risks and assist management decision making (Kester
2013). A risk matrix can be used for both qualitative and quantitative risk analyses
of a supply chain, where probabilities and impacts are considered as subjective
values and objective values, respectively (Norman and Lindroth 2004).
The two main elements, which are probability of occurrence and impact of risk,
are critical to determining the necessity of an action to combat a risk in a supply
chain. In general, there are three risk levels. The safest condition for a supply chain
is when either the probability of occurrence or the impact of risk (or both) are very
low. This level is referred to as the low level risk and usually does not require any
effort with respect to risk management. In contrast, when both the probability of
occurrence and the impact of risk are high, immediate action is required. The third
level is defined such that the probability of occurrence or the impact of risk, or both,
are moderate or high. This level, although requiring careful management, the risk is
not as critical (Fig. 1.2).

1.3.3 Definition of Supply Chain Risk Management

SCRM has been defined in a number of ways. For example, Tang (2006) described
SCRM as the management of supply chain risk through coordination or collabo-
ration among supply chain partners so as to ensure profitability and continuity.
Thun and Hoenig (2011) reported that a characteristic specific to SCRM, as
opposed to traditional risk management, is that SCRM is characterized by
cross-company orientation with the goal of identifying and reducing risk, not only
at the company level, but with a focus on entire supply chains. Ho et al. (2015)
defined SCRM as “the implementation of strategies to manage both everyday and
1 Supply Chain Risk Management … 9

exceptional risks along the supply chain based on continuous risk assessment with
the objective of reducing vulnerability and ensuring continuity”.

1.4 Research Methodology and Findings

In this section, we categorize papers published within the last three years, from
2014 to 2016. In the first stage, for collecting this set of papers we primarily used
the science direct database with “supply chain risk management”, “supply chain
risk”, and “supply chain under uncertainty” as keywords. The terms “risk” and
“uncertainty” are frequently used interchangeably. In this initial search, we found
more than 200 papers. We also tracked the references of these papers in order to
find any related recent publications. Next, we carefully read the titles and keywords
of studies. At this stage, we selected approximately 100 papers. In order to achieve
a higher level of relevance, we read the abstracts and conclusions of published
studies in order to ensure that the papers were related to SCRM. Moreover, a brief
examination of the content of the papers led to the removal of more than half of the
papers due to lack of relevance. We eventually selected 29 papers. Based on the
content of these papers, we created tables and categorized the papers. Among the
collection of 29 papers, which were carefully read and analyzed, 21 used mathe-
matical programming methods and two applied game theory in order to deal with
the SCRM issues. Moreover, six papers used statistical methods (Cantor et al. 2014;
Wiengarten et al. 2016; Giannakis and Papadopoulos 2016; Yang et al. 2015; Li
et al. 2015; Bot et al. 2015) to analyze empirical test results and observations.
However, in the present study, we focus on analyzing the mathematical program-
ming and game theory papers. We categorize these papers according to the model
used to present the problem in SCRM and the proposed solutions. In addition, in
order to categorize the models according to modeling approaches and analytical
methods, the papers that applied the optimization methods, we designated as single-
or multi-objective. We also added details about the most common objective
function/constraint considered in all of the papers. In addition, we investigated the
types of risks with which these papers deal and the risk assessment location in the
mathematical models, in the other words, in which section of the mathematical
programming the risk is considered. The consideration of features such as cost and
other related parameters was ubiquitous in these papers.

1.4.1 Mathematical Programming and Game Theory

Methods

After studying the problem formulation in the papers with mathematical pro-
gramming and game theory approaches, we found that the majority of these studies
10 Z. Khojasteh-Ghamari and T. Irohara

used pure mathematical modeling to formulate the problem. For example, all of the
papers that applied unconstrained and constrained mathematical programming,
linear and nonlinear programming, integer nonlinear programming, stochastic linear
programming, stochastic integer linear programming, mixed integer linear pro-
gramming, multi-objective mixed integer linear programming, or multi-stage
stochastic programming were categorized as belonging to the pure mathematical
programming group. Only two papers used game theory to formulate the SCRM
problem. Fang and Shou (2015) used game theory to study the competition between
two supply chains that are subject to supply uncertainty. Moreover, Fallah et al.
(2015) used game theory to study the competition between two closed-loop supply
chains that include manufacturers, retailers, and recyclers in an uncertain envi-
ronment. Game theory is used when the objective is competition between two
supply chain plans. There were also two papers that simultaneously applied both
mathematical (optimization) and simulation approaches (Govindan and Fattahi
2017; Aqlan and Lam 2016). In these studies, optimization is applied considering
the deterministic feature of the supply chain, and simulation is applied considering
the stochastic feature of the supply chain.

1.4.2 Modeling Approach

Researchers have investigated a number of ways to consider uncertainty within the

framework of mathematical programming. Two main approaches are stochastic and
deterministic. In the deterministic approach, the output of the model is fully
determined by the parameter values and the initial conditions. However, the
stochastic approach has inherent randomness and is a general method for finding
optimal decisions prior to learning some of the random variables (Lee 2014).
A stochastic approach for managing risk in global supply chains was developed by
Goh et al. (2007). The present study shows that the majority of the papers that
applied mathematical modeling used the stochastic approach (papers 1–7, 9–19, 21
and 22 in Table 1.1). In the stochastic approach, uncertainty is described by con-
sidering a set of scenarios. The reason for this is the existing uncertainty and risk in
the problem modeling.

1.4.3 Risk Quantification

In real-world situations, we face uncertain conditions due to lack of data and the
absence of knowledge about most of the parameters (Fallah et al. 2015). Liu and
Iwamura (1998) considered the uncertainty in terms of probability and possibility.
In probabilistic cases, the distribution function can be found through experiments,
where stochastic programming approaches are used to cope with the randomness of
parameters. Possibility theory is used to measure subjective parameters related to
Table 1.1 Classification of mathematical and game theory studied papers
Paper Authors Modelling approach Methodology Objective Case study (location)
number Stochastic Deterministic Mathematical Game theory Simulation Single Multi
1 Yolmeh and Salehi (2015) ✓ ✓ ✓ –
2 Nooraie and Parast (2015) ✓ ✓ ✓ –
3 Nooraie and Parast (2016) ✓ ✓ ✓ –
4 Aqlan and Lam (2016) ✓ ✓ ✓ ✓ ✓ High-end server (USA)
5 Sharifzade et al. (2015) ✓ ✓ ✓ ✓ Biofuel (UK)
6 Subulan et al. (2015) ✓ ✓ ✓ Acid (Turkey)
7 Govindan and Fattahi (2017) ✓ ✓ ✓ ✓ Glass supply chain (Iran)
1 Supply Chain Risk Management …

8 Fallah et al. (2015) ✓ Battery (Iran)

9 Nunes et al. (2015) ✓ ✓ ✓ Hydrogen (UK)
10 Lee (2014) ✓ ✓ ✓ Energy (US)
11 Sahling and Kayser (2016) ✓ ✓ ✓ –
12 Jabbarzadeh et al. (2017) ✓ ✓ ✓ SLA –Chair (Australia)
13 Rodriguez et al. (2014) ✓ ✓ ✓ ✓ Electric motors (Sweden)
14 Yang et al. (2015) ✓ ✓ ✓ Dairy (China)
15 Yu and Goh (2014) ✓ ✓ ✓ Toyota motors (Japan)
16 Shabani et al. (2014) ✓ ✓ ✓ Biomass (Canada)
17 Pishvaee et al. (2014) ✓ ✓ ✓ Medical (Iran)
18 Marufuzzaman et al. (2014) ✓ ✓ ✓ Biomass (USA)
19 Sawik (2014) ✓ ✓ ✓ ✓ –
20 Aqlan and Lam (2015) ✓ ✓ ✓ High end server (USA)
21 Shabani and Sowlati (2016) ✓ ✓ ✓ Biomass power (Canada)
22 Daultani et al. (2015) ✓ ✓ ✓ –
23 Fang and Shou (2015) ✓ –
11
12 Z. Khojasteh-Ghamari and T. Irohara

fuzzy set arguments. It is used in cases involving some type of ill-known param-
eters (Fallah et al. 2015). Zadeh (1978) first introduced possibility theory as an
extension of his theory of fuzzy sets and fuzzy logic. Most existing risk measures
are based on probability theory. The majority of papers can be interpreted as having
treated a set of risks that are measurable with known parameters.
Heckman et al. (2015) explained that, in a stochastic optimization problem, in
order to make decisions that restrict the extent of risk, it is often required to quantify
the risk. For the purpose of assessing and comparing different solutions to limiting
the extent of risk, decision-makers need to quantify the imprecise parameters (risk
and uncertainty). Standard deviation, mean-variance approaches, value-at-risk,
conditional-value-at-risk, and premiums are risk measures that attempt to describe
the interaction of uncertainty and the extent of its related harm or benefit. Owing to
the lack of quantitative measures that capture the more complex realities of supply
chains, these measures, which were developed in finance and insurance contexts,
are also applied to supply chain risk. Based on these concepts, supply chain risk is
also measured by the likelihood and the severity of adverse effects or the extent of
loss (Fishburn 1984; Morgan et al. 1992; Haimes et al. 2002).
Among the 23 papers considered herein, some assumed uncertainty to be
probabilistic and to have originated from different scenarios, such as forecasting,
benchmarking, and market analysis data (Nooraie and Parast 2015), and some used
scenario-based modeling, which has been widely used in stochastic programming
problems. In this case, the total probability, which is equal to one, is distributed
between all of the scenarios (Yolmeh and Salehi 2015). Some other papers used
deviation-based measures, such as variance, standard deviation, and expected or
absolute values of deviation (papers 7, 9–12, and 23 in Table 1.1). Variance or
standard deviation is widely used as a measure of supply chain risk. In financial
engineering and financial risk management, positive and negative deviations are
referred to as upside and downside risks, respectively, where downside risk reflects
the risk associated with undesirable outcomes, i.e., losses (Heckman et al. 2015).
Two papers considered only downside risks (papers 6 and 17 in Table 1.1). The use
of downside risk is primarily due to decreasing the size of the problem. In general,
according to You et al. (2009), the most commonly used risk measures applied for
managing are variance, variability, probabilistic financial risk, and finally downside
risk.
In rare cases, lack of knowledge about the real value of input parameters mostly
originates from the dynamic nature of the supply chain and the unavailability or
incompleteness of data required for a high degree of uncertainty in such a problem.
For example, in a case study by Pishvaee et al. (2014), there were no historical data
on the quantity of return products, and only partial data on customer demand were
available. Even when historical data are available, the behavior of parameters may
not necessarily follow with their historical pattern in the future, due to the dynamic
nature and strategic horizon of the supply chain network design problem (see
Pishvaee et al. 2011). Occasionally, the use of probability distributions is impos-
sible in some case studies due to the lack of required historical data and the
impreciseness of the available data. Therefore, as an appropriate alternative,
1 Supply Chain Risk Management … 13

possibility distributions (fuzzy theory, Zadeh 1978) are used in these cases to
formulate the imprecise parameters by relying on both available objective (but not
sufficient) data and expert subjective opinions.

1.4.4 Economic Evaluation Placement

In financial mathematics, a risk measure is used to determine the amount of

an asset or set of assets (traditionally currency) which is to be kept in reserve (Adam
2008). This explains why money is involved whenever there is discussion of risk,
and, in all of the papers we reviewed, economic evaluation was the most important
element to be considered, although it sometimes appeared through concepts such as
budget, profit, cost, or net present value. In all 23 of these papers, economic eval-
uation is definitely present in the concepts of profit/cost/budget/net present value
(NPV). The distribution of these concepts is depicted in Fig. 1.3. Economic eval-
uation can be interpreted as the most often considered feature in SCRM. Note that all
mathematical programming papers considered economic evaluation as the objective
function. In contrast with economic evaluation, risk evaluation was placed in the
constraints (Table 1.2). The comparison of the placement of economic evaluation
versus the placement of risk evaluation is depicted in Fig. 1.5.

1.4.5 Risk Placement

Supply chain risk has been categorized in different ways. However, we categorize it
exclusively into three components:
1. Supply risk: any risk that may occur on the supply side with regard to the input
material, e.g., disruptions and delays in supply, inventory, and schedules, or
delays in inbound logistics.
2. Demand risk: any risk that may occur on the customer side, e.g., variations in
demand.
3. Process risk: any risk that may occur during manufacturing and warehousing,
e.g., machine breakdowns, human resource errors, operations failures, and
financial problems. The last component exists between supply and demand risks.

Net Present Value 2

Budget 4
Profit 6
Cost 17

Fig. 1.3 Classification of economic evaluation in papers published between 2014 and 2016
 14

Table 1.2 Classification of economic evaluation placement and risk placement in the studied papers
Paper number Economic evaluation placement Risk placement
Objective function Constraint Objective function Constraint
Profit Cost Budget NPV Profit Cost Budget NPV Supply Demand Process Supply Demand Process
1 ✓ ✓ ✓
2 ✓ ✓ ✓ ✓ ✓
3 ✓ ✓ ✓
4 ✓ ✓ ✓ ✓ ✓
5 ✓ ✓
6 ✓ ✓ ✓
7 ✓ ✓
8 ✓ ✓
9 ✓ ✓
10 ✓ ✓
11 ✓ ✓
12 ✓ ✓ ✓
13 ✓ ✓
14 ✓ ✓ ✓
15 ✓ ✓ ✓ ✓
16 ✓ ✓
17 ✓ ✓
18 ✓ ✓
19 ✓ ✓
20 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
21 ✓ ✓
22 ✓ ✓ ✓
23 ✓ ✓ ✓ ✓ ✓
Z. Khojasteh-Ghamari and T. Irohara
1 Supply Chain Risk Management … 15

Fig. 1.4 Distribution of Risk types

journal papers from 2014 to
2016

Process Risk
20%

Supply Risk
40%

Demand Risk
40%

Supply Demand Process

The majority of the papers formulated the SCRM problem under the
risk/uncertainty of demand and supply (Fig. 1.4). However, the tendency of the
papers from 2003 to 2013 was slightly different, where the most widely studied risk
type was supply risk, 70 papers in 10 years, followed by demand risk in 39 papers,
and process risk in only 13 papers (Ho et al. 2015). The present study shows that,
from 2013 to 2016, the number of papers investigating supply risk was the same as
the number of papers investigating demand risk, namely, 14 papers each. This can
be interpreted as a recent increase in addressing demand risk. Moreover, the number
of papers investigating process risk was approximately half of the number of papers
investigating supply risk or demand risk (Fig. 1.4).
In our categorization, macro risks, such as natural disasters, terrorist attacks,
financial crises, and other such events that have enormous consequence, can be
placed into any of the abovementioned categories depending on whether the macro
risk affects the supply, demand, or process. Note that few papers considered macro
risks, primarily because the probability of their occurrence is low compared to the
supply, demand, and process risks, even though the impact of macro risks is
enormous. For example, although the impact of the 2011 earthquake off the Pacific
coast of Tohoku in Japan was high, the probability of a reoccurrence of that disaster
is very low. Therefore, industries do not invest huge amount of money in order to
protect the supply chain from such macro risks with a low probability of occur-
rence. However, since macro risks drastically disrupt the supply chain, the history
of SCRM papers reveals that the number of papers that consider such global macro
risks increases after such an event (for example, the terrorist attack on September
11, 2001 in New York city).
16 Z. Khojasteh-Ghamari and T. Irohara

Economic Evaluation
Placement Risk Placement
16 16

14 14

12 12

10 10

8 8

6 6

4 4

2 2

0 0
Objective Constraints Objective Constraints
Function Function

Profit Cost Budget NPV Supply Demand Process

Fig. 1.5 Placement of economic evaluation and risk

In contrast with the economic evaluation placement, in optimization approaches,

risk assessment is primarily considered in constraints, rather than appearing in an
objective function (Fig. 1.5).

1.4.6 Decision Variables

As shown in Fig. 1.6, the majority of the reviewed papers used facility location
(papers 2, 5, 12, 14–16, 19, 21, and 22 listed in Table 1.1) and supplier selection
(papers 3, 5–11, 17, and 18 in Table 1.1) as decision variables. Supplier selection is
the optimal selection of material providers based on cost and quality. In contrast,
facility location is the optimal placement of facilities to minimize transportation
costs, while considering factors such as safety and distance from competitors’
facilities. The rest of the papers used other decision variables such as assembly line
management, mitigation strategy selection, warehouse management, and stake-
holder management.
We found that the supplier selection problem is involved in considering supply
risk. Moreover, papers (papers 20 and 23 in Table 1.1) that considered all risk types
(supply, demand, and process), the decision variables were mitigation strategy
selection (refer to Table 1.3).
1 Supply Chain Risk Management … 17

Others Supplier Selection Facility Location

0 1 2 3 4 5 6 7 8 9 10

Fig. 1.6 Number of papers based on their decision variables

Table 1.3 Relation between decision variables and risk types

Papers Decision variable Risk type
number Supply Demand Process
1 Assembly line management ✓
2 Supplier selection ✓ ✓
3 Facility location ✓ ✓
4 Mitigation strategy selection ✓ ✓ ✓
5 Facility location-supplier selection ✓
6 Facility location ✓ ✓
7 Facility location ✓
8 Facility location ✓
9 Investment in plants and warehouses ✓
10 Facility location ✓
11 Facility location ✓
12 Supplier selection ✓ ✓
13 Warehouse (inventory) management ✓
14 Transportation Management ✓ ✓
15 Supplier selection ✓
16 Supplier selection ✓
17 Facility location ✓
18 Facility location ✓
19 Supplier selection ✓
20 Mitigation strategy selection ✓ ✓ ✓
21 Supplier selection ✓
22 Stakeholder management ✓ ✓
23 Supplier selection ✓ ✓ ✓
18 Z. Khojasteh-Ghamari and T. Irohara

1.4.7 Solution Method

Unlike the exact methods that guarantee optimal solutions to the problem of
interest, a heuristic method provide an acceptable, but not optimal solution. We
categorize the papers into two groups with respect to their solution methods:
1. Exact method: In the first group, the SCRM problem was solved using exact
methods, which always provide an optimal solution (papers 8, 10–12, 20, and 21
in Table 1.1). As an example, Jabbarzadeh et al. (2017) (paper number 12 in
Table 1.1) solved their problem by the elastic p-robustness approach using
minimax cost and minimax regret algorithms and compared their performances.
2. Heuristic algorithm: Most of the reviewed papers used heuristic algorithms to
solve the SCR problem (papers 2, 3, 13–15, 17, 18, and 22 in Table 1.1). Note
that, when supply and demand risks are considered simultaneously, the solution
method is a heuristic algorithm. The primary reason for this is that the size of the
problem increases by considering both the supply and demand risks. In such a
situation, exact methods may not be used on available hardware or in a rea-
sonable time length. The most commonly used heuristic method was Benders
decomposition (papers 17 and 18 in Table 1.1), which is a technique in math-
ematical programming that allows the solution of very large linear program-
ming problems that have a special block structure. This block structure often
occurs in applications such as stochastic programming, because the uncertainty
is usually represented through scenarios (Benders 1962).

1.4.8 Case Studies

There are two methods by which the applicability of a solution is determined. One
method is to use simulated data as input data in order to obtain a result. A number
of papers used this method (papers 1–3, 11, 19, and 22 in Table 1.1). The other
papers considered herein used the data of real case studies. Most of the reviewed
papers (approximately 75%) investigated real-life cases in industry, and the
remainder of the papers (25%) simply used simulated data to prove the effectiveness
and efficiency of their proposed methods. We observed that a significant number of
case studies used in SCRM research examined the biomass energy industry (papers
5, 16, 18, and 21 in Table 1.1). The reason for this is that the U.S. biofuel industry
is expanding rapidly. The U.S. Energy Information Administration reported that the
production of bio-ethanol in the U.S. has increased dramatically (10-fold) from
2000 to 2011 and is projected to increase further (US Energy Information
Administration, 2013). Moreover, the primary risk involved in the biofuel industry
is supply risk, since the supply is dependent on nature, which is unstable because of
environmental instabilities (atmospheric temperature, global warming, etc.). This is
why a significant number of SCRM papers that considered supply risk used this
industry as case studies.
1 Supply Chain Risk Management … 19

1.5 Conclusions

In this chapter, we reviewed the SCRM papers published within the last three years.
The review results revealed that the tendency of the studies was still the same as
that of previous decades, with more quantitative and analytical studies than qual-
itative conceptual ones. A closer examination of existing mathematical program-
ming papers revealed that features such as economic evaluation were considered in
all of the papers on managing supply chain risk. In the other words, companies are
attempting to manage supply chain risk while minimizing cost and maximizing
profit as well as net present value. Risk is either in supply side, or in demand side,
or in process side. We observed that stochastic approaches to modeling are common
in supply chain management when risk and uncertainty are involved, which is in
conflict with the previous research tendency in which deterministic approaches
were more common than stochastic approaches. We believe that applying a
stochastic approach to SCRM is becoming more popular over time. As a matter of
fact, a larger span of data will help to clarify the tendency in SCRM research. As
such, in the future, by considering older papers on SCRM, we hope to further
clarify the evolution and tendencies of SCRM research from various points of view.

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Chapter 2
Cost-Effectiveness and Manageability
Based Prioritisation of Supply Chain
Risk Mitigation Strategies

Abroon Qazi, John Quigley and Alex Dickson

Abstract Risk treatment is an important stage of the risk management process

involving selection of appropriate strategies for mitigating critical risks. Limited
studies have considered evaluating such strategies within a setting of interdependent
supply chain risks and risk mitigation strategies. However, the selection of strate-
gies has not been explored from the perspective of manageability-the ease of
implementing and managing a strategy. We introduce a new method of prioritising
strategies on the basis of associated cost, effectiveness and manageability within a
theoretically grounded framework of Bayesian Belief Networks and demonstrate its
application through a simulation study. The proposed approach can help managers
select an optimal combination of strategies taking into account the effort involved in
implementing and managing such strategies. The results clearly reveal the impor-
tance of considering manageability in addition to cost-effectiveness within a deci-
sion problem of ranking supply chain risk mitigation strategies.

2.1 Introduction

Risk management involves important stages of risk identification, risk analysis, risk
evaluation, risk treatment and risk monitoring (SA 2009). Supply chain risk manage-
ment (SCRM) is gaining an increasing interest both from the researchers and practi-
tioners (Sodhi et al. 2012). Complex interactions between supply chain risks ranging
across the entire spectrum of a supply network make it a challenging task to identify,
assess and manage key risks. Limited studies have focused on exploring causal
interactions between supply chain risks (Badurdeen et al. 2014; Garvey et al. 2015)

A. Qazi (&)
J. Quigley

Department of Management Science, University of Strathclyde Business School,
Glasgow, UK
e-mail: [email protected]
A. Dickson
Department of Economics, University of Strathclyde Business School, Glasgow, UK

© Springer Nature Singapore Pte Ltd. 2018 23

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_2
24 A. Qazi et al.

and integrating the impact of risk mitigation strategies on associated risks within the
modelling framework (Aqlan and Lam 2015). However, to the best of our
knowledge, no attempt has been made to capture the manageability associated with
implementing a mitigation strategy within the modelling framework. Manageability
relates to the concept of ease involved in managing a strategy. Besides capturing the
manageability of risks (effectiveness of strategies) representing the potential for
reducing the risk (Aven et al. 2007), we propose integrating the cost and man-
ageability of mitigation strategies within a theoretically grounded framework of
Bayesian Belief Networks (BBNs) encompassing complex interactions between
risks and strategies.
BBN is a directed acyclic graph comprising nodes representing uncertain vari-
ables and arcs indicating causal relationships between variables whereas the
strength of dependency is represented by the conditional probability values. BBNs
offer a unique feature of modelling risks combining both the statistical data and
subjective judgment in case of non-availability of data (Qazi et al. 2014). In the last
years, BBNs have also started gaining the interest of researchers in modelling
supply chain risks (Badurdeen et al. 2014).
In this chapter, we aim to address the decision problem of prioritising risk
mitigation strategies considering the cost, effectiveness and manageability of such
strategies within an interconnected network of interacting supply chain risks and
strategies. The proposed method is deemed as contribution to the literature on Risk
Management in general and SCRM in particular. Existing models focusing on
cost-effectiveness of strategies assume the same level of manageability for all
strategies.
The remainder of the chapter is organised as follows: A brief review of the
relevant literature is presented in Sect. 2.2. The modelling approach of prioritising
risk mitigation strategies is described in Sect. 2.3 and demonstrated through a
simulation study in Sect. 2.4. Results and managerial implications are also
described in Sect. 2.4. Finally, key findings and future research agenda are pre-
sented in Sect. 2.5.

2.2 Literature Review

SCRM is gaining interest of researchers and practitioners because of the occurrence

of major supply chain disruptions (Sodhi et al. 2012). Global sourcing and lean
operations are the main drivers of supply chain disruptions (Son and Orchard 2013).
The likelihood of the occurrence of an (undesirable) event, and the negative
implications of the event are the two common measures of risk (Bogataj and
Bogataj 2007). Risk mitigation strategies are implemented in order to reduce the
likelihood of occurrence and/or negative impact of risks (Tang and Tomlin 2008).
Robust strategies must be developed in order to help firms reduce cost and/or
improve customer satisfaction under normal conditions and to enable firms sustain
operations during and after a disruption (Tang 2006).
2 Cost-Effectiveness and Manageability Based Prioritisation … 25

According to Johnson (2001), capacity risks can be reduced by outsourcing and

building a flexible web of partners whereas operational hedging can help in
reducing currency and political risks. Christopher and Lee (2004) proposed a
number of strategies including information accuracy, visibility, accessibility and
responsive corrective actions. Zsidisin et al. (2004) recommended implementation
of supplier improvement programs and mitigation of supply disruptions through
creating business interruption plans, developing demand forecasts and modelling
supply processes.
Using the interpretive structural modelling, Faisal et al. (2006) introduced an
approach of understanding dynamics between different enablers of risk mitigation.
A similar concept of establishing cause and effect relationships between the enablers
of risk mitigation was explored in the Electronic supply chain in order to determine
the main drivers (Rajesh and Ravi 2015). Using a multi-method approach, Speier
et al. (2011) introduced a framework to examine the threat of potential disruptions on
supply chain processes and identified suitable potential mitigation strategies under
different conditions. Christopher et al. (2011) used a multiple case study approach in
several industries to understand how managers assess and mitigate global sourcing
risks across the entire supply chain. They proposed four generic strategies including
network re-engineering, collaboration, agility and risk management culture for
managing global sourcing risk. Son and Orchard (2013) developed an analytical
model for examining the effectiveness of two inventory based policies for mitigating
the impact of supply-side disruptions in a supply chain.
The main limitation of existing studies is their limited focus on capturing
interdependency between supply chain risks and mitigation strategies. Keeping in
view the significance of modelling systemic risks and capturing non-linear complex
interactions (Ackermann et al. 2014), researchers have started modelling interde-
pendency between supply chain risks (Badurdeen et al. 2014; Garvey et al. 2015).
However, to the best of our knowledge, interdependency between risks and risk
mitigation strategies has not been explored within a probabilistic network setting
including cost, effectiveness and manageability of strategies. Qazi et al. (2015b)
introduced a model for prioritising strategies within a probabilistic network of
interacting risks and strategies. In order to capture the risk appetite of a decision
maker, Qazi et al. (2015c) proposed an expected utility based method to select
optimal strategies. In this chapter, we integrate cost, effectiveness and manage-
ability of strategies within a single model and focus on a different problem where
the main purpose is to prioritise specific number of strategies instead of optimising
a portfolio of strategies subject to a budget constraint.
BBNs present a useful technique for capturing interaction between risk events
and performance measures (Badurdeen et al. 2014). Another advantage of using
BBNs for modelling supply chain risks is their ability of back propagation that
helps in determining the probability of an event that may not be observed directly.
BBNs also provide a clear graphical structure that most people find intuitive to
26 A. Qazi et al.

understand. Besides, it becomes possible to conduct flexible inference based on

partial observations, which allows for reasoning (Onisko 2008). Another important
feature of using BBNs is to conduct what-if scenarios (Blodgett and Anderson
2000). There are certain problems associated with the use of BBNs: along with the
increase in number of nodes representing supply chain risks, a considerable amount
of data is required in populating the network with (conditional) probability values;
similarly, there are also computational challenges associated with the increase in
number of nodes.

2.3 Proposed Modelling Approach

Based on the efficacy of BBNs in capturing interdependencies between risks, we

consider BBN based modelling of a supply network as an effective approach. Such
a modelling technique can help managers visualise interaction between supply
chain risks and take effective mitigation strategies (Qazi et al. 2014, 2015a). BBNs
have already been explored in the literature on SCRM, however, the proposed
approach is unique in terms of integrating the cost, effectiveness and manageability
of risk mitigation strategies within the network setting of interacting supply chain
risks and strategies.

2.3.1 BBNs

BBN is a graphical framework for modelling uncertainty. BBNs have their back-
ground in statistics and artificial intelligence and were first introduced in the 1980s
for dealing with uncertainty in knowledge-based systems (Sigurdsson et al. 2001).
BBNs have been successfully used in addressing problems related to a number of
diverse specialties including reliability modelling, medical diagnosis, geographical
information systems, and aviation safety management among others. For under-
standing the mechanics and modelling of BBNs, interested readers may consult
Charniak (1991), Sigurdsson et al. (2001), Nadkarni and Shenoy (2001), Nadkarni
and Shenoy (2004), Jensen and Nielsen (2007), and Kjaerulff and Anders (2008).
A BBN consists of following elements:
• A set of variables (each having a finite set of mutually exclusive events) and a
set of directed edges between variables forming a directed acyclic graph; a
directed graph is acyclic if there is no directed path A1 !


! An so that
A1 ¼ An , furthermore, the directed edges represent statistical relations if the
BBN is constructed from the data whereas they represent causal relations if they
have been gathered from experts’ opinion,
• A conditional probability table PðXjY1 ; . . .; Yn Þ attached to each variable X with
parents Y1 ; . . .; Yn .
2 Cost-Effectiveness and Manageability Based Prioritisation … 27

2.3.1.1 Chain Rule for BBNs

Let a Bayesian Network be specified over A ¼ fA1 ; . . .; An g, the chain rule of

probability theory allows factoring joint probabilities resulting in the calculations
made under certain probability states. The structure of a BBN implies that the value
of a particular node is conditional only on the values of its parent nodes. Therefore,
the unique joint probability distribution PðAÞ representing the product of all con-
ditional probability tables is given as follows:

Y
n
PðAÞ ¼ PðAi jpaðAi ÞÞ; ð2:1Þ
i¼1

where paðAi Þ are the parents of Ai :

2.3.2 Assumptions

Our model is based on following assumptions:

1. Supply chain risks and corresponding sources are known and these can be
modelled as a directed acyclic graph.
2. All random variables and risk mitigation strategies are represented by binary
states.
3. Conditional probability values for the risks and associated losses can be elicited
from stakeholders and the resulting network represents close approximation to
the actual perceived risks and associated interdependency.
4. Cost and manageability associated with each potential risk mitigation strategy
are known.
5. All stakeholders within the supply chain are willing to share information about
key risks, loss values and effort involved in implementing potential strategies.

2.3.3 Supply Chain Risk Network

A discrete supply chain risk network RN ¼ ðX; G; P; L; U; C; Cm Þ is a seven-tuple

consisting of [adapted from Kjaerulff and Anders (2008)]:
• a directed acyclic graph ðDAGÞ,G ¼ ðV; EÞ, with nodes ðVÞ representing dis-
crete risks and risk sources (XR ), discrete risk mitigation strategies (XS ), loss
functions (L), utility functions (U), cost functions (C), manageability weighted
cost functions (Cm ) and directed links (E) encoding dependence relations,
• a set of conditional probability distributions (P) containing a distribution,
PðXRi jXpaðRi Þ Þ, for each risk and risk source (XRi ),
28 A. Qazi et al.

• a set of loss functions (L) containing one loss function, lðXpaðV Þ Þ, for each node v
in the subset Vl 2 V of loss nodes,
• a set of utility functions (U) containing one utility function, uðXpaðV Þ Þ, for each
node v in the subset Vu 2 V of utility nodes,
• a set of cost functions (C) containing one cost function, cðXpaðV Þ Þ, for each node
v in the subset Vc 2V of cost nodes,
• a set of manageability weighted cost functions (Cm ) containing one manage-
ability weighted cost function, cm ðXpaðV Þ Þ, for each node v in the subset Vcm 2 V
of manageability weighted cost nodes.
Risk network expected loss, RNELð X Þ, is given as follows (Qazi et al. 2015b):
Y X
RNELð X Þ ¼ PðXv jXpaðvÞ Þ lðXpaðwÞ Þ ð2:2Þ
Xv 2XR w2VL

Risk network expected utility for loss, RNEU ð X Þ, is given as follows (Qazi et al.
2015c):
Y X
RNEU ð X Þ ¼ PðXv jXpaðvÞ Þ uðXpaðwÞ Þ ð2:3Þ
Xv 2XR w2VL

2.3.3.1 An Illustrative Example of a Simple BBN

We present a very simple BBN comprising three risks; R1, R2 and R3 as shown in
Fig. 2.1. Each risk is assumed to have two states: True (T) or False (F). R3 is the
parent node influencing two child nodes ‘R1’ and ‘R2’ which are the leaf nodes.
The (conditional) probability values of the risks are given in Table 2.1. The updated
probability value of R1 and R2 can be calculated using Eq. (2.4). One of the
benefits of BBNs relates to the revision of beliefs once any evidence is propagated
across a variable or set of variables. The posterior belief about R3 can be calculated
using Eq. (2.5) once the evidence is instantiated at R1 or R2. The updated prob-
abilities of R1 and R2 are 0.44 and 0.544, respectively as shown in Eqs. (2.6) and
(2.7). Similarly, the posterior probabilities of R3 are 0.82 and 0.99 corresponding to
the realisation of R1 and R2, respectively as shown in Eqs. (2.8) and (2.9).

Fig. 2.1 A BBN comprising

three variables R1 R2

R3
2 Cost-Effectiveness and Manageability Based Prioritisation … 29

Table 2.1 (Conditional) Parent PðRiskjParentÞ

probability values for the
R1 R2
three nodes
R3 T F T F
T (0.6) 0.6 0.4 0.9 0.1
F (0.4) 0.2 0.8 0.01 0.99

PðRi ¼ T Þ ¼ PðRi ¼ TjR3 ¼ T Þ * PðR3 ¼ T Þ þ PðRi ¼ TjR3 ¼ F Þ * PðR3 ¼ F Þ

ð2:4Þ

PðR3 ¼ T; Ri ¼ T Þ PðRi ¼ TjR3 ¼ T Þ * PðR3 ¼ TÞ

PðR3 ¼ TjRi ¼ T Þ ¼ ¼
PðRi ¼ T Þ PðRi ¼ T Þ
ð2:5Þ

PðR1 ¼ T Þ ¼ ð0:6 * 0:6Þ þ ð0:2 * 0:4Þ ¼ 0:44 ð2:6Þ

PðR2 ¼ T Þ ¼ ð0:9 * 0:6Þ þ ð0:01 * 0:4Þ ¼ 0:544 ð2:7Þ

0:6 * 0:6
PðR3 ¼ TjR1 ¼ T Þ ¼ ¼ 0:82 ð2:8Þ
0:44
0:9 * 0:6
PðR3 ¼ TjR2 ¼ T Þ ¼ ¼ 0:99 ð2:9Þ
0:544

In order to calculate RNELð X Þ and RNEUðXÞ, we assume the loss and utility
values corresponding to different states of risks as shown in Table 2.2 where utility
function is considered as uðlossÞ ¼ ðloss * lossÞ. Using Eqs. (2.10) and (2.11),
the expected loss and expected utility values are calculated as 537 and -461428,
respectively.

RNELðXÞ ¼ PðR1 ¼ T; R2 ¼ T; R3 ¼ TÞ  lðR1 ¼ T; R2 ¼ T; R3 ¼ TÞ

þ PðR1 ¼ T; R2 ¼ F; R3 ¼ TÞ  lðR1 ¼ T; R2 ¼ F; R3 ¼ TÞ
þ PðR1 ¼ T; R2 ¼ T; R3 ¼ FÞ  lðR1 ¼ T; R2 ¼ T; R3 ¼ FÞ
þ PðR1 ¼ T; R2 ¼ F; R3 ¼ FÞ  lðR1 ¼ T; R2 ¼ F; R3 ¼ FÞ
þ PðR1 ¼ F; R2 ¼ T; R3 ¼ FÞ  lðR1 ¼ F; R2 ¼ T; R3 ¼ FÞ
þ PðR1 ¼ F; R2 ¼ T; R3 ¼ TÞ  lðR1 ¼ F; R2 ¼ T; R3 ¼ TÞ
þ PðR1 ¼ F; R2 ¼ F; R3 ¼ TÞ  lðR1 ¼ F; R2 ¼ F; R3 ¼ TÞ
þ PðR1 ¼ F; R2 ¼ F; R3 ¼ FÞ  lðR1 ¼ F; R2 ¼ F; R3 ¼ FÞ
¼ 537
ð2:10Þ
30 A. Qazi et al.

Table 2.2 Loss and utility Risk Loss (l) (monetary Utility (u)
values for different states of units) (103 )
R1 R2 R3
risks
State
T T T 1000 −1000
T F T 750 −562.5
T T F 550 −302.5
T F F 300 −90
F T F 200 −40
F T T 700 −490
F F T 400 −160
F F F 0 0

RNEUðXÞ ¼ PðR1 ¼ T; R2 ¼ T; R3 ¼ TÞ  uðR1 ¼ T; R2 ¼ T; R3 ¼ TÞ

þ PðR1 ¼ T; R2 ¼ F; R3 ¼ TÞ  uðR1 ¼ T; R2 ¼ F; R3 ¼ TÞ
þ PðR1 ¼ T; R2 ¼ T; R3 ¼ FÞ  uðR1 ¼ T; R2 ¼ T; R3 ¼ FÞ
þ PðR1 ¼ T; R2 ¼ F; R3 ¼ FÞ  uðR1 ¼ T; R2 ¼ F; R3 ¼ FÞ
þ PðR1 ¼ F; R2 ¼ T; R3 ¼ FÞ  uðR1 ¼ F; R2 ¼ T; R3 ¼ FÞ
þ PðR1 ¼ F; R2 ¼ T; R3 ¼ TÞ  uðR1 ¼ F; R2 ¼ T; R3 ¼ TÞ
þ PðR1 ¼ F; R2 ¼ F; R3 ¼ TÞ  uðR1 ¼ F; R2 ¼ F; R3 ¼ TÞ
þ PðR1 ¼ F; R2 ¼ F; R3 ¼ FÞ  uðR1 ¼ F; R2 ¼ F; R3 ¼ FÞ
¼ 461428
ð2:11Þ

2.3.4 Problem Statement

Given different options of implementing risk mitigation strategies within a proba-

bilistic network of interconnected supply chain risks and strategies, how do we
prioritise these strategies keeping in view the cost, effectiveness and manageability
of strategies?

2.3.5 Objective Function

In this chapter, we aim to prioritise risk mitigation strategies yielding maximum

weighted summation of normalised expected utility for loss and normalised utility
for manageability weighted mitigation cost.
2 Cost-Effectiveness and Manageability Based Prioritisation … 31

max w  RNEUðXcxs Þ þ ð1  wÞ  UðCmcxs Þ;

cxs 2cXS ð2:12Þ
s:t: 0\n  N

where
cXS is a set of all possible orderings of different states of n mitigation strategies
ðxs1  xs2  . . .  xsn Þ;
RNEUðXÞ is the normalised expected utility for loss,
w is the relative importance weighting of normalised expected utility for loss,
UðCmcxs Þ is the normalised utility for manageability weighted cost of implementing
cxs combination of mitigation strategies,
n is the number of strategies considered for implementation,
N is the maximum number of potential strategies.
In the case of a risk-neutral decision maker (assumed in the simulation study),
the objective function transforms as follows:

max w  UðRNELðXcxs ÞÞ þ ð1  wÞ  UðCmcxs Þ;

cxs 2cXS ð2:13Þ
s:t: 0\n  N

where UðRNELð X ÞÞ is the normalised utility for risk network expected loss.
In order to assign manageability score to the strategies, we propose using the
ordinal scale (1–10) shown in Table 2.3.

2.3.6 Modelling Process

The following steps must be followed in developing the proposed network of

interacting supply chain risks and mitigation strategies:
1. Define the boundaries of the supply network and identify stakeholders.
2. Identify key risks and potential risk mitigation strategies on the basis of input
received from each stakeholder through interviews and/or focus group sessions.
3. Refine the qualitative structure of the resulting network involving all
stakeholders.

Table 2.3 Manageability scale for ranking of risk mitigation strategies

Manageability scale Ease of managing risk mitigation strategy
1–2 Very easy
3–4 Easy
5–6 Neither easy nor difficult
7–8 Difficult
9–10 Very difficult
32 A. Qazi et al.

4. Determine (conditional) probability values, loss values resulting from risks and
cost and manageability score associated with implementing each potential
mitigation strategy and populate the BBN with all parameters.
5. Run the model for each combination of strategies and determine the expected
utility (loss) value.
6. Analyse the results and prioritise risk mitigation strategies on the basis of rel-
ative importance of normalised expected utility for loss and normalised utility
for manageability weighted cost of strategies.
7. Validate the model output involving stakeholders.

2.4 Simulation Study

We demonstrate the application of our proposed approach through a simple supply

network (Garvey et al. 2015) as shown in Fig. 2.2. The model was developed in
GeNIe 2.0 (2015). The supply network comprises a raw material source (RM),
two manufacturers (M1 and M2), a warehouse (W) and a retailer (R). We also
consider a transportation link between the warehouse and retailer (W-R). Risks are
represented by nodes comprising bar charts whereas resulting losses and mitigation
strategies are represented by diamond and rectangular shaped nodes, respectively.
Though each domain of the supply network may comprise a number of risks and
corresponding sources, we consider limited risks for the sake of simplicity.
Although the presented model represents the process flow of the supply chain, the

Fig. 2.2 Bayesian network based model of a supply network developed in GeNIe 2.0 (2015)
(adapted from Garvey et al. (2015))
2 Cost-Effectiveness and Manageability Based Prioritisation … 33

Table 2.4 Loss values for different risks

Supply chain element Risk Loss (monetary units)
Raw material source Contamination (R1) 200
Delay in shipment (R2) 400
Manufacturer-I Machine failure (R4) 200
Delay in shipment (R5) 400
Manufacturer-II Machine failure (R3) 200
Delay in shipment (R6) 400
Warehouse Overburdened employee (R7) –
Damage to inventory (R8) 500
Delay in shipment (R9) 600
Flood (R12) –
Warehouse to retailer Truck accident (R10) 500
Retailer Inventory shortage (R11) 800

proposed approach is not strictly limited to capturing the network configuration of a

supply chain as it might not be feasible to model a huge supply network. Therefore,
we focus on modelling the risk network instead of mapping the entire supply
network.
Each risk and mitigation strategy is represented by binary states of ‘True (T)’ or
‘False (F)’ and ‘Yes’ or ‘No’, respectively. Assumed loss values associated with the
risks are shown in Table 2.4. The strength of interdependency between risks and
the impact of strategies on related risks are represented by (conditional) probability
values as shown in Table 2.5. As R1 does not have a parent node, its probability
value is not contingent on any node. The italicised value represents the reduced
probability of a risk after implementation of the related strategy. The conditional
probability value of R2 (being True) is 0.8 given that its parent node ‘R1’ is in
‘True’ state. Implementation of each mitigation strategy is assumed to incur a cost
of 100 units. The assumed manageability scores are shown in Table 2.6. All
parameters specific to a real case study can be elicited from experts through
interviews and focus group sessions.

2.4.1 Results and Analysis

After populating the model with assumed parameters, it was updated and the array
of values corresponding to different combinations of mitigation strategies was
exported to a Microsoft Excel worksheet. We evaluated the potential strategies with
respect to the cost-effectiveness based ranking scheme followed by the prioritisation
of strategies considering both manageability and cost-effectiveness. The results
provided an important insight into realising the significance of incorporating
manageability aspect into the model and prioritising strategies through the proposed
approach.
34 A. Qazi et al.

Table 2.5 (Conditional) probability values [Pðrisk ¼ FjparentsÞ ¼ 1  Pðrisk ¼ TjparentsÞ]

Parents P(risk = T|parents)
R1 R2 R3 R4 R1 R2 R3 R4 R5 R6
0.4
0.1
T 0.8
F 0.3
0.2
0.1
0.3
0.2
T T 0.7
T F 0.4
F T 0.6
F F 0.1
T T 0.9
T F 0.6
F T 0.5
F F 0.2
Parents P(risk = T|parents)
R5 R6 R7 R8 R9 R10 R12 R7 R8 R9 R10 R11 R12
0.4
0.3
T T 0.8
0.5
T F 0.3
0.15
F T 0.6
0.4
F F 0.2
0.15
T T T 0.9
T T F 0.5
T F T 0.6
T F F 0.3
F T T 0.4
F T F 0.3
F F T 0.3
F F F 0.2
0.4
0.15
T T 0.9
(continued)
2 Cost-Effectiveness and Manageability Based Prioritisation … 35

Table 2.5 (continued)

Parents P(risk = T|parents)
R5 R6 R7 R8 R9 R10 R12 R7 R8 R9 R10 R11 R12
T F 0.7
F T 0.6
F F 0.2
0.2

Table 2.6 Manageability scores assigned to the risk mitigation strategies

Risk mitigation strategy Strategy Impact Manageability
(control) ID on risk score
1 Quality assurance program R1 10
2 Scheduled maintenance R3 1
program
3 Scheduled maintenance R4 2
program
4 Scheduling software and R7 6
monitoring program
5 Early warning system R8 5
6 Training on simulator R10 9

2.4.1.1 Cost-Effectiveness Based Prioritisation of Strategies

We evaluated the cost-effectiveness of strategies and prioritised these through the

lens of risk network expected loss as shown in Fig. 2.3. Each point represents one
of the 64 different combinations of six mitigation strategies whereas the corre-
sponding value was calculated using Eq. (2.2) for the specific combination of
strategies applied to the risk network shown in Fig. 2.2. As each strategy was
assumed to incur 100 units of mitigation cost, the strategies represented by the
lowest points corresponding to each number of strategies are also the cost-effective
strategies. Considering the cost-benefit analysis, strategies resulting in maximum
improvement in the risk network expected loss (less mitigation cost) must be
selected. Such strategies are represented by the peak points appearing in Fig. 2.4.
It is interesting to note that there is only one cost-effective combination of 5
strategies, however, implementation of all 6 strategies does not result in achieving the
net gain. Moreover, the value of net improvement increases up to 2 strategies and
declines beyond that point. Optimal strategies are shown in Table 2.7. Strategy 4 is
not a feasible strategy except once all the potential strategies need to be implemented.
36 A. Qazi et al.

1800

Risk Network Expected Loss 1600

1400

1200

1000
0 1 2 3 4 5 6
Number of Mitigation Strategies

Fig. 2.3 Variation of risk network expected loss with respect to the number of strategies

200
Improvement in Risk Network

100
Expected Loss less Cost

0
0 1 2 3 4 5 6

-100

-200

-300
Number of Mitigation Strategies

Fig. 2.4 Variation of cost-effectiveness of risk mitigation strategies with respect to the number of
strategies

This is mainly because of the fact that the strategy is linked to R7 with no loss value
associated with the risk (Table 2.4). Furthermore, R7 does not appear to be a major
source of disruption across the entire risk network and even if all 6 strategies are
implemented (including Strategy 4), the risk network expected loss is not reduced
substantially (Fig. 2.3). That is why, when all 6 strategies are selected, the total cost
outweighs the associated benefit.
2 Cost-Effectiveness and Manageability Based Prioritisation … 37

Table 2.7 Cost-effectiveness based prioritisation of strategies

Number of risk mitigation strategies Prioritised strategies
1 6
2 1 and 6
3 1, 5 and 6
4 1, 3, 5 and 6
5 All except 4
6 All

3500
Manageability Weighted Mitigation

3000

2500

2000
Cost

1500

1000

500

0
0 1 2 3 4 5 6
Number of Mitigation Strategies

Fig. 2.5 Variation of manageability weighted mitigation cost with respect to the number of
strategies

2.4.1.2 Manageability and Cost-Effectiveness Based Prioritisation

of Strategies

We prioritised the strategies on the basis of associated manageability, cost and

effectiveness. Values of manageability weighted cost corresponding to different
combinations of strategies are depicted in Fig. 2.5. As each strategy was assumed to
incur a cost of 100 units, the manageability weighted cost directly reflects the
manageability score assigned to each strategy. The lowest points corresponding to
the number of strategies are the optimal combinations keeping in view the factors of
cost and manageability; however, these may not necessarily achieve the maximum
improvement in the risk network expected loss.
As we assumed the decision maker as risk-neutral, the utility for risk network
expected loss could be substituted for the expected utility for loss. Utility for
manageability weighted mitigation cost was assumed as a decreasing linear func-
tion. Variation of both the normalised utility functions considering maximum
values with the number of strategies is shown in Fig. 2.6. Normalised utility for the
manageability weighted cost attains the maximum value once no strategy is selected
and reduces to the minimum value in case of selecting all 6 strategies and vice versa
38 A. Qazi et al.

Normalised Maximum Utility

0.8

0.6

0.4

0.2

0
0 1 2 3 4 5 6
Number of Mitigation Strategies
Manageability weighted Mitigation Cost Expected Utility for Loss (Risk-Neutral)

Fig. 2.6 Variation of utility values with respect to the number of strategies

0.6
Normalised Expected Utility for Loss
Equal Weighted Summation of

and Utility for Cost

0.5

0.4
0 1 2 3 4 5 6
Number of Mitigation Strategies

Fig. 2.7 Variation of equal weighted summation of normalised utility values with respect to the
number of strategies

in case of normalised expected utility for loss. The two points corresponding to
each number of strategies represent optimal combinations of strategies with respect
to the two utility functions that might comprise different strategies. It is also
important to realise the non-linear trend of utility functions.
Considering equal weights assigned to the two normalised utility functions, we
analysed the behavior of the resulting function as shown in Fig. 2.7. It can clearly
be observed that a risk-neutral decision maker will prefer implementing 4 strategies.
Implementing all 6 strategies yields the minimum utility to the decision maker.
Points appearing in red colour are the optimal combinations of strategies corre-
sponding to the specific number of strategies.
We also conducted the sensitivity analysis through varying the weightings for
normalised utility functions as shown in Fig. 2.8. Optimal strategies considering
critical factors of cost, effectiveness, manageability and importance weighting of
each normalised utility function are given in Table 2.8. The optimal strategies vary
2 Cost-Effectiveness and Manageability Based Prioritisation … 39

Normalised Expected Utility for Loss

Maximum Weighted Summation of

and Utility for Cost (w, 1-w)

0.8

0.6 (0.9,0.1)
(0.7,0.3)
0.4 (0.5,0.5)
(0.3,0.7)
0.2
(0.1,0.9)

0
0 1 2 3 4 5 6
Number of Mitigation Strategies

Fig. 2.8 Variation of maximum weighted summation of normalised utility values with respect to
different weighting schemes and number of strategies

Table 2.8 Cost-effectiveness and manageability based prioritisation of strategies

Number of risk mitigation Prioritised strategies based on different weighting schemes [risk
strategies network expected loss (w), manageability weighted cost
(1  w)]
(0.9, 0.1) (0.7, 0.3) (0.5, 0.5) (0.3, 0.7) (0.1, 0.9)
1 6 6 6 2 2
2 1 and 6 1 and 6 2 and 6 2 and 3 2 and 3
3 1, 5 and 1, 5 and 1, 2 and 2, 3 and 2, 3 and
6 6 6 5 5
4 1, 3, 5 1, 3, 5 1, 2, 3 2, 3, 5 2, 3, 4
and 6 and 6 and 6 and 6 and 5
5 All All All All All
except 4 except 4 except 4 except 4 except 1

in relation to different weighting schemes. Strategy 4 appears to be the least

important strategy in all weighting schemes except the one in which minimum
importance is given to normalised expected utility for loss (w ¼ 0:1). For the
weighting schemes considering relative importance of normalised expected utility
for loss as w ¼ 0:9; 0:7; 0:5, it is always optimal to implement the same combi-
nation of 5 strategies. The sensitivity analysis also helped in verifying the validity
of our simulation model. Weighting schemes assigning substantial importance to
the normalised utility for manageability weighted cost (w ¼ 01; 0:3) result in
implementing no strategy.
Evaluation of risk mitigation strategies through the proposed approach results in
prioritisation of strategies considering holistic interaction of supply chain risks and
strategies, and integrating important factors of cost, effectiveness and manageability
of strategies within the modelling framework. As the approach is grounded in the
theoretical framework of BBNs the resulting solution can be considered as viable.
40 A. Qazi et al.

However, it is assumed that all stakeholders would be willing to share their

information and furthermore, elicited values would truly reflect the real-time risk
scenario. Furthermore, modelling the risk attitude of a decision maker and assigning
the relative importance weights to each utility function are challenging tasks.

2.4.2 Managerial Implications

The proposed modelling approach can help supply chain managers prioritise risk
mitigation strategies taking into account the cost, effectiveness and manageability of
strategies. Based on the risk attitude of a decision maker, optimal strategies can
easily be prioritised. The approach is equally beneficial for managers dealing with
complex supply chains as the development of a risk network does not necessarily
follow the process flow of a supply chain. Causal mapping (qualitative modelling of
BBNs) is beneficial to managers in identifying important risks and understanding
dynamics between these risks.

2.5 Conclusions

SCRM is an active area of research focusing on effective management of risks

ranging across the entire supply network. A number of models have been proposed
to identify and assess risks. Similarly, researchers have also proposed appropriate
strategies to mitigate specific risks. Limited studies have considered evaluating
supply chain risk mitigation strategies within an interdependent setting of inter-
acting supply chain risks and strategies. However, the evaluation of such strategies
within a probabilistic network model capturing cost, effectiveness and manage-
ability of potential strategies has not been addressed in the literature. Besides
considering cost of implementing a strategy, it is also important to model the
associated manageability-ease of implementing and managing a strategy.
In this chapter, we have proposed a modelling process of prioritising risk mit-
igation strategies on the basis of relative cost, effectiveness and manageability
within a theoretically grounded framework of BBNs and demonstrated its appli-
cation through a simulation study. Although we have assumed the decision maker
as risk-neutral in the study, the proposed modelling process can be adapted to
capture specific risk appetite of a decision maker which is represented by the unique
utility function for loss and the relative importance of cost for implementing
strategies.
In models ignoring manageability of strategies, it is assumed that all strategies
are equally manageable. However, strategies differ in terms of manageability and
such an assumption undermines the efficacy of models in evaluating strategies. The
proposed process helps in determining optimal strategies for a given number of
potential strategies. As the optimal strategies are different for cost-effectiveness and
2 Cost-Effectiveness and Manageability Based Prioritisation … 41

cost-effectiveness cum manageability based prioritisation schemes, we consider it

important to model the manageability of strategies without which a decision maker
would select and implement sub-optimal strategies.
We have represented risks and mitigation strategies by binary states. In future,
risks can be modelled as continuous variables whereas strategies can be represented
by a continuum of control levels. The proposed method is a first step towards
modelling manageability of strategies within a framework of interdependent risks
and strategies. It is important to consider the practical implications of adopting such
an approach within a real case study. Another interesting and related theme is to
model the adaptability of strategies and to explore the control levels of existing
strategies yielding maximum net improvement in the expected loss less cost.
Furthermore, less labour intensive elicitation methods may be developed and
evaluated to help practitioners implement the process.

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Chapter 3
Modeling Risk Emergence and
Propagation in Buyer-Supplier-Customer
Relationships

Kristian Rotaru and Mehrdokht Pournader

Abstract The present study aims to identify and formalize the structural and
relational patterns, which account for risk emergence and propagation in
buyer-supplier-customer service triads. Following the guidelines of the design
science research approach and based on the existing literature, buyer-supplier-
customer service triads are categorized into a coherent typology according to the
role that each supply chain dyad plays in the emergence and propagation of risk
within the triad it forms. In the context of this study, such triads are referred to as
Risk-aware Service Triads (RaSTs). To explore all the feasible forms of RaSTs,
including the ones that have not yet been addressed in the literature, this study
adopts the formalism of weighted directed graphs. As a result, a typology based on
thirty different types of RaSTs is suggested. This typology allows: (i) to systematize
and formally represent a variety of hypothetical scenarios when each of the dyadic
structures within buyer-supplier-customer service triads acts as risk trigger, risk
taker or risk neutral component of the respective RaST; and (ii) to calculate the
maximal and minimal risk index specific to each of the identified type of RaST,
thereby facilitating the identification and assessment of risk exposures associated
with buyer-supplier-customer service triads. An illustrative example of how the
methodological approach underlying the suggested RaST typology facilitates risk
assessment in service triads and service networks is presented.

K. Rotaru (&)
Monash Business School, Monash University, Melbourne, VIC, Australia
e-mail: [email protected]
M. Pournader
Macquarie Graduate School of Management, Macquarie University,
Sydney, NSW, Australia

© Springer Nature Singapore Pte Ltd. 2018 43

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_3
44 K. Rotaru and M. Pournader

3.1 Introduction

Globalization and the recent technological advancements coupled with the need to
cut costs and gain competitive advantage in an increasingly volatile global mar-
ketplace have resulted in a dramatic increase in outsourcing levels by servicing
companies, looking for further means of cost reduction and efficiency improvement
(Gunasekaran and Kobu 2007). In view of the growing complexity of modern,
highly diversified supply chains, the inherent linearity underlying the traditional
focus on the dyadic relationships between the members of a supply chain does not
allow to capture the nature of the properties, emerging within more complex supply
chain networks (Choi et al. 2002; Wu et al. 2010). To provide a more realistic
account of the network structure and inherent characteristics of the modern supply
chains, a number of studies suggested shifting the focus towards the elementary
form of the supply chain network: a supply chain triad (Finne and Holmström
2013). This was followed by a call for further investigation into the structural and
relational characteristics of service triads (Holma 2012), including the study of risks
causing failure in outsourcing practices (Choi and Wu 2009; Bastl et al. 2013).
Since the earlier articles introducing triadic relationships in the context of supply
chain management (e.g., Choi et al. 2002), the literature has reported on the fol-
lowing common types of supply chain triads including: buyer-supplier-customer
(e.g., Rossetti and Choi 2005; Niranjan and Metri 2008), buyer-supplier-supplier
(Wu et al. 2010), and buyer-buyer-supplier (e.g., Choi and Kim 2008). Notably,
most of these studies investigate the supply chain triads operating in manufacturing
rather than services domain. Hence, the focus of this study is on a relatively less
investigated form of supply chain triads, the ones supporting the service out-
sourcing processes (Niranjan and Metri 2008; Li and Choi 2009).
To date, the literature exploring the patterns of risk emergence and propagation
in the context of buyer-supplier-customer service triads has been limited but
growing (Wynstra et al. 2015). Despite a number of attempts to represent the
underlying factors that account for adverse behaviors by triad members (e.g., Choi
and Wu 2009; Bastl et al. 2013), the literature on supply chain triads still lacks a
systematic approach that would categorize risks according to where within supply
chain triads these risks emerge and what are the possible pathways for their
propagation between the member organizations of the supply chain triads. To the
best of our knowledge, no research study has attempted to develop a generic
typology outlining the core relational properties in buyer-supplier-customer service
triads service triads and, using this information, to attribute corresponding generic
risk profiles to the types of supply chain triads being analyzed. In this regard, a
number of studies could be outlined as conducting the assessment of relational
properties in supply chain service triads with the view to better understand the
performance drivers in the triadic relationships. Peng et al. (2010) used social
networks to study cooperative performance of service triads, while Holma (2012)
borrowed from social capital theory to investigate interpersonal interactions and
their effects on service triads. Depending on the initiating party, Wynstra et al. (2015)
3 Modeling Risk Emergence and Propagation … 45

identified three types of service triads, i.e. ‘buyer-initiated’, ‘customer-initiated’,

and ‘supplier-initiated’, and outline a number of characteristics for each of these
types, including: initiating party, focal service provider, service user (beneficiary),
as well as who are the providers of inputs for the focal service. While the suggested
typology serves as a generic framework to consider some of the properties of the
service triads, it does not provide any formal mechanism of informing the user
about either the performance drivers or the risk profile of the service triads being
investigated through the prism of the suggested typology.
To address this research gap, the present study seeks ways to categorize the
identified generic patterns reflecting the emergence and propagation of potential
adverse events and behaviors within buyer-supplier-customer service triads into a
comprehensive typology. Specifically, the concept of risk-aware service triads
(RaSTs) is introduced to outline and categorize relational and structural properties
of buyer-supplier-customer interactions that account for the increased levels of risk
exposure within a given buyer-supplier-customer service triad. It is also expected
that a greater clarity around the risk patterns delineated by RaSTs would facilitate
the evaluation of the risk levels according to the identified types of RaSTs.
Accordingly, the aim of this study is threefold: (i) to identify and formalize the
structural and relational patterns which account for risk emergence and propagation
in buyer-supplier-customer service triads; (ii) to design a coherent typology for
classification of the modeled RaSTs according to the nature of their implicit
mechanisms of risk emergence and propagation within the triads; and (iii) based on
the suggested RaST typology, to suggest an approach for evaluation of the inherent
risks associated with each RaST type.
Using guiding principles of design science research approach (van Aken 2004;
Holmström et al. 2009) and the modeling apparatus of graph theory in supply
chains (Borgatti and Li 2009; Kim et al. 2015), thirty types of RaST models are
developed and categorized within a coherent RaST typology. Each RaST model has
been ranked according to its implicit Risk Index (RI), which represents a quanti-
tative measure of risk associated with the structural relationships among the
members of a given RaST. Therefore, the taxonomy of RaST models, as well as the
underlying approach for categorizing supply chain service triads according to their
inherent risk profile, provide a comprehensive tool for risk assessment of triadic
relationships that match specific RaST types outlined in the RaST taxonomy. We
apply the suggested RaST taxonomy to review recent articles on buyer-supplier-
customer service triads, and specifically to categorize the relational properties and
risks categorized in these articles. This allows us to identify the types of RaSTs that
have been overlooked in this emerging body of literature but still impose risks that
threaten the objectives of supply chain partners operating within service triads, as
well as service triads seen as complex adaptive systems. With the view to justifying
the relevance of the proposed RaST typology, we use an illustrative example of the
application RaSTs to assess risks in service triads and subsequently in service
supply networks.
The remainder of this chapter is organized as follows. In the next section we
provide a brief background by discussing the properties of service triads,
46 K. Rotaru and M. Pournader

specifically focusing on the phenomenon of risk emergence in the context of service

triads. We then outline the research method built upon the design science, adopted
as a research approach that guides the process of building RaST typology, and
graph theory adopted as a modeling methodology. Subsequently, in line with the
principles of design science and using the toolset of graph theory, a range of RaSTs
types are suggested and categorized into three groups based on the nature of the risk
and emergence mechanisms reflected in each RaST types. The identification of
groupings and types of RaSTs is supported by a detailed review of the literature on
buyer-supplier-customer service triads. Based on the properties of the directed
graphs associated with each individual RaST type, a risk index is calculated fol-
lowing a formal procedure reported in operations and supply chain management.
Next, the relevance of the suggested RaST typology is justified by showing how the
proposed RaSTs can facilitate risk assessment in service triads and more complex
service networks. Finally, the chapter is concluded by outlining a number of
research limitations and discussing the core future research directions triggered by
this study.

3.2 Background

The enhanced ability to respond to changes in demand and to the opportunities that
may emerge, often goes hand in hand with the increasing dependency on quantum
of work outsourced by servicing companies to their suppliers leading to an
extension of the supply chains in both size and complexity (Ellram et al. 2008; Tate
et al. 2009). Along with the increasing profit margins and other performance
improvement outcomes achieved through the growing complexity and dynamism of
the modern supply chains, comes the issue of the increased vulnerability of the
supply chains and their individual members (Wagner and Bode 2008).
Having in mind the purpose of a desirable level of services delivered, service
providing companies seek to establish proper relationships with members partici-
pating in the outsourcing practices considering such relationships as the key for
achieving this purpose (Bastl et al. 2012). As a result, the companies today are
urged to establish additional forms of risk response strategies and control proce-
dures as part of their profiles to avoid the emergence of new sets of risks including
adversarial buyer-supplier relations or winning customers over by suppliers, to
name a few (Choi and Kim 2008). A considerable amount of risks threatening
supply chains, including service supply chains and their individual service triads,
are context-specific, i.e. their probability and magnitude largely depend on the
structural characteristics of the operational context where they emerge (Neiger et al.
2009). Both emergence and propagation of these risks across organizational
boundaries largely depend on the structural characteristics of the supply chain
network and the nature of the relationships of its members (van de Valk and van
Weele 2011; Bellamy and Basole 2013). To understand better these characteristics
some general properties of the service triads are discussed below.
3 Modeling Risk Emergence and Propagation … 47

A service triad is commonly regarded as an independent elementary form of a

service supply chain network that shares certain structural and behavioral charac-
teristics of the network (Niranjan and Metri 2008). The term ‘possible tie(s)’ used in
(Wasserman and Faust 1994) the definition of triads by Wasserman and Faust
(1994), implies up to six different types of triads built on a continuum of
inter-organizational relationships from less to more connected members (see Peng
et al. 2010). While such view could be applicable to the study of manufacturing
triads, in the context of service triads, where there is an ongoing interaction taking
place between the members of the triad (Li and Choi 2009; Li 2011), such diversity
of relationships is unlikely. It thus becomes of an utmost importance to take into
consideration all three bidirectional relationships of service triad members in order
to determine the possible risk propagation within the triad as well as the triad’s
degree of risk exposure. This concern has been addressed in the following sections
that address the development of the RaST typology.
Service triad as an elementary form of supply chain network possesses the
characteristics of a complex adaptive system whose behavior is determined by the
activity of agents that are part of this system. Thus, a service triad exhibits unique
characteristics or emergent properties, which are not properties of its distinct
components but the whole network (Bastl et al. 2013). This view implies inherent
qualitative and quantitative differences in risk profile of a service triad when
compared to the sum of the risk profiles of the individual members of the triad, even
if the dyadic relationships of each individual member is taken into account when
conducting such risk assessment. Thus, in the context of buyer-supplier-customer
service triads, new risk types emerge which are neither inherent properties of the
distinct members of these types of triads nor their dyadic relationships but refer to
the relationships between all the members within the network.
The need to account for the interactions among all members of service triads
when assessing their risk exposures precludes researchers and practitioners to
directly adopt the heuristics and more formal methods of risk assessment applicable
in the context of risk analysis of single organizations or their dyadic relationships.
At the same time, the literature investigating the issues of risk modeling/assessment
in the context of service triads is still scarce. One of the examples is the study by Li
and Choi (2009) who adopted the social network theory lens to highlight an
emerging condition implying that in time and upon building some confidence, a
customer may find it more comfortable working directly with the supplier without
the buyer being involved. This phenomenon deprives buyer of the benefits of being
the sole intermediary between customer and supplier (Rossetti and Choi 2005; Peng
et al. 2010) and delegate the associated competitive advantages (i.e. information
benefit and control benefit) to the supplier. These transitions in the triadic relations
of buyer-supplier-customer are referred to as ‘bridge decay’ and ‘bridge transfer’
conditions. Another example is the study by Niranjan and Metri (2008) who
identified the underlying premises of the ties in ‘client-vendor-consumer’ triad
addressing issues that arise from insufficient and unsatisfying levels in the quality of
the services provided.
48 K. Rotaru and M. Pournader

Despite the first steps that have been made in the literature to explain and
document a number of mechanisms associated with risk emergence and propagation
within service triads, and specifically buyer-supplier-customer service triads, to the
best of authors’ knowledge no comprehensive approaches have been suggested to
widen the scope of such investigation beyond the boundaries of the single case
studies. Specifically, no theoretically grounded approaches have been suggested to
support reasoning about the potential risk scenarios associated with service triads,
considering the nature of potential vulnerabilities in the relationships between the
members of these triads. Thus, a comprehensive typology, which would allow to
formally represent and categorize such scenarios based on a variety of factors
involved, as well as on the risk ratings assigned to each individual scenario, is
introduced further as a viable solution to address this research gap. Below we
present the research method supporting the design of such typology.

3.3 Research Method

In this study, the design science research approach is adopted to guide the identi-
fication and categorization of the structural and relational patterns underlying risk
emergence and propagation in buyer-supplier-customer service triads, whereas
graph theory is used as a modeling methodology that supports the development of
the RaST typology.

3.3.1 Design Science Research Approach

Design science has a long history as a set of pragmatic principles underlying the
invention of novel artifacts based on a previously acquired technological knowl-
edge, and as such, it is not t a discipline-specific approach to knowledge building. It
has been widely adopted in the fields of information systems and computer science
where it was reported to assist in understanding, explaining and frequently
improving the behavior of existing systems by creating innovative and unique
artifacts in a well-defined manner or by analyzing the use and performance of the
designed artifacts. The design science approach has also been adopted in organi-
zations science (van Aken 2004), operations and supply chain management
(Holmström et al. 2009), and specifically supply chain service triads (Finne and
Holmström 2013). Applied to operations and supply chain management, design
science is introduced as an approach aiming primarily at discovery and problem
solving, and emphasizing the novelty of the knowledge generated as a product of
the design process (Holmström et al. 2009). In doing so, design science provides a
utility-oriented methodology for addressing business needs through a purposeful
design of an artifact or intervention (van Aken 2004, p. 226). These needs can be
3 Modeling Risk Emergence and Propagation … 49

represented in terms of desirable properties that give a purposeful dimension to the

process of artifact building.
In the context of this study, the design science research approach is used to
support the formulation of our novel artifact, the RaST typology, which so far has
not been suggested in the research literature or practice. Thus, we see the end
product of the design process as a set of technological rules, each formalizing a
unique configuration of a RaST model according to the innate characteristics of risk
emergence and propagation associated with each individual type of a
buyer-supplier-customer service triad. To guide the design of the RaST typology
we conduct a literature review on service triads, their reported typology and the
nature of the dyadic relationships they are composed of. We then adopt graph
theory as a modeling method that supports the development of a set of techno-
logical rules suggested to formulate the desirable artifact. We formalize the rela-
tional properties between supply chain dyads, which form part of the triadic
structures and account for the emergence and propagation of risks within
buyer-supplier-customer service triads. Then, as part of our design process which
follows Holmström and Romme (2012), the risk trigger, risk taker or risk neutral
roles of the pairwise inter-organizational relationships between the members of
buyer-supplier-customer service triads are formulated. This allows for the formal
definition and categorization of the relational factors, or technological rules,
introduced in this study that increase the probability of risk events in these triads
(Figs. 3.1, 3.2 and 3.3). Next, RaSTs, which have been identified and categorized
into RaST typology are justified by demonstrating the relevance of the specific
RaST models matching them with the evidence reported in the research literature
(Table 3.1).

3.3.2 Graph Theory: A Modeling Methodology

for Designing RaSTs

The versatility of graphs in modeling the relationships between members of net-

works has made them widely applicable in social, technological, informational and
biological networks (Wasserman and Faust 1994; Borgatti and Li 2009). In their
recent review of the studies adopting network analysis approaches in the context of
supply chain management, Borgatti and Li (2009) and Bellamy and Basole (2013)
distinguish a number of promising research directions among which is the appli-
cation of the graph theoretical approach to model the network structure and relevant
properties of supply chains. The applicability of graph theory to modeling supply
chain risks has been recently confirmed in the literature (Wagner and Neshat 2010).
The simplest mode of a graph is comprised of a set of vertices linked by edges.
In more complex graphs, the vertices could each represent a particular feature,
50 K. Rotaru and M. Pournader

Fig. 3.1 Group 1 (1 Risk Trigger/1 Risk Taker/ 1 Risk Neutral) of RaSTs (B Buyer, S Supplier, C
Customer)

identity or entity (West 2001). Similarly the edges could also be directed and/or
have weights. The graph theory is adopted in this study to assist in modeling of a
range of risks that stem from the bidirectional relationships between the members of
a supply chain triad. The risks under consideration include those that are triggered
3 Modeling Risk Emergence and Propagation … 51

Fig. 3.2 Group 2 (2 Risk Triggers/1 Risk Taker) of RaSTs (B Buyer, S Supplier, C Customer)

by an external event pertaining to dyadic cross-organizational process(es) within the

service triad and then propagate further, affecting other dyadic relational aspects
within the triad. Hence, in line with the graph theory, it is suggested that the RaSTs
can be modeled as weighted directed graphs in which the vertices represent either
buyer, supplier or customer and the directed edges illustrate the risk transferred
from one vertex to the other.
52 K. Rotaru and M. Pournader

Fig. 3.3 Group 3 (1 Risk Trigger/2 Risk Takers) of RaSTs (B Buyer, S Supplier, C Customer)

3.4 RaST Typology: Groupings and Types of RaSTs

and their Risk Ratings

In line with the graph theoretical approach, the pairwise relationships between the
distinct members in buyer-supplier-customer service triads are categorized as
follows:
1. Risk trigger dyad: the dyadic relationship among two vertices (i.e.
buyer-supplier, or supplier-customer, or buyer-customer), which transfers risk to
another dyad.
2. Risk taker dyad: the dyadic relationship among two vertices, which is exposed
to risk by a risk trigger dyad.
3. Risk neutral dyad: the risk neutral dyad is not affected by risks that emerge in
the risk trigger dyad and propagate within the risk taker dyad.
The risk trigger, risk taker and risk neutral dyads in Figs. 3.1, 3.2 and 3.3 are
illustrated by a dotted unidirectional arrow, non-dotted bidirectional arrow, and a
continuous line respectively. The direction of the arrow in the risk trigger dyad
Table 3.1 Review of recent articles on buyer-supplier-customer service triads through the prism of RaST typology
RaST type Risk neutral Risk taker(s) Risk trigger(s) Article
(Dyad) (Dyad)
Type 3 Buyer-supplier Lack of harmony between customer Service quality gap between Niranjan and Metri (2008)
expectations and the received services by client and customer
buyer (buyer-customer)
(supplier-customer/customer-supplier)
Type 7 Buyer-supplier Customer dissatisfaction Customer influence negatively affecting
(buyer-customer/customer-buyer) buyer’s performance
(customer-supplier)
Type 5 Customer-supplier Customer dissatisfaction Legal/operational/relational risks
Type 6 (buyer-customer/customer-buyer) between client and buyer
(supplier-buyer or buyer-supplier)
Type 8 Buyer-supplier Deteriorating relationship between Solidification of bridge Li and Choi (2009), Li
buyer and customer position by supplier (2011)
(buyer-customer/ customer-buyer) (supplier-customer)
3 Modeling Risk Emergence and Propagation …

Type 17 – Deteriorating relationship between (1) Adversarial buyer-supplier

buyer and customer relationship
(buyer-customer/customer-buyer) (buyer-supplier)
(2) Solidification of bridge position by
supplier
(supplier-customer)
Type 9 Supplier-customer Having the advantage of critical information Deteriorating relationship between
by supplier customer and buyer and bridge transfer
(supplier-buyer/buyer-supplier) (customer-buyer)
Type 8 Buyer-supplier Customer dissatisfaction Reduction in the quality of services
(buyer-customer customer-buyer) (supplier-customer)
Type 5 Supplier-customer Deteriorating relationship between Supplier’s appropriation behavior
customer and buyer and bridge transfer (supplier-buyer)
(buyer-customer/customer-buyer)
53

(continued)
Table 3.1 (continued)
54

RaST type Risk neutral Risk taker(s) Risk trigger(s) Article

(Dyad) (Dyad)
Type 8 Buyer-supplier Customer dissatisfaction Inappropriate behavior of suppliers van der Valk and van
(buyer-customer/ customer-buyer) towards customers Iwaarden (2011) and van
(supplier-customer) Iwaarden and van der Valk
Type 18 – Customer dissatisfaction Conflicting objectives between: (2013)
(buyer-customer/ customer-buyer) (1) Buyer-supplier
(2) Customer-supplier
Type 17 – Customer dissatisfaction (1) Too much monitoring of supplier by
(buyer-customer/customer-buyer) customer
(buyer-supplier)
(2) Negative reaction of supplier on
customer
(supplier-customer)
Type 8 Buyer-supplier Increased downtime and higher maintenance Suppliers lacking expertise in Finne and Holmström
costs of the customers maintaining buyer’s products for the (2013)
(buyer-customer/customer-buyer) customers
(supplier-customer)
Type 5 Customer-supplier Supplier increasing costs or decreasing the Conflicting goals between buyer and Zhang et al. (2015)
Type 6 quality of services to maximize returns, supplier (buyer pursuing brand equity
resulting into customer dissatisfaction of while supplier aims at maximizing
buyer’s brand returns)
(buyer-customer/customer-buyer) (supplier-buyer or buyer-supplier)
Type 8 Buyer-supplier Developing an unfavorable perception of Customers dissatisfied by the quality of Wuyts et al. (2015) and
buyer and possibly terminating relationships services provided by the supplier Modi et al. (2015)
with the buyer (supplier-customer)
(buyer-customer/customer-buyer)
K. Rotaru and M. Pournader
3 Modeling Risk Emergence and Propagation … 55

depicts the adverse effect(s) of risk(s) imposed from one member of the dyad to
another. A bidirectional arrow of the risk taker dyad indicates that both members in
a particular type of dyadic relationship are exposed to risks by a risk trigger dyad.
All three groups of RaSTs discussed next should comprise at least one risk
trigger and one risk taker dyad. This condition assures the presence of at least one
inter-organizational risk affecting the service triad under investigation.

3.4.1 Group 1 (1 Risk Trigger/1 Risk Taker/1 Risk Neutral)

of Buyer-Supplier-Customer RaSTs

The first group of the RaSTs encompasses all three different types of the
above-mentioned dyadic relationships (Fig. 3.1). Triads in this group have a unique
feature characterized by a risk neutral dyad. This indicates that regardless of the
presence of mutual risk(s) between two members of the triad, the relationship
between the third member and either one of the first two members sharing the risk
remains unaffected.

Ai ; ð1 ¼ 1; . . .; nÞ in Fig. 3.1 represents the adjacency matrix of the bilateral

relations in service triads. Also RI reprents the Risk Index in service triads. Further
information on RI and how it is calculated is provided below and after introducing
the types of RaSTs. An example of this kind of relationship is RaST Type 8
indicating the bridge decay and bridge transfer case (Li and Choi 2009), where the
supplier tries to solidify its bridge position by making stronger ties with the cus-
tomer (‘risk trigger’ dyad). This type of risk is then imposed on the buyer-customer
relationship (‘risk taker’ dyad) but does not have a negative impact on the
buyer-supplier relationship (‘risk neutral’ dyad) (See Table 3.1). Figure 3.1 illus-
trates the twelve possible types of RaSTs in Group 1 along with their adjacency
matrices and RIs which are going to be discussed in more detail after the intro-
duction of all three groups of buyer-supplier-customer RaSTs.

3.4.2 Group 2 (2 Risk Triggers/1 Risk Taker)

of Buyer-Supplier-Customer RaSTs

Group 2 (Fig. 3.2) contains two risk trigger dyads that impose risk(s) to the
remaining dyad. There is no risk neutral dyad present in Groups 2 and 3. An instance
of this group, RaST Type 18, is discussed by van der Valk and van Iwaarden (2011)
and includes conflicting objectives in the buyer-supplier and supplier-customer
relations (risk triggers), leading to negative impacts on buyer-customer relationship
(‘risk taker’ dyad, further referred to as risk taker) (Table 3.1). Figure 3.2 illustrates
56 K. Rotaru and M. Pournader

the twelve possible types of RaSTs in Group 2 along with their adjacency matrices
and RIs.
For instance for A13 in Fig. 3.2, the RI is calculated using the formula in the
Appendix A as below:

RI ¼ 1  1  1 þ 1  1  1 þ 1  1  0 þ 1  0  1 þ 0  1  0
þ1  1  1 ¼ 3

For all the RIs, we consider the main diagonal to be 11. Also if we consider that
the remainder of non-zero arrays having their highest values of 10 (according to the
Likert Scale of 1-10), the max number obtained for RI is calculated as follows:

RI ¼ 1  1  1 þ 1  10  10 þ 1  10  0 þ 1  0  10 þ 0  10  0
þ 10  10  10 ¼ 1101

3.4.3 Group 3 (1 Risk Trigger/2 Risk Takers)

of Buyer-Supplier-Customer RaSTs

Another possible configuration according to predefined conditions of

buyer-supplier-customer RaSTs encompasses risk trigger dyadic relationships
between two vertices that impose risk(s) to the remaining two dyads (risk takers).
Figure 3.3 illustrates the remaining six possible types of RaSTs in Group 3 along
with their adjacency matrices and RIs.
Carson et al. (1997) argue that given the presence of a risk trigger dyad in a
supply chain triad (Group 1), if not neutralized, it will soon affect the other dyadic
relationships within this triad. According to this statement, RaSTs of Group 1 may
potentially transform into RaSTs of Group 3 characterized by a higher level of
hazard.

1
For the matrices shown in the Figs. 3.1, 3.2 and 3.3, the values for all diagonals equal to 0 as the
RaST models presented in these figures do not account for risks/vulnerabilities inherent in the
processes of each node (i.e. each member of the supply chain triad). This assumption is dictated by
the fact that the focus of the RaSTs depicted in these figures is on network risks (risks imposed by
one RaST member to another). However, for the purpose of calculating the RIs, it is assumed that
all the diagonals are equal to 1. Indeed, if the diagonal values are considered as being equal to 0,
this would result in 0 permanent for all RaSTs, thereby making problematic the calculation of the
corresponding RIs. On the other hand, assuming the diagonal values equal to 1 allows to acquire
meaningful (non-zero) values for RIs and thus to compare the risk levels of different RaSTs.
3 Modeling Risk Emergence and Propagation … 57

3.4.4 Further Instructions on the Application of the RaSTs

The graph models (RaSTs) specified in Figs. 3.1, 3.2 and 3.3 exhibit a number of
properties facilitating understanding, formalization, and quantification of the
inherent risks:
1. The Nodal-in degree or Nodal-out degree of vertices represent the extents to
which a vertex is subjected to risk(s) or imposes risk(s). These characteristics
can be easily extracted by summation of the columns and rows of the adjacency
matrix. According to the suggested typology of the triads, it is apparent that in
the adjacency matrix comprised of arrays with the highest value of 1, the
maximum Nodal-in degree or Nodal-out degree of each vertex could be 2. Thus,
considering RaSTs in Group 1, and for instance RaST Type 1, if the supplier’s
vertex value has the Nodal-in degree = 2, it indicates that it has the highest
exposure to risk(s). This concept is critical especially when there exists a
complex network of suppliers, buyers and customers to be investigated
(Bezuidenhout et al. 2011).
2. According to Wagner and Neshat (2012) the risk index (RI) of graphs or
weighted graphs could be calculated using matrix permanent. The similar
approach has been adopted in the literature that uses matrix permanent as an
indicator of cost effectiveness (Sabharwal and Garg 2013), effectiveness of risk
mitigation strategies (Rajesh et al. 2014), or for ranking agility enablers in a
manufacturing environment (Aravind Raj et al. 2013). The calculation of matrix
permanent represents a four-step procedure and includes the following:
(i) identifying the vertices, which in case of RaSTs represent buyer, supplier,
and customer; (ii) defining the directions and weights of the edges, which in case
of RaSTs reflect the types of the dyadic relationships between buyers, suppliers
and customers in a service triad; (iii) calculating the adjacency matrix permanent
and the RIs associated with the specific types of RaSTs (see Appendix A for
more details on calculating matrix permanent); and (iv) comparing the calcu-
lated indices for ranking purposes.2
3. When defining the RaSTs, we posit that no vertex contains internal risk(s) that
constitutes a self-loop. Therefore, the diagonal of the adjacency matrices for the
RaSTs in all three groups should constitute an array of 0s. Nevertheless, in order
to avoid 0 values for RIs, especially for Group 1 of RaSTs where:
8i 2 I ¼ f1; . . .; 12g, per ðAi Þ ¼ 0 (see Appendix A), we posit that the gradient
of matrix for all weighted graphs extracted subsequently in our empirical study
is 1 instead of 0. Accordingly, if we define a value range of 1–10 for all the other
arrays of RaSTs according to their adjacency matrices, the maximum RIs for the
triads in Groups 1, 2, and 3 are going to be 101, 1101, and 1201 respectively.
These values for RIs indicate the extent to which a triad is exposed to risk.

2
For additional information we suggest to refer to the extant literature on measuring matrix
permanent for matrices with unlimited number of nodes, e.g.(Glynn 2010)
58 K. Rotaru and M. Pournader

3.4.5 Justification of RaST Typology and an Illustrative

Example of its Use

To date, there have been no attempts in the literature to view and categorize the
relational properties of the supply chain service triads from the point of view of
their contribution towards the risk profile of the supply chain triad, seen as a system
of interrelated supply chain partners. Below we adopt our RaST typology to cat-
egories the knowledge on the emerging risks within different types of supply chain
service triads.
In Table 3.1, we categorize the buyer-supplier-customer RaSTs explored in the
research literature according to the proposed typology of RaSTs. In some cases
(e.g., Niranjan and Metri 2008), despite the fact that the service triads and their
associated risks represent the core unit of analysis, only dyadic risks have been
identified and no further investigation was conducted to analyze their impact on the
adjacent dyads. In such cases, we used logical deduction to identify the adverse
effects of these risks and to assign them to a particular RaST.
Though the number of studies investigating the buyer-supplier-customer triadic
relationships is still limited, it can be concluded from the main groupings of
Table 3.1 that certain types of triads in the proposed groups of RaSTs have attracted
more interest from researchers than others. In particular, this relates to the first two
groups, and especially RaST Type 8. This RaST type mainly deals with risks
imposed by supplier on customer by the quality of the services provided and
leading to the deterioration of the level of customer satisfaction (e.g., Niranjan and
Metri 2008; Finne and Holmström 2013). Such negative effect may potentially
propagate into the relationship between the customer and the buyer who acts as an
intermediary party. In some cases, similar to the bridge solidification scenario (Li
and Choi 2009; Li 2011), the strengthening of the ties in the supplier-customer dyad
has detrimental impact on buyer-customer relations overtime. It is also posited that
the aforementioned risks do not affect buyer-supplier relations or else they would be
categorized in Group 3 and more specifically Type 27.
In summary, the result of the mapping reported in Table 3.1 reveals that the
classification properties of the proposed RaST typology are sufficient to depict the
examples of buyer-supplier-customer service triads and their associated risks
reported in the literature. Moreover, the outcomes presented in Table 3.1 clearly
indicate that a significant number of types of RaSTs specified in the reported
typology (e.g., Group 3) have not yet been addressed in the research literature.
We illustrate the proposed typology of buyer-supplier-customer RaSTs by using
it in the context of a service network comprised of a buyer, two customers and a
supplier. It should be noted that the proposed approach based on RaST typology
can be adopted in of more complex supply networks, which include more than three
actors. An example is the quadratic risk-aware relationships in a buyer-
supplier-customer 1-customer 2 network presented in Fig. 3.4.
Figure 3.4 is illustrative of any simple service supply network in which the
buyer has outsourced certain services to a supplier that simultaneously provides
3 Modeling Risk Emergence and Propagation … 59

Fig. 3.4 Quadratic

risk-aware structure of
buyer-supplier-customer Buyer
relationships

Customer 2 Customer 1

Supplier

A Risk Trigger Dyad (B-A) B

A Risk Trigger Dyad (A-B) B

A Risk Taker Dyad (A-B/B-A) B

services to multiple customers. While fundamentally the nature of the two triads is
the same (buyer-supplier-customer triad), it is only logical to assume that the risks
and the severity of the disruptions that might occur in different triads of this net-
work (i.e. buyer-supplier-customer 1 and buyer-supplier-customer 2) could differ.
The two triads forming the quadratic network in Fig. 3.4 have unique RIs and
Nodal-in degree/Nodal-out degree values. In the first triad, on the right, one risk
trigger dyad (i.e., buyer-supplier) and two risk taker dyads (i.e., buyer-customer 1
and supplier-customer 1) are presented, matching RaST type 29 in Fig. 3.3.
Depending on the values for risk trigger and risk taker dyads and using the formula
in Appendix A and the adjacency matrix for this type of RaST in Fig. 3.3, the
permanent of this matrix could be calculated as the RI of this specific triad. The
second triad on the left shows two risk trigger dyads (i.e., buyer-supplier,
supplier-customer 2), and a risk taker dyad (i.e., customer 2-buyuer), which mat-
ches RaST type 17 in Fig. 3.2. Similar to the other triad in this network, RI of this
triad could be calculated by assigning values to the risk exposures and possible
disruptions occurring in the risk trigger and risk taker dyads. Next, by comparing
the RIs, the triad characterized by a higher exposure to risk (i.e. a higher RI score)
could receive a higher priority as part of the risk response and mitigation phase of
the risk management process. As per the earlier comment, the suggested
RaST-based approach to risk assessment is generalizable to more complex supply
networks than the one described for illustrative purposes in this section.
60 K. Rotaru and M. Pournader

3.5 Conclusions and Future Research

This study proposes and justifies a novel typology of the risk-aware

buyer-supplier-customer service triads. The development of the typology has
been guided by the design science research approach and the graph theory used as a
modeling methodology formalizing the structural and relational properties of dif-
ferent types of Risk-aware Service Triads (RaSTs). Each individual RaST model
forming the suggested typology is built on a unique set of characteristics (tech-
nological rules) outlining the mechanism of risk emergence and propagation among
dyadic structures within each buyer-supplier-customer service triad. Specifically,
the dyadic components of the service triads were classified according to their active,
passive or neutral role in risk emergence and propagation within RaSTs. The cat-
egorization of these components and their formal representation using the graph
theoretical approach resulted in thirty distinct types of RaST models, categorized in
three groups.
The application of the graph theory allowed calculating the Risk Index (RI) as an
implicit quantitative measure of risk, in line with the structural and relational
properties of the underlying dyadic structures informed by the RaST typology. The
suggested approach provides a quick and intuitive tool for risk assessment and
ranking of RaSTs in line with their type and group within the RaST typology. It
should be noted though that the application of this approach should not be regarded
as the end point in the assessment of risks in service supply networks, but rather as
a means to identify the critical areas (triads) and to timely allocate resources needed
to address high risk exposures. Hence, based on the problem context, the risk
assessment approach formulated in this study still requires to further conduct more
context-specific analyses into the risk factors and vulnerabilities that shape risk
exposures of the supply network (or its individual components) under
consideration.
By presenting the RaST typology, the study focuses explicitly on risks triggered
by the link-level properties (Bellamy and Basole 2013) of the service triads.
However, the vertex-specific risks triggered by the distinct members of the triads as
well as the risks external to the service triads, that may affect the dyadic relations
and the triad as a whole, have not been included in the proposed RaST typology. In
the real-world situations, such assumption does not hold and the vertices, in
addition to edges, could play a major role as risk triggers within a service triad.
Having said this, the arrays of the gradient would have distinct numerical values
other than non-zero values that are posited in the calculation phase. Furthermore, in
conducting of real-world evaluations of risk exposures in service triads and to
achieve more accurate scores of the resulting RIs, we recommend triangulating the
managerial judgments about the severity of the risk exposures associated with the
given processes from different sources including observations, historical loss data
and semi-structured interviews (Barratt et al. 2011).
The output of this study calls for a wider application of graph theory for the
analysis of risks in the context of cross-organizational collaborative relationships,
3 Modeling Risk Emergence and Propagation … 61

including the buyer-supplier-supplier triads (e.g. Choi et al. 2002) and/or

buyer-buyer-supplier triads (e.g. Choi and Kim 2008). To further progress the
ideas discussed in this chapter, our future research directions include an empirical
evaluation of the proposed RaST typology via a series of case studies.

Appendix A

Permanent Calculation Formula of the RaST Adjacency Matrix

2 3
r11 r12 r13
A ¼ 4 r21 r22 r23 5
r31 r32 r33

PerðAÞ ¼ r11 r22 r33 þ r11 r23 r32 þ r22 r13 r31 þ r33 r12 r21 þ r12 r23 r31 þ r13 r21 r32

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Chapter 4
Managing Reputational Risks in Supply
Chains

Fred Lemke and Henry L. Petersen

Abstract In the face of ever expanding global markets, supply chain risks have
become increasingly important. Most professionals are fully aware of the risks that
have the potential to disrupt supplies such as minor design problems or even natural
disasters. However, there is one kind of risk that has been often overlooked in
supply chain management but is now becoming a threat: reputational risk. This
chapter will explain the theoretical underpinnings of this vital management area and
how to mitigate reputational risks in a practical supply chain setting.

4.1 Introduction

In this chapter, we begin by explaining the concept of reputation and how important
it is to a corporation. This will lead us to the reputational triggers and the dimen-
sions that carry an inherent risk to partnering organisations. These characteristics
are particularly relevant in the supply chain context and the nature of spillover and
the reputational ripple effect will bring ‘reputational owners’ and ‘reputational
borrowers’ in the supply chain to the fore. Within this setting, corporations can use
this effect to their advantage as it helps them to identify the zones of risk and to
address these with mitigating strategies early on. Corporate social responsibility
(CSR) serves as a contemporary measure to manage reputational risks – a critical
aspect that we will further elaborate on in the discussion and conclusion of this
chapter.

F. Lemke (&)
Vlerick Business School, Avenue du Boulevard—Bolwerklaan 21, 1210 Brussels, Belgium
e-mail: [email protected]; [email protected]
H.L. Petersen
Department of Management, University of Wisconsin-La Crosse, La Crosse, USA

© Springer Nature Singapore Pte Ltd. 2018 65

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_4
66 F. Lemke and H.L. Petersen

4.2 Corporate Reputation

Reputation is a dynamic and valuable asset that has been shown to mitigate the
negative outcomes stemming from a crisis (Vanhamme and Grobben 2009), and
serves as a fundamental source of competitive advantage (Dierickx and Cool 1989).
The significance for managing the organization’s reputation cannot be over stated –
particularly in the supply chain context.
Fombrun (1996) identified three foundational elements in the development of a
reputation: First, it is based upon perceptions. Second, it is the aggregated per-
ceptions of all stakeholder groups; and third, it is comparative. Individuals form an
impression of who and what an organization represents by their individual expe-
riences with the firm (Lemke et al. 2011) and by the way the firm manages its assets
(Reese and Kossovsky 2011). In the former, the impression is shaped by the
consumer’s experience with the firm regarding its actions (including how the firm
interacts with the local community), the offering (including products and services),
and lastly the firm’s communications (including official standards and third-party
certifications). These three triggers convey an impression, and when considered
collectively with other stakeholders, result in a reputation. These are thus consid-
ered ‘reputational triggers’. Take for instance McWane Inc., a U.S. manufacturer of
pipe used in municipal utilities. Its reputation for being a dangerous company is due
in large part by its actions associated to the health and safety of its employees. Over
the years, a significant number of employees have been injured or killed while
working at the facilities (Mokhiber and Weissman 2004). Apple Inc. (the U.S.
technology company) has the reputation of being an innovator. This is a result of
their product offerings, sporting state of the art design, and cutting edge technology.
Lastly, whether we read it on social media platforms, on the firm’s own website, or
hear it from other stakeholders, we may decide that the BMW may not be the
vehicle of our choice. It is a decision based upon a series of communications that
influenced our perception. Others may have a completely different opinion. We, as
consumers, pay attention to information that we deem relevant, which in turn
impacts our views and resulting reputation.
The three general triggers, actions, offering and communications are made up of
individual dimensions that form the basis of a reputation. Before proceeding to look
at these more closely, it is important to recognise that we often associate a firm’s
reputation with the end-consumer market. But if we were to broaden our focus
beyond the consumer, even past the retailer, multiple stakeholder groups would
come under consideration. In this larger context, we then see that reputation is
relevant in both the business-to-consumer (B2C) and the business-to-business
(B2B) setting. In order to capture the various impressions, we draw upon the
relevant academic work (Fombrun 1996; Worcester 2009; Lemke and Petersen
2013, Petersen and Lemke 2015) to form the integrative model that uses reputa-
tional triggers as a starting point to highlight the various stakeholder views.
Figure 4.1 details the three triggers of reputation. Each trigger has specific
dimensions that are relevant for all stakeholder groups. Given that end-consumers’
4 Managing Reputational Risks in Supply Chains 67

perceptions play a dominant role for today’s market-oriented companies, an asterisk

highlights the dimensions that are particularly relevant for this stakeholder group.
With respect to the first trigger, the firm’s actions, this entails the quality of
management, how management treats its employees, how the firm’s resources are
being utilized, what long-term investments are made, their corporate social
responsibility efforts, the image that is casted and lastly, the firm’s culture.
Activities in any one or a collective of these activities can influence a reputation.
Regarding the firm’s offerings, the second trigger, this captures the products and
services, innovativeness, its origin, the brand, the class image of the offering, the
experience consumers have with the offer, and lastly, the image of the brand users.
With respect to the last trigger, communications, the financial performance, cor-
porate design, industry standards and third-party certifications are influential, as
well as the classic marketing communication tools such as advertising, promotions,
direct marketing, and public relations.
These triggers serve as a set of variables for the formation and development of a
reputation, which reflects a multi-stakeholder acuity whether it is in a B2C or B2B
setting. Within each of the three triggers, we can see how corporate reputation can
be developed or in particular easily damaged (Dowling 2004; Hamilton 1995),
especially when it is not developed, managed, and protected in a timely and
appropriate fashion (Casado-Díaz et al. 2009). Wasting resources and taking a
short-term horizon in investments may signal negligence. Employee complaints of
mistreatment and superior financial performance may signal that an organization is
greedy. That may be reinforced by insufficient activities in CSR and the destruction
of the natural environment. In short, the reputation of any corporation is at risk and
needs to be closely and regularly monitored.

4.3 Reputational Risks

Reputational risks are defined as the cumulative likelihood that events resulting
from exogenous or endogenous sources can occur and negatively impact the
stakeholder’s perception of the firm’s behaviour and performance (Roehrich et al.
2014). They may be based upon an economic, societal, or environmental event that
involves the firm directly or they may arise indirectly via the activities of another
organization in the supply chain (Hoejmose et al. 2014). An organization’s repu-
tation may be placed at risk if a member organization conducts itself in such a
manner that the behavioural outcomes spread beyond its organizational boundaries.
It is not surprising that this type of risk, if not realized, goes unnoticed. On the one
hand, reputational risks rarely result in the disruption of resources and they hardly
impact the quality and quantity of a supply—two major risks that tend to receive the
most attention. On the other, it is generally problematic to assess their associated
costs, if realized, making mitigation difficult to justify. Lastly, estimating the
probability of an event occurring and the impact the event will have on a reputation
68 F. Lemke and H.L. Petersen

Corporate Corporate
Action Managerial Employee
Resource Use
Long-term
Social Corporate Culture/
Quality Management Investments Image*
Trigger Responsibility Personality*

Image of
Offering Products and
Innovation Country of Brand*
Product/Service
Experience*
Brand Users
Services Class Image* Image*
Trigger Origin*

Commun- Industry Personal Selling

Financial Corporate Standards and Public
ication Performance Design* Third-Party
Promotion* Advertising* and Direct
Relations*
Marketing*
Trigger Certifications*

*Note:
The reputational dimensions are relevant for all stakeholders. An asterisk sign indicates that this dimension is most relevant for the
end-consumer stakeholder group.

Fig. 4.1 Reputational triggers and dimensions in a multi-stakeholder environment

(and to what extent) is very difficult. This means that assessing the costs and
benefits of managing such risks are highly unpredictable. In order to mitigate the
potential risks that threaten a firm’s reputation, we must first understand its function
in the supply chain context. Lets look at the theoretical underpinnings before
proceeding with some of the practical steps.

4.4 Reputation, Spillover and the Ripple Effect

in the Supply Chain

We will start with describing reputation in a supply chain setting, before moving on
to how the variables of reputation can ‘travel’ via the reputational ripple effect.
After the theoretical foundation is established, we will outline the management tool
that helps in detecting and capturing reputational spillovers.

4.4.1 Supply Chain Reputation

The reputational triggers and dimensions discussed thus far are particularly suitable
for capturing the perspectives of all stakeholders associated with the processes and
outcomes of a supply chain. Figure 4.2 represents a simplified view of such a chain.
We only consider one raw material producer (tier-2 supplier), system supplier
(tier-1), manufacturer, and a distributor for practical purposes but in reality, there
may be many more with multiple tiers. Yet, the underlying principle applies just the
same: along the chain, each firm forms their own reputation based upon the per-
ceptions of stakeholders with respect to the firm’s behaviours and competences for
each of the three triggers.
The reputation derived from any one or more dimensions (i.e., within the
respective trigger) has the probability of being transferred from one party to another
4 Managing Reputational Risks in Supply Chains 69

Raw Material System Supplier

Manufacturer Distributor
Supplier (Tier-2) (Tier-1)
Ac on Trigger Ac on Trigger Ac on Trigger Ac on Trigger End-consumer
(Stakeholder)
Offering Trigger Offering Trigger Offering Trigger Offering Trigger

Communica on Trigger Communica on Trigger Communica on Trigger Communica on Trigger

Fig. 4.2 Diagrammatic representation of a supply chain and member reputational triggers

(Fiol et al. 2001; Lemke and Petersen 2013). This is another way of saying that the
three reputational triggers have the potential to traverse the supply chain, i.e.,
moving up- and down-stream the chain irrespective of organisational boundaries.
For instance, a raw material supplier that causes a significant amount of damage to
the natural environment will develop a reputation that formed primarily from the
CSR dimension. There is now a high probability that partnering firms will expe-
rience a spillover effect in which they may also be associated with the misdeed,
being guilty by association, and therefore, placing their reputation at risk.
Importantly, reputational dimensions are transferrable in both the negative and the
positive. A mere partnership with an innovative company may result in a positive
spillover whereby the associated company may also be perceived as being
innovative.

4.4.2 The Mechanics of Reputational Spillover

and the Ripple Effect

Even though a corporation will develop a reputation along the chain (Eltantawy
et al. 2009) this is not in isolation. In fact, there is an associated chain where
‘reputational owners’ and ‘reputational borrowers’ co-exist (see Lemke and
Petersen 2013). Knowing which dimensions remain with the party that essentially
earned it and which dimensions have a probability of spillover is the key to
understanding when or where risks should be mitigated. Figure 4.3 provides a
snapshot of the underlying mechanics:
70 F. Lemke and H.L. Petersen

(a) Decreasing (b) Increasing

RB RB
RB RB
4 4
3 3

RO RO
RB RB
1 1
RB RB
2 2

RO: Reputational Owner

RB: Reputational Borrower

High

Low
Magnitude

Fig. 4.3 Reputational spillover and the ripple effect

The reputational owner (RO in the figure) forms a reputation through the
varying triggers associated with its market offering, communications, and actions.
The reputational borrower (RB) will passively or indirectly be impacted by the
reputation from the owner merely by association. This association could be
embedded in a contractual frame (e.g., business partnership), industry setting (e.g.,
electronics), geographical region (e.g., South America), and others. Transferring
reputation from the owner to the borrower is what we consider the spillover effect.
The spillover could be direct (RO to RB1, RB3, and RB4) or indirect (RO to RB2)
via multiple partners.
Although a full treatment of wider network considerations is beyond the scope of
this chapter, it is important to understand that whoever is in the associative network
of the reputational owner could be affected by it. This is because any reputational
spillover is largely a matter of perception and thus, there are no physical bound-
aries. If we consider the temporal aspects of how reputation spreads outwards in
incremental steps (i.e., away from the RO), this forms a ripple effect in which the
transfer of reputation varies in length, direction, time, and magnitude. In nature, the
magnitude of the ripples may weaken as they spread out and thus, the strength of
the impact will be greatest at the core and begin to fade with every progressive
wave (section ‘A’ in figure, on the left). In the business context, we see this
happening with organizations that extract natural resources. The raw resource will
eventually make its way along the supply chain to become any number of products
that are eventually offered by retailers. Oil is a good example. Extraction methods in
4 Managing Reputational Risks in Supply Chains 71

the North of Canada have been questioned with respect to the impact on human
health. Regionally, stakeholder perceptions will impact the reputation of the
organization (Jamasmie 2014). However, downstream, after the oil is transported,
refined and transported yet again to become products in local gas retail outlets, the
associated reputation with being a hazard to the North Canadian community is all
but non-existent.
By contrast, the ripple effect could be like a tsunami that will erupt at some
breaking point and reach its greatest impact at the outer-layer. In this case, we see
that the magnitude of the effect increases or becomes amplified (‘B’, on the right)
and a small – almost unnoticeable – action may turn into an enormous reputational
effect. Take the 2014 UK poultry dilemma as an example (Lawrence and Wasley
2014). Clearly, customers enjoyed the lower prices. That is until they learned that
unhealthy poultry, travelling across a number of countries, avoided safety stan-
dards, ending up on the shelves for an unreasonably low price. The issue grew to a
point in which the reputations of several end of the chain retailers of various supply
chains were threatened. Therefore, such a ripple effect can be seen to extend beyond
the supply chain.
No matter whether the ripple effect becomes reduced or amplified, corrective
actions should be taken to first address the effect and somewhat insulate or mini-
mize the organization from the spillover and then second, take the appropriate
measures to eliminate the risk right at the core of the effect. As shown in Fig. 4.4,
certain reputational triggers will have a multi-dimensional effect and spill over from
one chain to another.
We draw attention to four different reputational spillover states (R1 to R4 in
Fig. 4.4) to explain variations in the supply chain context:
• Stemming from the reputational borrower, R1 is a direct downstream spillover.
Note that ‘down’ refers to the supply chain, meaning that the reputation transfers
from one supply chain actor to another that is positioned closer to the target
market. For instance, a manufacturing firm that has a significant reputation for
being fashionable, like Superdry (the UK clothing company), may have a
spillover effect and thereby enhances the reputation for being fashionable to a
partnering firm. Put another way, the retailer borrows the reputation for being
fashionable from the manufacturer.
• R2 describes an interesting spillover that first directly transfers undetected to a
downstream partnering firm (R2a) and re-spills detected to the next downstream
organisation. This is an indirect down spill from the reputational owner to a
reputational borrower without any direct relationship (R2b). For example, the
reputation of a manufacturer for following fair trade principles may not be
important for a global distributor of food. Given that this is neither relevant for
the distributor nor for its stakeholders, there is a hidden fair trade reputational
effect. The distributor could borrow the reputation, but does not look for it, does
not detect it, and does not publicise it. Stakeholders also do not deem this
important and are, thus, not concerned with this. Next, the retailer buys a range
of products from the distributor and will then offer these to the end-consumer
72 F. Lemke and H.L. Petersen

Reputa onal
Borrower

Communica on

Ac on
R3
Offer

Reputa onal R4 Reputa onal

Owner Borrower
Communica on

Ac on
Offer

R2a R1 / T1

Reputa onal
Borrower
Communica on

Ac on

R2b / T2
Offer

Reputa onal
Borrower

Supply Chain 1 Supply Chain 2

R1: Detected Direct Down Spill Over

R2a: Undetected Direct Down Spill Over
R2b: Detected Re-spill of R2
R3: Detected Direct Up Spill Over
R4: Detected Horizontal Spill Over
T1: Immediate Spill Over
T2: Delayed Spill Over

Fig. 4.4 Reputational spillover, length, and time

market. If end-consumers, as a stakeholder group, are looking for fair trade

products, the manufacturer’s fair trade reputation becomes relevant and re-spills,
via the distributor, to the retailer who will borrow it for attracting
end-consumers. In this scenario, we see that spillovers can vary in length,
sometimes transferring reputation to both upstream and downstream companies
that are more than one tier away. It is all about sequencing, which is another way
of saying that the reputational ripple effect underlines the supply chain system
4 Managing Reputational Risks in Supply Chains 73

and extends beyond it. A re-spill creates the next wave that, in this particular
case, increases in magnitude (variation ‘B’ in Fig. 4.3). Following this thought,
R1 could be further transferred, providing that the reputation (for being fash-
ionable, to stay with the example above) becomes relevant for organisations and
stakeholders further downstream the supply chain.
• R3 describes an upstream spill of reputation. A supplier that works with Apple
Inc. could borrow Apple’s reputation for being innovative and could “use the
high-tech reputation to present itself as a highly capable and innovative supplier
to new potential customers”, as Smals and Smits (2012, p. 161) explain. In this
example, we see that reputational spillovers can be multi-directional.
• R4 is an example that goes beyond the realm of a single supply chain. Thus far,
R1 to R3 described vertical spillovers that stay within a given chain. R4
demonstrates that an organisation outside that chain can borrow the reputation
from the owner. For instance, the reputation of Volkswagen (the German
automotive manufacturer) for being environmentally responsible was tarnished
with the diesel emissions scandal (Farrell and Ruddick 2015). As soon as it
became public that the French police raided some of the manufacturing sites of
Renault (the French automotive manufacturer), stock prices fell by 20% because
investors were worried that Renault would be pulled into the Volkswagen
emissions scandal as well (Topham and Kollewe 2016). Even the reassurances
of the French government that Renault is not involved in any fraud, did not help
to recover the losses. In this example, we see that the reputation of one company
can spill horizontally to another organisation, even though these are embedded
in two different supply chains.
The figure also draws attention to two time lapses (T1 and T2):
• T1 shows that reputation could spill over with an immediate effect. For instance,
the reputation of a company manufacturing real fur coats spills over to partner
organisations (e.g., retailers) as soon as ‘wearing real fur products’ becomes
unfashionable, unethical, unsustainable, etc. The negative or positive reputation of
the manufacturer has the potential to spillover directly and immediately to others.
• T2 highlights that reputation could remain latent and stay with the owner for
some time and may spill over later to another party as soon as the reputational
trigger becomes relevant and active in a given situation. For example, a clothing
company sourcing products from countries where child labour is the norm has
no reputational damage, as long as ‘child labour’ is not perceived as being
wrong. Retailers will not experience any spillover, given that its immediate
stakeholders do not deem this important. As soon as child labour becomes a
topic of debate and stakeholders (such as end-consumers) perceive this as being
negative, the reputation of the clothing company will spill over to the retailer,
regardless of whether the retailer offers products from the clothing company at
present. Given that the manufacturer-retailer association has already been
established, activities and market offerings of the past could result in a latent
reputational spillover at a later point in time.
74 F. Lemke and H.L. Petersen

4.4.3 The Tool to Detect and Capture Reputational Spillover

Regardless of time and the reach of a reputational spillover within the ripple zone, it
is important to understand what reputational dimensions typically stay with the
reputational owner and what dimensions have the propensity to transfer to bor-
rowers. When seen from a distant, reputation in a supply chain becomes an
unknown entity making it difficult to tease out the processes that lie behind it. The
conceptual model presented next captures this by arranging the dimensions in the
supply chain context.
Figure 4.5 is a template that illustrates the individual firm-specific triggers for
reputation, which have the potential to surface in the supply chain as a holistic and
multi-source construct that then poses a risk to all chain members. The figure
outlines a simplified supply chain at the top; a matrix, cross-tabulating the
dimensions for each of the supply chain parties, is given underneath, extending to
the right, depending on chain length. Populating the matrix with ROs and RBs is
contextual and thus, it is helpful to objectify and note the risk zones that are
largely subjective in a given situation. For instance, managerial quality is a
dimension that applies to every single firm and can spill over from any one
member to another, depending on the specific setting of relationships. Hence, as an
example, the manufacturer Foxconn engaged in questionable activities that gen-
erated a reputation for employee mismanagement, human rights abuses and neg-
ligence (Chan et al. 2013). The directionality of the spillover will be dependent
upon the organization and its stakeholders. Spilling forward, Apple was a recipient
and thus, the reputational borrower (RB) as shown in Fig. 4.5. Foxconn, the tier-1
supplier, is the reputational owner (RO) associated with the events and as seen in
the figure, demonstrates this via the triggers. They are the RO for employee
management, CSR, and corporate image. The RO-RB setup of other triggers
would normally be included in Fig. 4.5, but they are not for illustrative purposes.
The reputation on these dimensions is negative, and Apple has reluctantly become
a recipient.
Other firms may experience a spillover as well, e.g., Amazon.com Inc. (the U.S.
online distributor) and this could also happen via a different category or different
supply chain. By the same token, the spillover could also occur upstream. But
regarding the Foxconn-Apple example, this has not been reported in the media.
This may be a result of tier-2 suppliers being in the same country of origin as
Foxconn (tier-1); thereby perhaps the events are considered business as usual and
therefore not a risk. The figure notes ‘contextual’, as a firm can be a reputational
owner or reputational borrower. In this light, mitigation begins with analysing how
the dimensions of reputation are developed and transferred and then assessing
options for buffering or risk removal. This aspect draws the attention to reputational
risk management and will be discussed next.
4 Managing Reputational Risks in Supply Chains 75

Reputation
Reputation
Reputation
Reputation

Action
• Resource Use
• Long-term
Investments
Raw Material • Etc.
Supplier System
(Tier – 2) Supplier Offering
Action
(Tier – 1)
Action Manufacturer Action Market
Distributer • Innovation
Offer. Offer. Offer. Perception of
• Products and
Com. Com. Com. Offering,
Services
Communication,
• Etc.
and Action

Communication
• Promotion
• Public
Relations
• Etc.

Raw
System
Material Manu-
Reputational Trigger Reputational Dimension Supplier Distributor
Supplier facturer
(1st Tier)
(2nd Tier)
Managerial Quality contextual RO RB contextual
Employee Management contextual RO RB contextual
Resource Use
Action Long-term Investments
Corporate Social Responsibility contextual RO RB contextual
Corporate Image* contextual RO RB contextual
Corporate Culture / Personality*
Products and Services
Innovation
Image of Country of Origin*
Offering Brand*
(Offer.) Product / Service Class Image*
Experience*
Brand Users Image*
Financial Performance
Industry Standards & 3rd-Party Certifications*
Corporate Design*
Communication Promotion*
(Com.) Advertising*
Personal Selling and Direct Marketing*
Public Relations*
*Note: The reputational dimensions are relevant for all stakeholders. An asterisk sign indicates that this dimension is
most relevant for the end-consumer.
RB = Reputational Borrower
RO = Reputational Owner
contextual = it depends on the specific setting and the member could be either a RB or a RO

Fig. 4.5 Supply chain reputation: the market, generators, and borrowers. Source Based on Lemke
and Petersen (2013)
76 F. Lemke and H.L. Petersen

4.5 Reputational Risk Management

Integrating CSR into the supply chain serves to guide members with incentives and
tools to enhance performance, a strategy that builds on the notion of ‘greening’ the
supply chain (Björklund et al. 2012). We have found that this approach is struc-
turally sounder than invoking rules, having to monitor member performance or
using surveys. Figure 4.6 outlines the relevant management steps.
Assessing and managing for reputational risks entails a coordinated effort to
assess all supply chain members’ commitment, actions, and surrounding policies.
The emphasis is to target the governance of partnering firms. Figure 4.6 shows the
seven-step management process that the environment initiates—one has to take
these in stated order:
1. Member Orientation—The process begins with the gathering of information
from supply chain members. This entails their responsibility and sustainability
statements, an analysis of their policies and procedures, corresponding perfor-
mance, the quality of their metrics, and their connections to other business
parties. This procedure would make the supply chain transparent (Doorey 2011)
and creates a platform where knowledge-sharing, learning, developing a sense
of shared meaning and values, etc. is encouraged (cf. Hernández-Espallardo
et al. 2010). Other efforts, such as conducting a lifecycle analyses on the
products (Lemke and Luzio 2014), would assist in identifying opportunities to
mitigating environmental issues, human rights problems or disruptions to sup-
plies. Scanning the environment for issues associated to the specific activities an
organization engages in (i.e., regulatory matters, public policy issues, and
societal trends) helps to identify and navigate through potential risks. This also
includes regulatory non-compliance and/or awards. Ensuring that interested and
affected parties are taken into consideration, identifying risks early on will assist
in addressing and mitigating stakeholder issues at a later date.
2. Risk Analysis—Assessment begins with the characterization of the risks.
Probability, impacts, social burden and cost to the organization are conducted
here. Prioritization should occur to determine which risks should receive
immediate attention as per stakeholder preferences and their input. Nevertheless,
capturing and detailing the risks, based on accurate and relevant information,
will lead to better decision-making. For instance, the lifecycle analysis will
identify whether any supply chain member uses conflict materials in the pro-
duction process or perhaps detail the carbon footprint of their product or service.
It will also indicate the risk type perceived by each stakeholder group.
3. Risk Ranking—Risks should be prioritized and then categorically assessed for
how the organization should manage them. This step could be based on the
costs, resources, capabilities, impact, etc. involved in addressing the risk or on
the consequences resulting from it.
4. CSR Mitigating Strategies—CSR is shaped by the activities of the firm, the
environmental situation, and the perceptions of respective stakeholders. The
result of the previous step, risk ranking, provides a process of prioritization that
4 Managing Reputational Risks in Supply Chains 77

Environment

1. Member Orientation

2. Risk Analysis 3. Ranking

Reputational Reputational Potential Supply Chain Importance Prioritisation
Trigger Dimension Impact Reach 1 2 3 4 5 Top Mid Low

4. CSR Mitigating Strategies 5. Decision 6.

Implementation
Risk Rank 1 Best Option
Governance
Policies
Ethical
Processes
Environmental
Resources
Social

Risk Rank 2 Best Option

Governance Policies
Ethical Processes
Environmental Resources
Social

Risk Rank n Best Option

Governance Policies
Ethical Processes
Environmental Resources
Social

7. Feedback

Fig. 4.6 Assessing and managing reputational risk in supply chains

is captured within a CSR framework, and would then provide options for mit-
igation. Given the complexity, CSR allows the formulation of counter-strategies
specifically in light of governance, ethical, environmental, and social aspects of
the business, which shall be discussed later.
5. Decision—Selection of the best option should lead to reducing or eliminating
the risk in the most cost effective manner. Management’s approach must be
collaborative. Reducing or eliminating the risk is in the best interests of all
78 F. Lemke and H.L. Petersen

supply chain members, but more so with those that have more to lose. By
developing the managerial competencies of all parties in the analysis, recogni-
tion and decision-making process, the chain becomes stronger and has the
probability of providing a competitive advantage. Selection of the mitigating
options are contingent upon ensuring that there is a collaborative approach that
considers the resources required by the decision, the intensity of the effort, and
the parties that are affected.
6. Implementation—Collecting and assessing the performance data for effective-
ness ensures that management practices are measured. This then will allow for
continuous improvement. Implementation involves the development of the
appropriate policy, establishing goals and metrics, identifying roles and
responsibilities, acquiring the needed resources, and starting the implementation
programme.
7. Feedback—After the data is collected, procedures implemented, and perfor-
mance evaluated, the loop must be closed. Performance evaluation data is fed
back in at the front of the loop and the risk analysis process begins once again.
Assessing and managing reputational risks is an iterative process. If all members
of the supply chain commit to the same CSR policies, the probability of reputational
risks may be greatly reduced. In this fashion, every chain member is contributing to
the supply chain and piece-by-piece, the profile of the socially responsible supply
chain (SRSC) is taking shape. This idea furnishes a different perspective on supply
chain performance and hence, this is an added incentive for members to work
together. Those members that are inactive or obtuse would be replaced over time.
Ultimately, only the SRSC truly fulfils the requirements of the modern consumer
and will earn a positive reputation on all dimensions.

4.6 Corporate Social Responsibility in the Supply Chain

From a traditional stakeholder vantage point, one of the primary roles or respon-
sibilities of business is wealth generation (Friedman 1970) which guides them on
their duties as for-profit entities (Davis 1973). This is an extreme view, and one held
by very few business people today. Included in the building up of monetary wealth,
business now must also strive to assume CSR, which entails responsibilities sur-
rounding economic, societal and environmental issues (Jo and Harjoto 2012;
Petersen and Vredenburg 2009a; Orlitzky et al. 2003). Although it is a topical
business practice with a pedigree of academic writing, the CSR concept is still
somewhat ill-defined (Freeman and Hasnaoui 2011). This is due, in part, to varying
stakeholder expectations (Franz and Petersen 2012) and what one would consider to
be a CSR-related action (cf. Alessandri et al. 2011).
Our conceptualisation is based on the works that have defined and identified
stakeholder expectations (Epstein and Roy 2001; Carroll 1991), and four distinctive
4 Managing Reputational Risks in Supply Chains 79

CSR

Governance Ethical Environmental Social

Environmental
Organizational Business Businesses expected to
management informed
deployment of responsibilities and alleviate societal
organizational
resources ethical expectations problems
processes / procedures

Firm-stakeholder Shaped by culture and Company-specific Philanthropy meets

interaction types context strategies societal needs

Fig. 4.7 Four spheres of corporate social responsibility. Source Based on Lemke and Petersen
(2013), Petersen and Lemke (2015)

spheres shoulder our operational approach: governance, ethics, environment and

social (see Fig. 4.7).
The first CSR sphere, governance, views a corporation as being embedded in
existing social structures and international business networks. This sphere encap-
sulates how organizational resources are being deployed and the type of interaction
the organization has with its stakeholders (Daily et al. 2003). Responsible firms
have better organizational performance, good risk management practices, support
from institutional investors, satisfied employees, and loyal customers (cf. Petersen
and Vredenburg 2009b; Becker-Olsen et al. 2006; Peloza and Shang 2011; Du et al.
2007; Hansen et al. 2011). Compliance and organizational responsiveness among
chain members should be observed at the level of governance. Here, we could point
to the very charter1 of member partners and a commitment of upper management
that is transparent and observable.
The second sphere is ethics which captures the expectations of stakeholders and
also the corporation’s willingness to assume its ethical responsibility (Perrini 2006).
In general, ethical behaviour has a direct impact on shareholder value (Johnson
2003) and in the supply chain, organizations are serving a more diverse and global
market and thus, have to cooperate with multiple and sometimes international
suppliers and buyers. Ethics covers the materials and working processes employed

1
In a number of economies, a company charter is a legal document filed with the regulatory body
to describe a company as to why it exists including its objectives, operations and so forth. In other
countries, this may be considered a company constitution, article of incorporation or certificate of
incorporation.
80 F. Lemke and H.L. Petersen

at each link of the supply chain that may start in one country, and cross national
boundaries, cultural zones, legal systems, and individual viewpoints. On this
journey, the interpretation of ethics can and does change and what appeared to be
ethical at one stage – even with the best intentions at any given time – may look
neutral or unethical in the next (cf. Adebanjo et al. 2013). Although many stake-
holders of a supply chain are important, in the end, it is the consumer that fuels the
production process and, therefore, the final ethical verdict would come from the
end-consumer. This highlights the necessity that the ethical interpretation of all
supply chain members becomes united and reflects one and the same ethical
approach.
The environment represents the third sphere and it captures the responsibilities
and actions pertaining to the management of the natural environment. This sphere
includes business processes (Brundtland 1987) so that the organization and the
environment form a symbiotic relationship in which both entities flourish. In this
instance, a future-oriented and pro-active environmental strategy could reap
financial rewards for the business (Yu et al. 2014; Luzio and Lemke 2013).
The last CSR sphere is social and it involves the public’s expectations on
business leaders that surpass their fiduciary duties. Just as we would expect of a
good citizen to participate in alleviating social ills, businesses are expected to
contribute in the same way. Human rights atrocities, racial disparity, the prevention
of child labour, creating awareness of alcohol abuse, anti-smoking campaigns—
there are many issues needing attention and socially responsible firms get behind
those that they believe they can contribute the most.
As you can see, CSR becomes the mainframe for not only the identification and
mitigation of reputational risks but also serves as a means for the selection of
partnering firms, identifying and managing stakeholders, and so on. It ultimately
becomes the lynch pin for keeping on top of many risks in the supply chain context.

4.7 Discussion and Conclusions

In this chapter, we discussed the nature of reputation and the risks involved in a
supply chain setting. Understanding, identifying, and mitigating reputational risks
becomes a key management task. Our four-lenses CSR perspective enables com-
panies to improve upon the risk identification process (Ennis 2015) and as Peters
and Romi (2014) note, may also increase the transparency of members which may
mitigate or even eliminate the risks entirely. What this means is that chain members
would commit to a common CSR profile. In this fashion, the CSR philosophy
serves as a source code that becomes firmly implanted in the DNA of the chain.
CSR would, therefore, become SCSR as the philosophy sits within the supply
chain, rather than in an isolated corporation. Then, for example, if environmental
management is highlighted, it is more likely that a tier-2 supplier will observe its
environmental impact with an eye to continual improvement and maybe even the
adoption of cradle-to-cradle practices. That the governing body of the firm has
4 Managing Reputational Risks in Supply Chains 81

made a commitment to this may increase the likelihood that both their immediate
stakeholders and their immediate chain members will hold them more accountable.
Another aspect of mitigation is in reference to the spillover and ripple effect.
Mitigation begins with minimizing the impact a negative reputation can have as a
result of any number of combinations of triggers. As in the case discussed earlier,
Apple Inc. may increase their investments in CSR, an actionable trigger, to buffer
the risks generated by Foxconn until such a time that they are able to effectively
encourage Foxconn to change their practices, or find an alternative manufacture that
therefore eliminates the risk entirely. However, influencing Foxconn to alter their
practices and commit to a common set of responsibilities may need to be embedded
in the fabric of the organization. Committing to a code of conduct may not be as
effective of a catalyst as opposed to having an organizational commitment to social
responsibility that comes from the Board of Directors.
Our emphasis on promoting the mitigation of reputational risks via CSR stems
from what has been considered a substandard approach to supply chain manage-
ment (Storey et al. 2006), and the management of risks (Fischl et al. 2014). It is for
this reason that we see how the adoption of a common CSR policy by associated
members may address reputational risks and improve upon the mitigation of any
number of supply chain risks with respect to quality and supply disruptions.
Perhaps this becomes a supply chain social responsibility (SCSR) ‘charter’ that
details a commitment to a common understanding of governance, ethics, social and
environmental responsibilities that in turn guides corporate practices. From a
stakeholder’s viewpoint, it would be the psychological signature that is shorthand
for ‘trust’. Analysing the competitive landscape with a social responsibility focus
would provide managers with an appreciative vantage point to position their
offering more favourably in the B2B market. Hence, collaboration with suitable
partners will clearly indicate needle-moving improvement, but can only be done
when the set of supplier selection factors are relevant, transparent and as we have
described, socially responsible. Pursuing this line of thought further, the same
principle applies to partners downstream in the chain. Manufacturers need partners
that have the ability to control the reputational risk since they are positioned at the
‘supply chain-market interface’. They will also have to assess their individual
reputational risks and their own mitigating practices. This will inform the discus-
sion with manufacturers that are looking for suitable partners delivering the SCSR
performance created by all members.

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Chapter 5
Managing IT and Cyber Risks in Supply
Chains

Barbara Gaudenzi and Giorgia Siciliano

Abstract This chapter describes the potential impact of Information Technology

(IT) and cyber risks on the continuity and vulnerabilities of the supply chain. We
propose a theoretical framework and direction to help organizations to manage
these risks. The evidence gleaned from an empirical investigation will illustrate
how organizations actually perceive, control, and manage IT and cyber risks within
the supply chains. The findings will underline that managers tend to invest in few
mitigation strategies; hence, they take risks that are much higher than their declared
risk appetites. In addition, managers denounce a general lack of awareness
regarding the effects that IT and cyber risks may have on supply operations and
relationships.

5.1 IT Risks and Cyber Risks: Real Threats for All Supply
Chains

Global trends, such as digitalization and servitization, have caused an evolution in

all conventional supply chains whose structures have switched from a “web of
disconnected islands” to a network of interconnected processes, which are strongly
oriented toward flexibility, efficiency, and resilience.
In this context, Internet platforms assure operational benefits, such as cost
reduction, inventory pooling, postponement, a reduction of the bullwhip effect, and
shorter lead times, to allow for faster information sharing across different organi-
zations. For example, supply chain leaders such as Wal-Mart, Warnier-Lambert,
Procter and Gamble, and Levi Strauss, have achieved great benefits from their
investments in Information Technology (IT) tools such as the Enterprise Resource

B. Gaudenzi (&)
G. Siciliano

Department of Business Administration, University of Verona, Verona, Italy
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 85

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_5
86 B. Gaudenzi and G. Siciliano

Planning (ERP). In particular, these companies have improved their performances

in demand planning and scheduling production, which have created better coor-
dination with their key suppliers.
However, the use of IT tools and Internet platforms generates new forms of
supply chain vulnerability and new risks, which may affect the supply chain’s
continuity and performance. Managers should recognize these new threats as crit-
ical issues that may exacerbate the other supply chain risks throughout interde-
pendencies (Gaudenzi and Borghesi 2006). However, recent reports (PWC Report
2014, 2015a) show that the awareness of these risks is still low: among security
incidents across geographic regions, IT and cyber breaches are rising significantly
in Europe, which reported a 41% jump over the previous year. Thus, supply chain
managers need to focus more attention on the management of all risks that may be
generated by IT tools, such as ERP or any vertical software, and external
Cyberspace.

5.2 How External Cyberspace and IT Tools Generate

Risks

A McKinsey report (Bailey et al. 2014) considers “Cyberattacks” to be events such

as fraud, identity or intellectual property theft, and political statements made by
hacktivists. A PWC report (2015b) sees IT as a tool and an enabler of seamless and
real-time interconnectivity across the entire network. Part of the literature considers
the two risks related and even occasionally exchangeable. Both are not easily
predictable, and they always imply a violation of three key properties: confiden-
tiality, availability, and integrity.
Some authors consider IT as the foundation of Cyberspace (Melville 2010),
while others consider it a mere infrastructure, where hardware, software, and
external data represent “Cyber assets” (D’Amico et al. 2010). Cyberspace is typi-
cally considered an external environment with low entry barriers, which have an
ambiguity characterized by a certain risk exposure.
In practice, IT risks seem strictly technical: they stem from failures of ERP/IT
systems and impact only on the flow of information itself. Here, the control of
technical features and procedures plays a key role in assuring information security.
Cyber risks go beyond mere IT disruptions; they are linked to human Cyberattacks,
where hackers intentionally access an organization or a network with the goal of
either gaining an economic advantage or causing sabotage. These actions are typ-
ically linked to cyber bullying, cyber terrorism, or political issues (Garfinkel 2012;
von Solms and van Niekerk 2013).
In 2014, McKinsey found that, while IT and cyber-related breaches are occur-
ring with growing regularity, executives perceive that they are not quickly
responding with adequate tools (Bailey et al. 2014). In the Global Risk
5 Managing IT and Cyber Risks in Supply Chains 87

Management Report (Aon 2015), “Cyberattacks” were listed in the top 10 threat-
ening risks for organizations and networks.
Despite these perceptions, cyber security and IT security remain the areas of risk
management with the largest gap between the level of threat and the amount of
resources invested. Several studies (Bandyopadhyay et al. 2010; Kong et al. 2012;
Gao and Zhong 2015; Gao et al. 2015; PWC Report 2015a) have revealed that, as
these threats become more frequent and severe, investments in security initiatives
decrease. Even with this attention on IT and cyber security management, recent
literature has mainly focused on managerial perceptions, technical aspects, or
legislative perspectives (Ellison and Woody 2010; Ozkan and Karabacak 2010;
Huang et al. 2011; Markmann et al. 2013; Brender and Markov 2013;
Mukhopadhyay et al. 2013; Yang et al. 2013; Biener et al. 2015). From the supply
chain risk management perspective, authors only recently investigated the impacts
of IT risks and cyber risks on supply chains (Olson and Wu 2010; Järveläinen 2013;
Bartol 2014; Boyson 2014; Khan and Estay 2015; Gaudenzi and Siciliano 2016).
Therefore, supply chain managers should carefully focus on two critical points:
1. Information security should not be considered as a technology investment itself.
Instead, decisions should be made that involve all the actors in the supply chain,
create an awareness about IT and cyber risks, and define clear procedures to
identify these threats to protect the supply chain from these vulnerabilities.
2. Managing IT and cyber risks may increase the overall performance, which will
augment the sharing of information and collaboration as well as the efficient
management of processes across the supply chain.

5.3 Managing IT and Cyber Risks in Supply Chains:

A Practical Framework

We propose a supply chain risk management framework that may guide managers
to assess and manage IT and cyber risks in protecting supply chain processes. We
addressed key risks, such as IT failures, piracy and thefts, product shortages, safety
and security, inventory levels, and supplier dependence, which may significantly
affect strategic, financial, and operational performances of all actors in a supply
chain. Nonetheless, to the best of our knowledge, there are very few theoretical
frameworks (Khan and Estay 2015) that link the supply chain risk management
process to IT and cyber risks throughout the entire value chain.
To fill this gap, we adapted a framework based on Fawcett et al. (2011), whose
objective was to study the effective deployment of IT by analyzing why some types
of investments are more successful than others. We aimed to enlarge the above-
mentioned scope by considering how systematic IT and cyber risk management
may enhance the ability to share information and better manage supply chain
processes. The proposed framework is shown in Fig. 5.1, which represents how the
88 B. Gaudenzi and G. Siciliano

Managing IT and Cyber Risks

in the Supply Chains
Strategic benefits:
IT & Cyber Risk Assessment
-Controlling the
IT & Cyber
-Identification and measurement supply chain level of
Risk
IT & Cyber of key risks risk
Governance
Risk -Investments in risk assessment - Assuring a
Compliance consultant projects Efficient and compliance to legal
-Definition of
effective requirements
the risk
-Selection of information
appetite and Reputation
risk and IT & Cyber Risk Prevention sharing
tolerance protection:
security across the
standards to -Investments in hardware tools supply chain -Stabilizing the
-Investments
conform to -Investments in software processes cooperation and
in security
solutions, integrated with other training and relationships
IT systems programs and members - Avoiding reputation
in human crises
resources
IT & Cyber Risk Mitigation Assuring business
(risk/security
managers) continuity:
-Financial control solutions
(Insurance) -Decreasing the
-Physical control solutions severity of disruptions
(access controls, secure areas, -Controlling costs
equipment security levels)

Fig. 5.1 A framework for managing IT and cyber risks in supply chains

key steps of a risk management process (risk assessment, risk treatment, risk
governance, and risk compliance) should be adapted to IT and cyber risks.
A robust IT and cyber risk management program may protect the strategic goals
of the supply chain, preventing business disruptions and protecting the reputation of
all actors involved. Firstly, managing IT and cyber risks would have the strategic
benefits of enhancing the firms’ capability to guarantee a tolerable level of overall
risk for all actors involved and consistently do so within their real risk appetite.
Thus, managers should monitor if and how IT and cyber risks may threaten relevant
assets and relationships with upstream and downstream supply chain partners.
Secondly, IT failures, piracy, thefts, and Cyberattacks are listed among the major
causes of reputation crises and losses of reputation value. Protecting the supply
chain against those risks requires stable relationships amongst supply chain
members and fostering collaboration.
Thirdly, IT failures and Cyberattacks may cause business interruptions, which in
turn may damage suppliers’ and customers’ operational and financial performances.
The risk management process should therefore start with a careful assessment of
the sources of IT and cyber risks amongst all supply chain members. In companies
that lack awareness of these risks, the role of the “channel captain” is essential.
These supply chain leaders should, for example, lead supply chain risk management
projects or include them in their contractual agreements or sourcing strategies’ ad
hoc requirements regarding investments in IT and cyber risk consultancy projects.
After the assessment (identification, measurement, and evaluation) of these risks,
each supply chain member should decide the nature and amount of investments in
5 Managing IT and Cyber Risks in Supply Chains 89

risk prevention strategies, such as investments in hardware and software, which

they plan to implement. Risk mitigation strategies reduce the severity of disrup-
tions, control costs, and assure continuity of supplies. Risk mitigation comprises
both financial controls (IT and cyber risk insurance programs) and physical controls
(investing in access control, secure areas, equipment security levels).
This framework offers a holistic risk management process, in which the
abovementioned strategies, processes, technologies, and human resources should be
aligned in coherence with the governance of each organization and of the supply
chain as a whole. Several variables will influence the implementation of the risk
management process such as the position of the supply chain captain (i.e., a
manufacturer or a retailer), strategic priorities (i.e., efficiency vs. responsiveness),
the industry/markets (there are different security standards to conform to, such as
ISO/IEC 27001:2013, depending on the sector/markets), and organizations’
dimensions. The final result should be a supply chain where the actors share more
information throughout the whole process, which guarantees strategic benefits,
reputation protection, and business continuity.
Notably, empirical studies have demonstrated that IT-enabled information
sharing promotes advantages, such as logistics integration and agility, which has a
positive impact on operational, strategic, and financial performances (Trkman et al.
2010; Dewan and Ren 2011; Giannakis and Louis 2011; Mithas et al. 2011; Tallon
and Pinsonneault 2011; Prajogo and Olhager 2012; PWC Report 2015b). Thus,
companies that show a real commitment to safeguarding the entire value chain from
IT and cyber risks have greater control over the supply chain’s level of risk, build
solid reputations, and assure business continuity.

5.4 Practical Evidence from a European Sample

of Companies

Recent literature has poorly investigated the perceptions and decision-making

processes regarding the management of IT and cyber risks within the supply chain
(Benlian and Hess 2011; Yildirim et al. 2011; Pezderka and Sinkovics 2011). This
led us to conduct an empirical investigation of European organizations that rely on
security and risk management standards in order to choose the drivers of systematic
IT and cyber risk management (risk assessment, risk prevention, risk mitigation,
risk compliance, and risk governance), as shown in Table 5.1.
To investigate whether or not the perceptions and management of these risks
vary, depending on the industry, performance, and globalization choices of orga-
nizations, we considered heterogeneity with regard to the industries they operate in,
their size, and their level of internationalization (Martin and Eisenhardt 2010). The
sample involved several European companies including: one small, local company,
with a revenue under €1 million, which had between 10 and 100 employees; seven
medium companies, with revenues between €1 million and €500 million, less than
90 B. Gaudenzi and G. Siciliano

Table 5.1 IT and cyber risk management constructs

Risk management process Main references
Risk assessment
∙ Identification and measurement of Yildirim et al. (2011)
key risks such as Biener et al. (2015)
- Inadvertent breaches Järveläinen (2013)
- Deliberate attacks
- Asset thefts
- Equipment failures
- Backup failures
- Data thefts
- Site disasters
- Copyright infringements
∙ Presence of a dedicated budget for
IT security management
∙ Investments in risk assessment
consulting projects
Risk prevention
- Investments in hardware tools Ifinedo (2012)
- Investments in software solutions Järveläinen (2013)
integrated with other IT systems Yildirim et al. (2011)
Biener et al. (2015)
Boyson (2014)
Silva et al. (2014)
Risk mitigation
- Financial control solutions Biener et al. (2015)
(insurance) Silva et al. (2014)
- Physical control solutions (access Feng et al. (2014)
controls, secure areas, and equipment Yildirim et al. (2011)
security levels)
Risk governance
- Defining the organization’s risk Järveläinen (2013)
appetite and tolerance Yildirim et al. (2011)
- Investments in ad hoc training Boyson (2014)
programs in security Ifinedo (2012)
- Investments in organizational Johnston et al. (2010)
human resources (risk manager, Biener et al. (2015)
security manager, etc.)
Risk compliance
- Perception of the organization Yildirim et al. (2011)
regarding exposure and vulnerability Ifinedo (2012)
toward IT and cyber risks Bulgurcu et al. (2010)
- Risk appetite of an organization Feng et al. (2014)
Biener et al. (2015)
Boyson (2014)
5 Managing IT and Cyber Risks in Supply Chains 91

50 thousand employees, and that represented various interests internationally; and

seven large companies, which were evenly distributed throughout their level of
internationalization, with revenues exceeding €10 billion and more than 50 thou-
sand employees.
We interviewed more than one key informant, including CEOs, supply man-
agers, risk managers, and/or IT managers, within the same organization to consider
whether or not their role might impact the way IT and cyber risks are seen and
faced. This process allowed us to reach the point of theoretical saturation with
fifteen organizations.
Some evidences from our research are summarized in Table 5.2. The sample
revealed that managing IT risks and cyber risks positively influences reputation
toward both the upstream and downstream actors of the supply chain. However, the
commitment to managing these risks and protecting reputation varied by the
dependence of the supply chain under observation: IT and cyber risk management
toward the upstream supply chain was almost non-existent, while a higher com-
mitment was seen toward clients and customers. In fact, managers perceived
breaches to private and personal information as less tolerable than threats to
business-to-business partners.
Strategic and operational advantages related to careful IT and cyber risk man-
agement currently lack acknowledgement. Thus, managers usually neither stipulate
contractual agreements with key suppliers nor implement systematic plans for
disaster recovery, business continuity, or the backup of sensitive data. Moreover,
there is a low commitment at the corporate level: risk and security managers show a
greater awareness about IT and cyber risks, while top managers do not prioritize
their management. The consequence is a scarce effort in building a deeper aware-
ness among employees through systematic training.
Regarding risk assessment, IT and cyber risks were systematically assessed by
more than half of the sample, who also had a dedicated budget. However, the
identification and measurement of key risks appeared to be far from effective: three
out of four of the respondents had faced some IT and cyber breaches in the last
24 months.
Investments in risk assessment consulting projects were low for the majority of
larger, multinational organizations, which used consultancy “on demand” for
testing protection systems (penetration intrusion test), disaster recovery, and backup
systems.
Regarding risk treatment, mitigation strategies were widely used, even if the
majority was exclusively dedicated to IT risks. More than half of the sample had a
budget solely dedicated to software, hardware, insurance, physical entry controls,
secure areas, and equipment security levels. Interestingly, managers appeared
genuinely convinced that effective IT and cyber risk management was possible
solely through these types of investments. Risk prevention rarely accounted for ad
hoc investments by most of the organizations. Thus, they seemed somewhat dis-
oriented by the breaches from which they suffered; a third of the sample admitted
that companies tend to be high-risk takers, with a dramatic number of IT and cyber
breaches discovered roughly six months after the fact.
92 B. Gaudenzi and G. Siciliano

Table 5.2 Some evidences from the interviews

IT and cyber risk C1: When we analyze risks, what we measure is the reputational
assessment damage. We also address the economic damage for the company, but
the reputational damage is our priority, as it is knowable to anybody
and it takes time to reabsorb
C2: We assess risks through daily antivirus scanning and we keep
ourself updated about the possible IT and cyber risks through
specialized journals and blogs
C1: In the last 24 months we suffered from inadvertent breaches,
deliberate attack, asset theft, equipment failure, backup failure,
copyright and compliance infringement. We focus our risk assessment
on these risks
IT and cyber risk C7: We do not have a dedicated budget for IT and cyber risk
prevention prevention. The problem is that there are urgent needs, and we invest
only on emergencies. In this way, sometimes we spend more than we
would if we were investing in formal prevention plan
C3: We get there only when it is too late, when the damage has been
done. There is little strategy and a lot of tactics, and little prevention
C14: Only a careful training could improve the efficacy and the
efficiency of the IT risk prevention
IT and cyber risk C2: The back-up procedures (for IT risk) are formal and these are
mitigation able to reconstruct the history of up to three years. The back-up is on
a daily base, business continuity is excellent. The disaster recovery is
great and there are two separate sites. However all of this is just for
IT risks, not cyber risks
C4: On average we realize we had an intrusion 180 days later, and
between 70 and 80% of internal fraud are discovered only by
informers. So our mitigation strategy is not efficient yet
IT and cyber risk C8: We decided not to follow some specific information security
compliance standard. We just follow our best practices
IT and cyber risk C7: The risk manager is also responsible for IT risk, but he cannot be
governance good in everything! He assigns priorities to the problems to solve
C15: Top managers consider themselves completely risk adverse.
Nonetheless, they do not care sufficiently about IT risks
C2: We do not have systematic training on IT and cyber risk
management. We rely just on our perceptions
C7: The IT manager is not in the management committee, and his
language is too technical to deal with the top management. There is a
communication problem

In general, risks were assessed by only one out of three organizations.

Interestingly, the majority of them were medium and small companies, which
invested in protection, disaster recovery, and backup consultancy services. The only
exception to this trend was represented by multinational operations in the financial
and oil industries, which invested significantly in risk assessment consulting pro-
jects. However, they often required consultancy services exclusively to assess cyber
risks and rarely for IT risks.
Efforts in IT and cyber risk prevention were performed systematically by all the
multinational companies and by the small organization, which operates in the
5 Managing IT and Cyber Risks in Supply Chains 93

software industry. As mentioned earlier, roughly all the sampled companies

implemented systematic mitigation strategies. The only striking exceptions were the
small organization and all those operating in the healthcare industry.
The majority of the medium and small companies perceived low exposure and
vulnerability toward IT and cyber risks, while risk appetite was declared to be very
low throughout all companies and industries. Roughly all the companies invested in
ad hoc training programs in security, but they were only directed toward the risk
and security managers, never to all the employees.
In general, finance and high technology industries showed the most careful and
systematic IT and cyber risk management processes, while the healthcare sector
implemented only occasional measures.

5.5 Conclusions

The pervasive use of Internet throughout the entire value chain may assure sig-
nificant advantages to organizations, particularly in terms of resilience. To inves-
tigate how companies in practice perceive IT and cyber risks and whether they
include them in their decision-making process, we conducted an exploratory survey
among different European companies, leaders in their industries. The findings show
a lack of awareness at different organizational levels. Employees seem to be
unprepared to deal with these risks and with their effects onto processes and
operations. From the top management perspective, managers seem to dedicate
insufficient efforts and investments particularly in IT and cyber risk mitigation
strategies, mainly using reactive approaches instead of proactive ones.
The proposed risk management framework seems to fill an existing gap in the
literature, addressing how systematic IT and cyber risk management may enhance
the ability to share information and better manage supply chain processes. From a
practitioner perspective, the framework addresses those risks—such as IT failures,
piracy and thefts, product shortages, safety and security, inventory over-stocks, and
supplier dependence—which may significantly affect supply chain performances. In
practice, this approach may guide managers to formally assess and manage IT and
cyber risks in order to protect supply chain processes. Moreover, the framework
promotes a formal mitigation plan to update systematically, in order to respond to
IT and cyber risks, considering the time pressure these new threats impose to all the
actors of the supply chain. These risk management process should be constantly
supported by strong commitment from top management, especially in conforming
to the ad hoc security standards and the definition of the real risk appetite and
tolerance of the company. Managers should also be engaged in promoting an
overall “IT and cyber culture” transversally in the entire supply chain, because IT
and cyber risks represent significant threats for both the upstream and downstream
supply chain.
94 B. Gaudenzi and G. Siciliano

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Chapter 6
Developing Supply Chain Risk
Mitigation Strategies

Yacob Khojasteh

Abstract In this chapter, the different types of potential risks in supply chains are
described and the specific impacts of natural disasters such as the Great East Japan
earthquake and tsunami on Japanese supply chains are outlined. Moreover, some
strategies and developments on how to mitigate supply chain disruptions are
presented.

6.1 Introduction

Supply chain management is responsible for managing and controlling all material flow
within a supply chain. It includes the movement of materials from suppliers to different
sections in the firm, and from those sections to distribution centers or end users. The
flow of materials would be affected by any unexpected event (a potential risk) that may
disrupt the smooth movement. Supply chain vulnerability can also be considered a risk
factor, which is defined as exposure to serious disturbance arising from supply chain
risks and affecting the supply chain’s ability to effectively serve the end customer market
(Mason-Jones and Towill 1998). Therefore, managing risks or disruptions becomes an
essential task in an effective supply chain management. The aim of supply chain risk
management (SCRM) is to identify the potential sources of risk and implement
appropriate actions in order to avoid supply chain vulnerability (Jüttner et al. 2003).
A firm’s business and its financial performance could be affected by supply
chain disruptions. Smooth movement of materials or operations in the supply chain
might be affected as well. Supply chain disruptions may cause delay in production
or deliveries. A late delivery of raw materials might stop production, raise costs by
forcing a move to alternative transport, materials, or operations, raise the
work-in-process (WIP) inventory, and make partners reconsider their trading rela-
tionships (Waters 2007).

Y. Khojasteh (&)
Graduate Program in Business and Development Studies,
Sophia University, Tokyo, Japan
e-mail: [email protected]; [email protected]

© Springer Nature Singapore Pte Ltd. 2018 97

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_6
98 Y. Khojasteh

Accenture conducted a survey and reported in 2006 that 73% of organizations

have experienced a significant disruption in the past five years. Of those, nearly
32% required more than one month to recover, and another 36% took between one
week and one month. The ability to meet the needs of customers and constituents
was compromised in 94% of these situations (Inagaki and Kuroda 2007). Also,
according to a survey done by Hendricks and Singhal (2003, 2005), sales typically
fall by 7% in the year after a major supply chain disruption, shareholder return falls
by 7–8% on the day that a disruption occurs, operating income falls by 42%, and
return on assets is down by 35%. This highlights the importance of strategies to be
developed by the companies to mitigate the supply chain disruptions and to manage
supply chain risks.
The remainder of this chapter is organized as follows: Sect. 6.2 describes dif-
ferent types of supply chain risks. Some examples of disruptions in Japanese supply
chains caused by the Great East Japan earthquake are provided in Sect. 6.3.
Section 6.4 outlines some strategies to mitigate risk, and Sect. 6.5 introduces a
supply chain risk management software.

6.2 Supply Chain Risks

Supply chain risks can be generally categorized into internal risks and external
risks.

6.2.1 Internal Risks

Internal risks are originated from sources inside the supply chain and they usually
occur in normal operations. They include machine breakdowns, late deliveries,
forecast error, supplier failure, supplier quality problems, malfunction of informa-
tion technology and communication systems, change in customer demand, trans-
portation failure, human error, etc. An effective planning and scheduling is crucial
to control most of those risks.
Internal risks can be divided into internal controllable and internal partially
controllable risks. Internal controllable risks originate from sources that are most
likely to be controllable by the company. For example, the quality and cost of the
products. Internal partially controllable risks originate from sources that are par-
tially controllable by the company; for example, a fire accident in the company (Wu
et al. 2006).
6 Developing Supply Chain Risk Mitigation Strategies 99

6.2.2 External Risks

External risks come from outside the supply chain and managers have little or no
control on them. They include natural disasters (earthquake, hurricane, tsunami,
etc.), war, oil crises, terrorist attacks, the outbreak of disease, financial irregularities,
crime, rising custom duty, etc.
External risks in supply chains can be divided into external controllable risks,
external partially controllable risks, and external uncontrollable risks. External
controllable risks originate from sources that are mostly controllable by the supplier
company. For example, the selection of the next-tier suppliers. External partially
controllable risks originate from sources that are partially controllable by the
supplier company. For example, customer demand can be partially impacted by
company’s promotion plan. External uncontrollable risks originate from sources
that are uncontrollable by the supplier company. For example, natural disasters such
as earthquake and tsunami (Wu et al. 2006).
Internal risks are mostly controlled by Japanese companies via an effective and
efficient planning and scheduling system. For instance, they are controlled in
Toyota partly by Toyota production system. However, external risks are mostly
difficult to control or impossible to prevent. Therefore, they should be taken into
account as an important factor in supply chain management.
An example of external uncontrollable risk is the Great East Japan Earthquake
that occurred in 2011. It had a serious impact on Japanese supply chains that caused
various production and delivery problems. The next section presents some of those
problems in supply chains with a focus on Japanese companies.

6.3 Natural Disasters and Supply Chain Disruption

The Great East Japan Earthquake hit the north-eastern parts of Japan (the Tōhoku
region) in March 2011, and its scale was the fourth largest in the world since 1900
and the largest in recorded history in Japan. It triggered a destructive Tsunami that
reached more than ten kilometers inland. Besides it serious social effects, it had a
significant impact on industries as well. It caused significant disruptions in both
domestic and global supply chains by halting production at several companies and
their part suppliers which resulted in significant delay in delivery of parts.
Japan has been a major producer of parts and products worldwide, and the
disruption in its supply chains caused disruptions in supply chain globally. The
followings are just few examples of such disruptions (Khojasteh and Abdi, 2016).
Japan provides 60% of the world’s silicon which is an important raw material for
semiconductor chips. It is also the world’s largest supplier of dynamic
random-access memory and flash memory which are critical raw materials for
liquid-crystal displays (LCD). Right after the disaster, the prices for these
100 Y. Khojasteh

components in the world market soared by 20%, showing the world’s strong
dependence on the Japanese supply chain (Park et al. 2013).
Apple faced shortages of the lithium-polymer batteries used in its iPods. The
reason was that a crucial polymer used in those batteries was provided by Kureha, a
Japanese chemical company, and the company had to shut its factory down due to
serious damages caused by the disaster (Sanchanta 2011). The production cites of
Xirallic pigments (paints used to give greater color intensity to automobiles’
appearance) were badly damaged. The shortage of these parts caused some oper-
ational shutdowns in the plants of world’s automakers including GM, Ford, and
Chrysler (Park et al. 2013).
Two major Japanese suppliers, Mitsubishi Gas Chemical and Hitachi Chemical,
provided more than 85% of the world’s BT resin, which is a critical raw material for
circuit boards. However, operation of some plants was suspended due to damaged
infrastructure after the earthquake (Chiu 2011).
After the disaster, many other Japanese large companies such as Panasonic,
Sony and Fujitsu had to close their damaged plants. Panasonic, the Japan’s biggest
maker of batteries, closed two plants; and Fujitsu, a personal computers and home
appliances maker closed 10 plants (Ohnsman et al. 2011). Renesas Electronics, a
major global producer of chips to be used in automotive microcontrollers, was
badly damaged. Its plant operations stopped for nearly three months, and after
restarting production, it operated at only about 10% of capacity (Matsuo 2015).
Toyota, more than its domestic competitors, faced with supply chain disruptions.
For two weeks after the disaster, the entire Toyota plants in Japan stopped com-
pletely. The problems were lack of parts, or not even knowing which parts would be
missing when the plants resumed production. It is reported that it took a week for
Toyota to list the 500 parts sourced from 200 locations which would be difficult to
secure, and then recover to the normal production level. Although it grasped the
availability of parts up to the second tier suppliers, Toyota did not keep track of the
suppliers of the third tier or further down in general. This is a period when
one-of-a-kind-product companies like Fujikura Rubber Ltd., which had 1333
employees and produced rubber parts that were used in some of Toyota’s cars,
became well-known to the public (Matsuo 2015).
These disruptions in the supply chains pushed the companies to develop (or to
revise) strategies to mitigate risk in their supply chains. Some of those strategies are
outlined in the next section.

6.4 Developing Risk Mitigation Strategies

Prior to 2011, risks were not seriously taken into account in the supply chain of
many Japanese companies. Many companies developed plans to consider the risk
mitigation strategies in the supply chains after the Great East Japan Earthquake and
floods in Thailand had a significant impact on their production and delivery of their
6 Developing Supply Chain Risk Mitigation Strategies 101

products. In fact, the concept of risk in the supply chain was extended to include all
parties in the supply chain, and external factors as well (Khojasteh and Abdi, 2016).
For instance, Toyota revised the supply chain coordination mechanism of its
production system, which considers the followings (Matsuo 2015):
• Monitoring the information on all the suppliers of key parts/materials across the
entire supply chain.
• Managing the inventory of key parts/materials across the entire supply chain.
• Ensuring the continuing supply of key parts/materials.
• Increasing the standardization of key parts/materials and their production
methods.
The followings are also examples of companies’ strategies in order to avoid a
significant disruption in their supply chains:
• Companies should request their suppliers to develop disaster plans in order to
get prepared for taking a set of actions to minimize the effect of disruption and
the recovery period. This strategy could be even considered in service sectors as
well. The author experienced developing “backup syllabus” requested by his
university located in Tokyo short after the Great East Japan Earthquake in 2011.
The backup syllabus contained a detailed plan on how to resume the course
when the classes have to be canceled when a similar disaster occurs.
• Having only one supplier for critical parts and materials is too risky. Thus,
companies should not fully rely on single source suppliers even though they are
the best in terms of cost, quality, and trust. Dual or multi sourcing for critical
parts and suppliers would be a good strategy even in small scales. Regarding the
dual-sourcing, one plan could be buying the majority of the parts and materials
from the primary supplier, and the rest from a secondary one that is possibly
located in another region. This can keep the secondary supplier operational and
ready to be switched at any time.
• Companies should group the suppliers geographically and identify the suppliers
who are located in risky areas. As a result, buying the critical parts and materials
from those suppliers should be limited and different alternatives should be
planned (Mojonnier 2011). For instance, the area that is currently considered
highly risky in Japan is Tōkai area. The probability of a magnitude eight or
greater earthquake along the Nankai Trough within the next forty years is about
80%.

6.5 A Supply Chain Risk Management Software

Fujitsu Research Institute introduced a Supply Chain Continuity Assessment sys-

tem in 2007. It identifies potential supply chain problems arising from contingen-
cies and can evaluate various countermeasures. The system is able to evaluate and
102 Y. Khojasteh

analyze a firm’s business continuity capabilities in cases of natural disasters and

other unexpected situations. The system has the following features (Fujitsu 2007,
2013):
(1) Evaluating and analyzing business continuity capabilities of suppliers
The system enables companies to perform quantitative analyses regarding the
resumption of suppliers’ operations, the amount of time required for recovery,
damage projections, and the status of implemented countermeasures before a dis-
aster occurs.
(2) Using hazard maps to evaluate geographic risks for suppliers
It uses the latest hazard maps with the addresses of suppliers’ production
facilities and offices, which makes it possible to visually simulate the expected
damage that will occur during a natural disaster.
(3) Analyzing the impacts on the firm’s own products
Based on an evaluation of suppliers’ business continuity capabilities and the
results of geographic risk evaluations using hazard maps, the system enables a firm
to quantitatively analyze the impact of a disaster on its own products. For example,
firms can estimate which products will be affected by production stoppages and
calculate when production will resume.
After the Great East Japan Earthquake, Fujitsu added some new feature for its
Supply Chain Continuity Assessment system to reduce supply chain disruptions
after occurrence of an unexpected event. It developed the SCRKeeper system that
can provide damage forecasting and assessment for the regions where suppliers are
located. The SCRKeeper system has the following additional feature (Fujitsu 2013;
Japanbullet 2013):
(4) The system visualizes supply chain risk per each production part or production
site of a supplier to manage the supplier’s damage situation in disaster time. It
provides immediate damage status updates on suppliers. When a disaster
actually occurs, the system is immediately updated with reports from suppliers
about the status of damage and the situation of their operations. This makes it
possible for firms to check on the status of their suppliers in real time and
overview their damage status, so that they can quickly respond to their suppliers
or select alternative suppliers (Fujitsu 2013).

Acknowledgements This work was supported by the Japan Society for the Promotion of Science,
Grant-in-Aid for Scientific Research (C), 16K01257.
6 Developing Supply Chain Risk Mitigation Strategies 103

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 Part II
Supply Chain Vulnerability and
Disruptions Management
Chapter 7
Analyzing Supply Chain Vulnerability
Through Simulation

Jyri Vilko and Lauri Lättilä

Abstract Supply chain vulnerabilities have attracted little research attention

despite being recognized as an important issue. To provide further insights into this
issue, this chapter uses a simulation approach for analyzing supply chain vulner-
ability. Specifically, simulations are used to gain additional insights into multi-
echelon supply chains and the impact of supply disruptions. This study employs an
integrated literature review of supply chain vulnerability and risk management and
a discrete-event-simulation. The presented framework and simulation models pro-
vide important information about the feasibility of using a simulation for analyzing
supply chain vulnerability. The results of this study suggest that supply chain
vulnerability depends on both the complexity of the supply chain as well as the
disruption risks inherent in it. To gain a more holistic view of an entire supply chain
system, it is imperative to use proper tools to analyze vulnerabilities. Simulations
can be used to model both the system complexity and the different levels of
operation holistically and gain insights into managing supply chain vulnerability.
By analyzing supply chain vulnerability, managers can ground their decisions in a
more holistic understanding of the issue.

7.1 Introduction

During the last decade, improving efficiency and delivery times has become a key
issue in many organizations. Supply chains have become a focal point for
improving competitiveness in an increasingly global marketplace. While numerous
trends (e.g., development of communications and other technologies, e-business

J. Vilko (&)
School of Business, Lappeenranta University of Technology, Lappeenranta, Finland
e-mail: jyri.vilko@lut.fi
L. Lättilä
SimAnalytics, Kaisaniemenkatu, Helsinki, Finland

© Springer Nature Singapore Pte Ltd. 2018 107

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_7
108 J. Vilko and L. Lättilä

outsourcing, and lean and agile logistics) have made it possible to develop complex
international networks of industrial partners, they have also made organizations
vulnerable to various risks arising from these networks (Narasimhan and Talluri
2009; Thun and Hoenig 2011; Vilko 2012). Many recent events have highlighted
the vulnerability of long and complex service supply chains. A risk realization
affecting operations anywhere in the system can directly affect its ability to continue
operations, thus endangering customer value creation. A recent study presents a
good example of the vulnerability of value provision in supply chains (Hendricks
et al. 2009), where companies admitting to major supply chain difficulties lost 10%
of their shareholder value on average. These issues have become increasingly
relevant as the global financial crisis emphasized the role of supply chain risk
management in many companies (Blome and Schoenherr 2011).
In international supply chains, interorganizational dependencies and relation-
ships have become increasingly important, and while the network exposes orga-
nizations to various risks, it is difficult to be competitive in the modern world
without them (Soosay et al. 2008). Therefore, organizations need to understand and
analyze the causalities of network processes to ensure that the goals of the supply
chain fit with their own organizational strategy. It is essential for actors to col-
laborate and share information in their network to avoid interruptions in logistic
flows (Edwards et al. 2001; Svensson 2001).
Indeed, supply chain management is undergoing continuous, considerable, and
rapid changes leading to a high cost of vulnerability (Frankel et al. 2008). However,
in the past decade, only a few studies have addressed the issue of vulnerability in
the context of supply chains (e.g., Peck 2005; Sheffi 2005), and even fewer studies
have addressed the methodological issues faced therein. In current literature (e.g.,
Vlajic et al. 2012), researchers have emphasized the need for integrated frameworks
to support analyses for overcoming supply chain vulnerability and supply chain
disturbances. Therefore, this chapter aims to provide insights on supply chain
vulnerability using analyses with a discrete-event-based simulation. Specifically, it
shows how a simulation method can be used to gain a more holistic view of supply
chain vulnerability. For this purpose, a conceptual framework is developed and
tested to analyze supply chain vulnerability, and its feasibility is evaluated. This
chapter focuses on process-level disturbances (consequences of unwanted and
unexpected events) and how these impact wider supply chain level operations.
The rest of this chapter is organized as follows. Section 7.2 presents relevant
concepts and their definitions. Section 7.3 introduces the research process used for
simulating supply chain vulnerability. Then, Sect. 7.4 presents a simulation anal-
ysis. Finally, Sect. 7.5 presents the conclusions and discussions.
7 Analyzing Supply Chain Vulnerability Through Simulation 109

7.2 Literature Review

The theoretical part of this study contains two main perspectives: supply chain
vulnerability theory with related concepts and applying a simulation in the supply
chain vulnerability context.

7.2.1 Supply Chain Vulnerability

A supply chain is defined as a system of suppliers, manufacturers, distributors,

retailers, and customers in which material, financial, and information flows connect
participants in both directions (Fiala 2005). Waters (2007) described a supply chain
as consisting of a series of activities and organizations through which material
moves on its journey from initial suppliers to final customers. Material can include
everything that an organization moves and can be both tangible and intangible.
To define supply chain vulnerability, it is essential to first examine the charac-
teristics of risk. Risks have been defined in numerous ways in literature. Waters
(2007) defined risks as a threat of disruption to normal activities that stop these
activities from happening as planned. A standard formula for the quantitative
definition of supply chain risk is (Mitchell 1995)

Risk ¼ P  I ð7:1Þ

where P is the probability of a risk event, and I is the impact of the risk event.
Depending on the context, the sources of risk can be categorized in several ways.
The sources of risk are generally categorized as endogenous and exogenous,
depending on whether they derive from within or outside the system, which in this
case is the supply network (Trkman and McCormack 2009). Risks can arise from
organizations, supply chain partners, or the external environment (Waters 2007).
The sensitivity of a supply chain to these disturbances is measured by its
vulnerability.
From the perspective of supply chain risk management, an organization incurs
loss as a result of its supply chain’s vulnerability to a risk event (Wagner and
Neshat 2010). Asbjørnslett (2008) defined vulnerability as “the properties of a
supply chain system; its premises, facilities and equipment, including human
resources, human organization and all its software, hardware, netware that may
weaken or limit its ability to endure threats and survive accidental events that
originate both within and outside system boundaries.” Previous definitions were
somewhat different. For example, Peck (2005) described vulnerability as an “ex-
posure to serious disturbance, arising from risks within the supply chain as well as
risks external to the supply chain.” Furthermore, according to Waters (2007),
“supply chain vulnerability reflects the susceptibility of a supply chain to disruption
and is a consequence of the risks to the chain.” Jüttner et al. (2003) described
110 J. Vilko and L. Lättilä

supply chain vulnerability as the propensity of risk sources and risk drivers to
outweigh risk-mitigating strategies, thus causing adverse supply chain conse-
quences and jeopardizing the supply chain’s ability to effectively serve the end
customer market.
According to Asbjørnslett (2008), the difference between vulnerability analysis
and risk analysis arises from the focus of the analysis. While vulnerability analysis
focuses on the more holistic supply chain perspective in terms of the system’s
mission and supply security, risk analysis focuses more on the impacts of individual
events. When examined from a quantitative perspective, the difference between risk
and vulnerability arises from the exposure element, which reflects the extent of the
impact with regard to a specific supply chain actor. The benefit of this type of
examination is that it allows the differentiation of both the general risk (e.g., for the
supply chain) and an individual actor’s vulnerability to a specific risk. In doing so,
the illustration of these different perspectives allows a better understanding of
different actors’ views on different risks and therefore allows mitigation actions to
be adjusted accordingly in the entire supply chain. Currency risk is a practical
example of the benefit of adding the exposure element to risk management
examination: if a company faces a currency risk in its supply chain, its risk
exposure is determined by the risk management actions it conducts. If the company
acknowledges the risk but does not manage it in any way, its risk exposure can be
considered to be 100%. Accordingly, we define supply chain vulnerability as
follows:

Vulnerability ¼ P  I  E ð7:2Þ

where E is the risk exposure.

In reality, when considering supply chain vulnerability, the actors can better
affect the probability of a risk event when they have control over the operations
(risk arising inside the supply chain) or the exposure to risk events (risk that enters
from outside the supply chain). Thus, when analyzing the proper responses to
supply chain vulnerability, the origin of the risk event needs to be taken into
account.

7.2.2 Simulation of Supply Chain Vulnerability

Few studies have attempted to use simulations to analyze supply chain vulnera-
bility. The lack of research can be illustrated by a simple comparison with other
related areas through a keyword search in Google Scholar (Table 7.1).
While some studies have reported on the use of simulations, the feasibility of
their application has not yet been thoroughly investigated. To gain deeper insights
into the state-of-the-art in analyzing supply chain vulnerability using simulations,
we systematically analyzed existing literatures using Elsevier’s Sciencedirect as the
7 Analyzing Supply Chain Vulnerability Through Simulation 111

Table 7.1 Keyword searches (using Google Scholar on 10.4.2015)

Keyword combination Search results
“supply chain vulnerability analysis” and simulation 2
“supply chain risk analysis” and simulation 117
“supply chain vulnerability” and simulation 547
“supply chain risk management” and simulation 1950
“supply chain analysis” and simulation 2290
“supply chain risk” and simulation 2970
“supply chain management” and simulation 52,600

main search tool With the keywords supply chain, simulation, and vulnerability. As
a result, 26 studies were found, of which 16 were relevant (Table 7.2 and Fig. 7.1).
Simulations have been used for analyzing vulnerability-related issues in various
applications during the last decade; studies have used various research approaches
to this end. In Table 7.2, Conceptual approach refers to a purely conceptual con-
templation of concepts and terms; Hypothetical approach, to a simulation research
conducted with hypothetical models (without real-world cases or data); and
Empirical approach, to real-world case examples in which simulations are used in
different ways. The first case found in our search was by Gnoni et al. (2003), who
analyzed only risks involving demand-side uncertainty. Marquez and Blanchar
(2004) concentrated on a portfolio of contracts for procuring strategic parts. Wilson
(2007) studied the effect of transportation disruptions on the performance of dif-
ferent parts of the supply chain. Biehl et al. (2007) concentrated on the carpet
manufacturing industry with a focus on reverse logistics.
Kull and Closs (2008) studied a generic supply chain; their results highlighted
the importance of true systematic analyses when risks need to be managed and of
coordination to manage supply risks.
Galasso and Thierry (2009) concentrated on risk analysis from the viewpoints of
suppliers, customers, and cooperation among all parties involved. They also noted
how different criteria could be taken into account in a decision-support system.
Tuncel and Alpan (2010) used more traditional risk management tools, including a
Petri net.
Supply chain risks can also depend on global issues. Jacxsens et al. (2010)
developed a conceptual framework that can be used to enhance research on the
impact of climate change on fresh produce supply chains. In this case, the risks are
greatly different from those in most analyses where some physical disruption or
demand uncertainty is evaluated. Carvalho et al. (2012) used Supply Chain
Operations Reference (SCOR) for constructing a simulation model. SCOR is a
supply chain management tool used to address, improve, and communicate supply
chain management decisions within a supply chain (Huan et al. 2004).
Vilko and Hallikas (2012) concentrated on multimodal supply chains; their
approach allowed the identification of issues that had the highest impact in a
maritime supply chain. Li and Liu (2013) used dynamic programming to model a
multitier supply chain with various sources of uncertainty; this was one of the few
Table 7.2 Review of literature on supply chain vulnerability simulation
112

Author (Year) Venue Main research method (discrete-event Research objective Research
simulation, system dynamics, approach
agent-based modelling, or other (conceptual/
method) hypothetical/
empirical)
DES SD ABM Other* C H E
Shu et al. (2014) ESWA MP Supply chain construction optimization in x
production uncertainty and different product
Burgholzer et al. (2013) DSS X X Analysis of intermodal transport network x
flows under disruption
Li and Liu (2013) AMM DP Bullwhip effect control in supply chain x
system
Shi et al. (2013) EJOR x Supply chain distribution performance and x
risk optimization
Villada and Olaya (2013) EP x x Evaluating alternative policies for x
increasing the security of gas supply
Carvalho et al. (2012) C&IE x Design support for supply chain resiliency x
Schmitt and Singh (2012) IJPE x The impact of disruptions in different nodes x
of the network
Vilko and Hallikas (2012) IJPE MC Supply chain risk assessment x
Jacxsens et al. (2010) FRI N/A Safety and security of food supply chain x
Tuncel and Alpan (2010) CI PN Supply chain risk management and x
real-time control
Galasso and Thierry (2009) EAAI MC&MP Decision and cooperation support of x
planning processes
Kull and Closs (2008) EJOR x Interaction of inventory and supply risk on x
system performance
(continued)
J. Vilko and L. Lättilä
Table 7.2 (continued)
Author (Year) Venue Main research method (discrete-event Research objective Research
simulation, system dynamics, approach
agent-based modelling, or other (conceptual/
method) hypothetical/
empirical)
DES SD ABM Other* C H E
Wilson (2007) TRE x Transportation disruptions’ effect on supply x
chain performance
Biehl et al. (2007) COR x Design of reverse logistics system x
Marquez and Blanchar (2004) IJPE x Managing and valuing supplier contract x
portfolio
Gnoni et al. (2003) IJPE x MP Demand stochastic variability effects on x
production systems’ technical and economic
performance
*PN PetriNet, MC Monte Carlo simulation, MP Mathematical programming, DP Dynamic programming
7 Analyzing Supply Chain Vulnerability Through Simulation
113
114 J. Vilko and L. Lättilä

0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

Fig. 7.1 Supply chain vulnerability simulation studies in Sciencedirect

attempts to apply a holistic approach to risk management and robust network

design.
In recent years, areas other than traditional supply chains have attracted interest
in supply chain vulnerability simulations. For example, Villada and Olaya (2013)
evaluated the short-term security of natural gas supply with a contracts-based
simulation model by representing different parts of the supply chain. Burgholzer
et al. (2013) concentrated on intermodal transport networks with a microlevel
perspective. Shi et al. (2013) analyzed a JIT-based cross-docking distribution center
by minimizing supply uncertainty in the cross-docking activities. Shu et al. (2014)
proposed a generic tool that is based on a bill-of-materials and covers production
disruptions and supply chain optimization.
Overall, the above examples clearly show that simulations are mostly applied on
the demand or supply side or from a single actor’s perspective of the supply
network; only a few studies take into account the supply chain vulnerability
holistically. Previous simulation-based analyses have typically concentrated on a
specific part of a supply chain or a certain perspective of it. Herein, our aim is to
contribute to the current body of knowledge with a more holistic perspective of
supply chain vulnerability by developing and testing a model that illustrates the
concrete benefits of collaboration in a supply chain. Specifically, our holistic per-
spective involves taking into account the complete supply chain system by exam-
ining the perspective of a larger supply chain as well as the perspective of
individual actors, thus allowing a more comprehensive view of vulnerability for
simulation analysis. In doing so, the risk mitigation actions of the entire supply
chain can be more carefully measured and planned for each actor.
7 Analyzing Supply Chain Vulnerability Through Simulation 115

7.3 Research Process

The research process involved two main phases: literature review and model
development.
The literature review revealed the scarcity of scientific literature on supply chain
vulnerability management. A Google Scholar search with the keywords “supply
chain vulnerability management” and simulation only yielded 6 results, and a
search with the keywords “supply chain risk management” and simulation yielded
1850 results. This also illustrates the state of maturity of the concepts, namely, that
while both are still developing (Vilko 2012), supply chain vulnerability is clearly
still in its early stages. Therefore, to provide better clarity for our study, we
developed our own definition for the concept and thereafter used it in the simulation
model. To have a proper conceptual foundation, we used a vulnerability-related
concept with an integrated literature review strategy.
The main message from the literature reviewed on supply chain vulnerability
management is that further studies with a systematic approach should be developed.
For example, Peck (2005) noted that there is a need to develop more complete
predictive simulations that can estimate the impact of various actions in dynamic
supply chain networks. These types of complex simulation studies should be able to
estimate how the entire supply chain reacts to different types of issues. These
systems would be aimed towards managers, who currently do not have adequate
tools to cope with supply chain vulnerability analyses. Similar issues have also been
noted by Wu et al. (2006) and Bernadel and Panizzollo (2012).
The model development involved three steps following the basic principles
given by Banks et al. (2005). The first was the selection of the model, which was
based on a previous smaller study (Vilko and Lättilä 2013). The supply chain case
was observed from a wider perspective to gain a more complete view of the supply
chain events. The hypothetical supply chain case was built based on 40 interviews
from the STOCA (Study of Cargo flows in the Gulf of Finland in Emergency
Situations) project. The second step was the actual development of the model by
two logistics researchers with different backgrounds (one focused on supply chain
risk management and the other, on supply chain simulations). The development was
conducted as an iterative process, in which the main focus was on material flows.
The final step of model development was testing. It included several runs of the
model, fine-tuning of the factorial relationships, and top-down verification of the
model and code.
As the main rule for a disruption, we use the concept of supply security.
According to the Finnish National Emergency Supply Agency (NESA), supply
security refers to “the capacity to maintain the basic activities that are indispensable
for safeguarding the population’s living conditions, for sustaining the functioning of
critical infrastructures, and the material preconditions for maintaining national
preparedness and defence in case of serious disturbances and emergency situa-
tions.” Thus, ensuring capacity and delivery can be considered essential, as is the
case in business as well. However, in complex and long supply chains, it is difficult
116 J. Vilko and L. Lättilä

to identify the chain reactions produced by different types of disturbances.

A simulation can be used to discover the systemic structures and causalities of the
network; this, in turn, can provide valuable information about the role of different
factors in the supply chain.

7.4 Vulnerability Simulation

7.4.1 Case Description

The supply chain consists of multiple suppliers, a manufacturing unit, distribution

warehouses, and sales offices, as shown in Fig. 7.2. Two of the suppliers are located
offshore. When the manufacturing unit places an order, the goods arrive in 30–
41 days (Table 7.3); two of the suppliers had a delivery lead time of 7–14 days; and
the last supplier had a lead time of 2–4 days. We assume that the lead time is
uniformly distributed and that it should reflect real operations as deliveries tend to
be optimized. The distribution warehouses also have different lead times; the last
distribution warehouse had a lead time of 14 days. Each distribution warehouse

Fig. 7.2 Basic supply chain structure

7 Analyzing Supply Chain Vulnerability Through Simulation 117

serves three sales offices. These sales offices are supplied with a lead time of 1–
3 days. The actual simulation is run for 11 years, in which the first year is a
warm-up period and the last ten years are the actual simulation period.
Both the factory and the distribution warehouse reserve their stock according to
the orders received from the next tier in the supply chain. All tiers inform the
previous tier by using their own sales data. For instance, as soon as a sales office
sells one product, it sends information to its own distribution warehouse, which in
turn reserves one product from the warehouse for that particular sales office. As
soon as an entire order is ready, the supplier/factory/distribution warehouse sends
the delivery to the customer. The actual warehousing policies and distribution lead
times are summarized in Table 7.3.
Supply chain costs arise from three different sources: lost sales, warehousing
costs, and ordering costs. These costs are location dependent, for example, an order
from an offshore supplier has much higher cost than an order from a supplier
located nearby. Warehousing costs start accumulating as soon as the raw materials
arrive at the factory, and it is assumed that all raw materials have a similar cost. All
cost elements are listed in Table 7.4.
In addition to the supply chain nodes, simplified production is also modelled.
Producing one unit takes 6 min, and the factory operates in two shifts per day from

Table 7.3 Warehousing policy and distribution lead times

Node Batch size (units) Delivery lead time (days)
Suppliers 1 and 2 400 30–41
Suppliers 3 and 4 150 7–14
Supplier 5 30 2–4
Distribution warehouse 1 60 2
Distribution warehouses 2 and 3 75 5
Distribution warehouse 4 90 7
Distribution warehouse 5 120 14
Sales offices 30 1–3

Table 7.4 Cost elements in supply chain

Cost element Amount
Cost of lost sales $1000/unit
Ordering cost from suppliers 1 and 2 $3000/order
Ordering cost from suppliers 3 and 4 $700/order
Ordering cost from supplier 5 $200/order
Ordering cost for distribution warehouse 1 $500/order
Ordering cost for distribution warehouses 2 and 3 $625/order
Ordering cost for distribution warehouse 4 $750/order
Ordering cost for distribution warehouse 5 $1000/order
Ordering cost for sales offices $500/order
Warehousing cost $200/unit/year
118 J. Vilko and L. Lättilä

Fig. 7.3 Basic connections in simulation model

Monday to Friday. This is used to ensure that the production is not instant and that
it reflects normal operating conditions.
The actual simulation model was constructed using Anylogic. The distribution
warehouses and sales offices are almost identical, with the only difference between
them being that the demand at the sales offices is stochastic and random whereas
that at the distribution warehouses is dependent on the demand at the sales offices.
Figure 7.3 shows an example of these nodes. The suppliers’ warehouses are not
modelled and have infinite capacity; however, in the simulation model, they are
completely dependent on the demand from the factory. The factory has a simple
assembly operation in which all goods from the suppliers are assembled to make
final products. The factory itself operates on a push principle; however, the raw
materials arrive based on a pull principle. The factory stock is then connected to the
distribution warehouses.
“Stock” represents physical stock. Products arrive at the location and wait in the
queue for an order. When an order arrives, they are moved to the “lot” element. The
“lot” element batches the products depending on the batch size, and when the
correct batch size is reached, the goods are delivered. The “deliver” element con-
tains a node-dependent delay. In the case of a disruption, the delay contains
additional time in addition to the actual delivery lead time. When the goods arrive,
they are removed from the batch in the “debatch” element to become individual
products. Finally, the products arrive at the next stock called “distributorStock.”
The distributor has a similar chain for the sales offices.

7.4.2 Disruptions in the Model

We want to analyze how the supply chain behaves when different partners react to
changes in the likelihood of disruptions. We analyze multiple different scenarios, in
which either only one party will change their amount of safety stock or all parties will
cooperate. By doing so, we can understand the benefits that can be achieved when
supply chain partners cooperate to manage changes in supply-chain-related risks.
We assume that there is an inherent likelihood of having an excess delay
between the raw material suppliers and the factory. The actual disruption will
double the delivery time to the factory. The three scenarios use different likelihoods
for this disruption: 5, 15, and 25%. In each case, we use the OptQuest optimization
engine to minimize the supply chain costs.
7 Analyzing Supply Chain Vulnerability Through Simulation 119

Overall, there are nine different scenarios. We use the scenario with a disruption
likelihood of 5% as a baseline scenario. The baseline scenario defines the used
safety stocks; these are used in the other scenarios as well. If all supply chain
partners cooperate, we can allow all safety stocks to change. However, if only one
tier tries to cope with the change in the environment, we assume that the other tiers
do not change their safety stock policies but instead rely on the values optimized in
the baseline scenario.

7.4.3 Results

Table 7.5 presents the results in millions over a ten-year period. These results clear
show the benefits of cooperating in supply chain risk management. Depending on
the scenario, different partners have a larger impact on the results. In the scenario
with 15% likelihood, the sales offices have the best tools to manage disruptions as
they can keep their costs the lowest if the tiers do not cooperate. However, in the
scenario with 25% likelihood, the factory has the best impact on the supply chain
cost structure. The nonlinear dependencies place different importance on different
actors in different scenarios.
Cooperation between supply chain partners should be encouraged. This creates
some issues with incentives as the tier that increases the amount of safety stocks has
to carry more costs. Table 7.6 provides the optimized safety stocks when cooper-
ation is used. In the 15% scenario, the sales offices hold lesser inventory than in the
baseline scenario, whereas the factory and distribution warehouses hold more
inventory. In the 25% scenario, the factory and sales offices hold more inventory.
If a supply chain tier tries to mitigate the change alone, the safety stocks need to
increase. In particular, the sales offices needs to hold much more inventory than in
the cooperative scenario, as shown in Table 7.7. These values should be compared
to the 5% likelihood scenario in the cooperative scenario as it serves as the baseline
for the other scenarios.

Table 7.5 Supply chain 5% 15% 25%

costs in millions during
ten-year period when different Factory 8.387 8.473
partners react to changes in Warehouse 8.339 8.475
the supply chain environment Sales office 8.294 8.525
Cooperation 7.885 8.264 8.336

Table 7.6 Optimized safety 5% 15% 25%

stock levels in the scenario
where different partners Factory 200 450 350
cooperate Warehouse 125 175 125
Sales office 10 5 16
120 J. Vilko and L. Lättilä

Table 7.7 Optimized safety 15% 25%

stock levels if only one tier
mitigates Factory 450 500
Warehouse 150 200
Sales office 19 36

7.5 Discussion and Conclusions

Owing to lengthier and more complex supply chains, vulnerability against dis-
ruptions has clearly increased. Even though this has increased the need for
advanced vulnerability analyses among practitioners, there is still a clear need for
further research. To address this gap in scientific literature, this chapter developed
and tested a vulnerability analysis framework based on a simulation approach. This
chapter contributes to both theory and practice as follows.
From a theoretical perspective, we make three main contributions. First, we
provide a definition for supply chain vulnerability using an integrated literature
review. Second, we demonstrate the current state-of-the-art of using simulations in
scientific studies. Finally, and most importantly, we develop and test our
discrete-event simulation model that enables one to test the benefits of collaboration
in supply chain risk management and thus reduce the overall vulnerability. Our
method seemed to work particularly well when analyzing the key components of
vulnerability, namely, disruptions and exposure risk.
From a practical perspective, we make two main contributions. First, we
demonstrate how simulations can be used to illustrate complex structures in long
supply chains without losing process-level factors, which is especially important for
gaining a holistic view of supply chain vulnerability. Second, we illustrate how the
model can be used to run “what-if” experiments and how it can be used to increase
the supply chain performance by influencing the factors a supply chain is most
sensitive to.
This model includes some obvious limitations owing to the research design.
However, when considering the illustrative purposes of this research, the examples
used are considered appropriate. Moreover, the companies considered as examples
in the simulation might have multiple suppliers for the same components, in which
case a backup supplier would be used; the model built cannot take this into account.

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Chapter 8
Supply Chain Disruptions Preparedness
Measures Using a Dynamic Model

Amit Sonar and Cameron A. Mackenzie

Abstract Supply chain risk management has recently seen extensive research
efforts, but questions such as “How should a firm plan for each type of disruption?”
and “What are the strategies and the total cost incurred by the firm if a disruption
occurs?” continue to deserve attention. This chapter analyzes different disruption
cases by considering the impacts of disruptions at a supplier, a firm’s warehouse,
and at the firm’s production facility. The firm can prepare for each type of dis-
ruption by buying from an alternate supplier, holding more inventory, or holding
inventory at a different warehouse. The Wagner-Whitin model is used to solve the
optimal ordering strategy for each type of disruption. Since the type of disruption is
uncertain, we assign probabilities for each disruption and use the Wagner-Whitin
model to find the order policy that minimizes the firm’s expected cost.

8.1 Introduction

Disruptions are unpredictable events and can occur at any facility location of a plant
at any point of time. A supply chain is vulnerable to different types of disruptions,
which can take the form of supply disruptions, operational problems at warehouses,
demand uncertainty, transportation difficulties, or catastrophic events that close a
firm’s manufacturing facilities. Since a firm does not know what type of disruption
will occur, if any, planning for disruptions should account for this uncertainty.
This chapter addresses disruptions occurring at three major locations: a supplier,
a warehouse, and a firm’s production facility. Two important questions are:
(1) How should a firm plan for each type of disruption? and (2) How should a firm
prepare for the possibility of all three disruptions? This chapter presents a model

A. Sonar (&)
C.A. Mackenzie

Department of Industrial and Manufacturing Systems Engineering,
Iowa State University, Ames, USA
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 123

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_8
124 A. Sonar and C.A. Mackenzie

that seeks to answer these questions by exploring the firm’s planning horizon and
preparation strategies. First, the firm can prepare itself from calamity by holding
inventory, possibly at different locations. Second, the firm can have an alternate
supplier for its product.
Preparation strategies may also account for how the firm and other entities may
respond if a disruption occurs. For example, a multinational firm may be able to rely
on suppliers from other countries that are not impacted by a disruption. For
example, if the firm’s manufacturing plant is located in one part of world, the firm
could increase productions at other facilities. Selecting international suppliers as an
alternate supplier may incur higher ordering cost, however.
Each of the preparation strategies has a cost, and the cost of implementing all
these strategies might be higher than the disruption itself. This chapter models this
decision using the Wagner-Whitin model to incorporate the uncertainty around the
type of disruption and to select a strategy that minimizes the firm’s expected cost.
This research is novel because we look at preparedness strategies of a firm during
disruptions, which will reduce the overall disruption losses. It uses the idea of the
Wagner-Whitin model to think about different disruption scenarios. A firm can use
this Wagner-Whitin model with disruptions to make profitable decisions before and
after a disruption.
Section 8.2 reviews the literature on supply chain disruptions. Section 8.3
introduces the supply chain model, the Wagner-Whitin algorithm, and the three
disruption scenarios. Section 8.4 applies probabilities to each disruption and finds
the firm’s order policy that minimizes its expected cost. Section 8.5 discusses the
results of this analysis.

8.2 Literature Review

Supply chain risk management and supply chain disruptions have received a lot of
attention both in academia and in industry. A supply chain disruption can be
defined as an internal or external event that alters the normal or planned flow of
goods and services in a supply chain. Literature reviews on supply chain disruptions
and supply chain risk management can be found in Tang (2006), Snyder et al.
(2006), Vakharia and Yeniparzarli (2008), Natarajarathinam et al. (2009), Schmitt
and Tomlin (2012), and Snyder et al. (2016). Supply chain disruptions can take
many different forms, including production difficulties or operational risks (Xia
et al. 2004), wholesale prices impacted by cost fluctuations (Xiao and Qi 2008),
supply shortages (Xiao and Yu 2006), and sudden drops in demand based on the
market conditions (Xiao et al. 2005). Much of the academic literature on supply
chain disruptions focuses on understanding and modeling strategies that firms can
use to mitigate a disruption, such as holding inventory (Song and Zipkin 1996;
Tomlin 2006) purchasing from alternate suppliers (Tomlin 2006; Song and Zipkin
2009; Babich et al. 2007; Hopp et al. 2009), rescheduling production (Bean et al.
1991; Adhyitya et al. 2007), rerouting transportation (MacKenzie et al. 2012), and
8 Supply Chain Disruptions Preparedness Measures … 125

producing at an alternate facility (MacKenzie et al. 2014). A firm can attempt to

build a supply chain resilient to disruptions (Sheffi 2005) by reconfiguring resources
or improving its infrastructure (Ambulkar et al. 2015).
Understanding characteristics that make firms more or less vulnerable to supply
chain disruptions is another important area of research. Bode and Wagner (2015)
empirically found that the complexity of a supply chain, to include the horizontal
and vertical complexity, can increase the frequency of disruptions and exacerbate
them. Make-to-order supply chains may be more vulnerable to disruptions than
make-to-forecast supply chains (Papadakis 2006). Supply chain disruptions may be
more severe for firms that are more geographically diverse or undertake a lot of
outsourcing (Hendricks et al. 2009). This chapter explores some of the potential
impacts that could occur in a complex supply chain with multiple suppliers and
different warehouses.
The model in this chapter uses the model developed by Wagner and Whitin
(1958) which provides a production or ordering plan with varying but known
demand. If demand and order lead time are uncertain to small extent, a modified
Wagner-Whitin model can still be applied (Kazan et al. 2000; Jeunet and Jonard
2000). The Wagner-Whitin model was recently extended to situations with variable
manufacturing and remanufacturing cost (Richter and Sombrutzki 2000; Richter
and Weber 2001). To our knowledge, no research has extended the Wagner-Whitin
model to supply chain disruptions to understand how a firm can use a manufac-
turing resource planning system to prepare for potential disruptions.

8.3 Supply Chain Model and Illustrative Example

8.3.1 The Model

We consider a supply chain (see Fig. 8.1) in which a manufacturing firm requires
several suppliers. These suppliers transform raw materials into goods that are
delivered to the firm. The firm stores these supplies in a warehouse. The firm also
operates two smaller warehouses that are located further away but can be used if the
main warehouse is short of supplies or unusable. The firm depends on a single
primary supplier for parts. An alternate supplier is also available to deliver parts at a
more expensive price if the primary supplier cannot meet demand. Since this
chapter assumes that at most one supplier is disrupted, the analysis focuses on the
firm’s ability to obtain parts for its manufacturing process.
We assume that the firm’s forecasted demand Dt in time period t is deterministic
but changes in each time period where t ¼ 1; 2; . . .; T and T represents the planning
horizon. The firm develops a plan to order quantity Qt in each period in order to
minimize its cumulative cost over the time horizon. The firm’s cost is composed of
a per-unit ordering cost Ct , a fixed cost per order At , and a per-unit holding or
inventory cost Ht . All costs are in U.S. dollars. Given the assumptions in this
126 A. Sonar and C.A. Mackenzie

Fig. 8.1 Supply chain map

framework, the model developed by Wagner and Whitin (1958) provides an

appropriate solution for the firm’s planning. The Wagner-Whitin model is a
dynamic lot-sizing model that produces an optimal lot size for each period.
A notional example is developed for a firm using the “RoadHog” example from
Hopp and Spearman (2008, pp. 58–64). The example without a disruption is
explained first. We extend the example to three possible scenario disruptions: (1) a
supplier disruption, (2) a firm closure, and (3) a warehouse disruption.

8.3.2 No Disruptions

Table 8.1 depicts the parameters for a 10-period model. The demand changes in
each period, but the variable ordering cost, the fixed order cost, and the holding cost
remain the same for each period. The cost in period t equals At 1Qt [ 0 þ Ct Qt þ Ht It
where 1Qt [ 0 is in the indicator function that equals 1 if Qt [ 0 and where It is the
amount of inventory being held from period t to t þ 1. We assume the revenue for
the firm is the product of the demand and a per-unit selling price.
Under an optimal lot-sizing policy, the inventory carried from period t  1 to
t will be zero, or the order quantity in period t will be zero (Hopp and Spearman
2008). In the Wagner-Whitin model, the per-unit ordering cost Ct is constant and
can be ignored in the calculations. When no disruption occurs, Ct is constant, but as

Table 8.1 Data representing demand, variable order cost, fixed order cost, and holding cost
Time period 1 2 3 4 5 6 7 8 9 10
Dt 20 50 10 50 50 10 20 40 20 30
Ct 10 10 10 10 10 10 10 10 10 10
At 100 100 100 100 100 100 100 100 100 100
Ht 1 1 1 1 1 1 1 1 1 1
8 Supply Chain Disruptions Preparedness Measures … 127

will be explained later, Ct can change during a supply chain disruption. Thus, Ct is
included in this model’s calculations. The basic recursive algorithm is outlined
below. The algorithm goes forward in time by calculating Xs;t the cost of ordering
in period s to satisfy demand in all periods from s through t. The cumulative
minimum cost Zt in each period t is selected, and jt f1; 2; . . .; tg represents the
period in which to order parts to meet demand in t. The third and fourth steps in the
algorithm ensures that the optimal order period jt is selected in cost calculations.
Wager-Whitin algorithm:
1. Satisfy demand in first period D1 , … Z1 ¼ X1;1 ¼ A1 þ C1 D1 … j1 ¼ 1
2. Determine minimum cost for periods t ¼ 2; 3; . . .; T
8 !
>
<X tP
1
s1;t þ Dt Cs þ Ht 0 if s\t
Xs;t ¼ t0 ¼s
>
: 
Zt1 þ Dt Ct þ At if s¼t
Zt ¼ min Xs;t
s
jt ¼ argmin Xs;t
s

3. Begin with t ¼ T and continuing with t ¼ T  1; T  2; . . .; 2

If jt \js for any s ¼ jt ; . . .; t  1, then set js ¼ jt
4. For periods t ¼ 2; 3; . . .; T, repeat calculation for Xs;t from step 2 and set
Zt ¼ Xjt ;t .
As shown in Table 8.2 (which replicates the result from Hopp and Spearman
2008, pp. 58–64), the firm should order 80 units in period 1 to satisfy demand in

Table 8.2 Planning horizon with total costs for each possible ordering period
Last period with Planning horizon (t)
order 1 2 3 4 5 6 7 8 9 10
1 300 850 970 1620 2320 2470 2790 3470 3830 4400
2 900 1010 1610 2260 2400 2700 3340 3680 4220
3 1050 1600 2200 2330 2610 3210 3530 4040
4 1570 2120 2240 2500 3060 3360 3840
5 2170 2280 2520 3040 3320 3770
6 2320 2540 3020 3280 3700
7 2540 2980 3220 3610
8 3000 3220 3580
9 3300 3630
10 3620
Zt 300 850 970 1570 2120 2240 2500 3000 3220 3580
jt 1 1 1 4 4 4 4 8 8 8
128 A. Sonar and C.A. Mackenzie

periods 1, 2, and 3; 130 units in period 4 to satisfy demand in 4, 5, 6, and 7; and 90

units in period 8 to satisfy demand in 8, 9, and 10.

8.3.3 Supplier Disruption

We first consider that a disruption occurs with the primary parts supplier in period 5
and lasts through the rest of the planning horizon. The firm is able to order from the
secondary parts supplier, but the ordering cost Ct increases from 10 to 20 for
periods 5 through 10. All other values from Table 8.1 remain the same. If we
assume that the firm knows the primary supplier will be disrupted in period 5, we
can use the Wagner-Whitin algorithm to calculate the optimal order period given
this disruption (Table 8.3).
When the cost is 20 the firm should order 80 units in period 1 to satisfy demand
in periods 1, 2, and 3; and 220 units in period 4 to satisfy demand in periods 4
through 10. It is cheaper for the firm to hold inventory than to purchase from the
alternate supplier.
We explore the impact of changing the ordering cost from 10 to 20 for the
alternate supplier. Figure 8.2 illustrates the relationship between total cost and the
per-unit ordering cost. As the ordering cost increases, the total cost initially
increases until the ordering cost equals 13, at which point the total cost remains the
same. When the cost is 13, the firm changes its strategy from ordering in periods 1,
4, and 8 to ordering in periods 1 and 4 only. The cost of holding inventory from

Table 8.3 Optimal planning horizon with local supplier disruption

Planning horizon (t)
1 2 3 4 5 6 7 8 9 10
Zt 300 850 970 1570 2120 2240 2500 3060 3360 3840
jt 1 1 1 4 4 4 4 4 4 4

3900
3850
3800
Total cost

3750
3700
3650
3600
3550
10 12 14 16 18 20
Ordering cost

Fig. 8.2 Total cost as the ordering cost changes for period 5 through 10
8 Supply Chain Disruptions Preparedness Measures … 129

periods 4 through 10 is less than the cost of ordering in period 8 when the cost is 13
or greater. Since the firm is ordering all of its parts before the disruption in period 5,
the total cost remains the same even when the ordering cost increases beyond 13.

8.3.4 Firm Disruption

The second type of disruption occurs when the firm itself is impacted and cannot
produce. We model this type of disruption by setting Dt ¼ 0 for those periods when
the firm is disabled. The firm’s revenue will be 0 until the firm recovers from the
disruption. If the impact due to the disruption is large, the firm will take more time
to recover from it. The purchase and holding costs remain the same as in Table 8.1.
Table 8.4 illustrates the notional data in which the disruption takes place in period 5
and the firm recovers in period 9. The firm is disabled in periods 5 through 8
(Table 8.5).
Since the firm is losing revenue when it is not producing, we examine the impact
of the firm disruption on the firm’s revenue and profit. We assume the firm receives
a revenue of 50 for each unit it produces. Table 8.6 shows how the firm’s profit
changes based on when it recovers and resumes ordering and production. If the firm
reopens in periods 6 or 7, the firm orders enough supplies in period 4 to cover the
initial periods when it reopens. If the firm reopens in periods 8, 9, or 10, the firm
holds no additional inventory from period 4 and orders supplies when it completely
recovers.

8.3.5 Main Warehouse Disruption

The third type of disruption occurs when the main warehouse is impacted. If the
main warehouse is closed, the firm will need to arrange for additional warehouse
space. We assume that the firm can use one of its two other warehouses as depicted
in Fig. 8.1, but using either of these facilities increases Ht the holding cost.

Table 8.4 Demand with a firm disruption

t 1 2 3 4 5 6 7 8 9 10
Dt (units) 20 50 10 50 0 0 0 0 20 30

Table 8.5 Optimal planning horizon with firm disruption

Planning horizon (t)
1 2 3 4 5 6 7 8 9 10
Zt 300 850 970 1570 1570 1570 1570 1570 1870 2200
jt 1 1 1 4 4 4 4 4 9 9
130 A. Sonar and C.A. Mackenzie

Table 8.6 Recovery period and ordering strategy in case of a firm disruption (* means the firm
is closed)
Recovery period Cost Revenue Profit Ordering strategy jt
No disruption 3580 15,000 11,420 1, 1, 1, 4, 4, 4, 4, 8, 8, 8
6 3030 12,500 9470 1, 1, 1, 4, *, 4, 4, 8, 8, 8
7 2910 12,000 9090 1, 1, 1, 4, *, *, 4, 8, 8, 8
8 2650 11,000 8350 1, 1, 1, 4, *, *, *, 8, 8, 8
9 2200 9000 6800 1, 1, 1, 4, *, *, *, *, 9, 9
10 1970 8000 6030 1, 1, 1, 4, *, *, *, *, *, 10

Table 8.7 illustrates the increase in holding cost when the main warehouses closes
from periods 5 through 10.
If the holding cost is 5 beginning in period 5, the firm is incentivized to make
more frequent orders. As depicted in Table 8.8, the firm should order 80 units in
period 1 to satisfy demand in periods 1, 2, and 3; 110 units in period 4 to satisfy
demand in periods 4, 5, and 6; 20 units in period 7 to satisfy demand in period 7; 60
units in period 8 to satisfy demand in periods 8 and 9; and 30 units in period 10 to
satisfy demand in period 10.
Figure 8.3 shows the relationship between the firm’s total cost and the holding
cost. Not surprisingly, as the holding cost increases, the total cost also increases.

Table 8.7 Holding cost with a main warehouse disruption

t 1 2 3 4 5 6 7 8 9 10
Ht 1 1 1 1 5 5 5 5 5 5

Table 8.8 Optimal planning horizon with warehouse disruption

Planning horizon (t)
1 2 3 4 5 6 7 8 9 10
Zt 300 850 970 1570 2120 2280 2580 3080 3380 3780
jt 1 1 1 4 4 4 7 8 8 10

3850
3800
3750
Total cost

3700
3650
3600
3550
1 2 3 4 5 6 7 8 9 10
Holding cost

Fig. 8.3 Total cost as the holding cost changes for periods 5 through 10
8 Supply Chain Disruptions Preparedness Measures … 131

Table 8.9 Optimal planning Holding cost Ordering strategy jt

horizon with warehouse
disruption 1 1, 1, 1, 4, 4, 4, 4, 8, 8, 8
2 1, 1, 1, 4, 4, 4, 4, 8, 8, 10
3 1, 1, 1, 4, 4, 4, 7, 8, 8, 10
4 1, 1, 1, 4, 4, 4, 7, 8, 8, 10
5 1, 1, 1, 4, 4, 4, 7, 8, 8, 10
6 1, 1, 1, 4, 4, 4, 7, 8, 9, 10
7 1, 1, 1, 4, 4, 4, 7, 8, 9, 10
8 1, 1, 1, 4, 4, 4, 7, 8, 9, 10

When the holding cost increases from 5 to 6, the ordering strategy changes from 1,
4, 7, 8, 10 to 1, 4, 7, 8, 9, 10 as represented in Table 8.9. As the holding cost
increases, it is cheaper to order more frequently.

8.3.6 Disruption Occurs in Different Periods

The previous section assumes that the disruption always occurs in period 5, but the
disruption could occur in any period. This section analyzes the impact on the firm’s
cost and profit if the disruption occurs in different periods for each of the three types
of disruptions.
Supplier Disruption
The initial period in which the primary parts supplier experiences a disruption is
varied from periods 3 through 8. The primary supplier is always closed through
period 10. As in Sect. 8.3.3, the firm can order from the secondary parts supplier,
but the ordering cost increases to 20. The holding cost and fixed cost are the same
as in Table 8.1. Figure 8.4 illustrates the relationship between the firm’s total cost
and when the disruption begins. The last ordering period for the firm should occur
in the previous immediately prior to the disruption (Table 8.10).
Firm Disruption
The disruption disables the firm, and it cannot produce for a number of periods.
The firm’s revenue will be 0 until the firm recovers from the disruption, and we
continue to assume that the firm recovers in the 10th period. The period in which the
disruption begins is varied from periods 3 to 8. Table 8.11 and Fig. 8.5 illustrate the
relationship among the period in which the disruption begins, the firm’s profit, and its
ordering strategy. The firm’s profit increases as the period in which the disruption
occurs increases. The firm continues to order in periods 1 and 4 irrespective of the
length of the disruption (as long as the disruption occurs after period 4).
Main Warehouse Disruption
If the firm’s main warehouse is disrupted, we assume the firm can use alternate
warehouses, but its holding cost increases to 10. The disruption can begin in periods
3 through 8 but always continues through period 10. The ordering cost and fixed
cost remain the same as in Table 8.1. Table 8.12 and Fig. 8.6 illustrate that the total
132 A. Sonar and C.A. Mackenzie

4300
4200
4100

Total cost
4000
3900
3800
3700
3600
3500
3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
IniƟal period of disrupƟon

Fig. 8.4 Total cost as the initial period of disruption changes from 3 through 8

Table 8.10 Total cost and ordering strategy with different period of disruption
Periods during which primary supplier is disabled Total cost Ordering strategy
3–10 4220 1, 2, 2, 2, 2, 2, 2, 2, 2, 2
4–10 4040 1, 1, 3, 3, 3, 3, 3, 3, 3, 3
5–10 3840 1, 1, 1, 4, 4, 4, 4, 4, 4, 4
6–10 3770 1, 1, 1, 4, 5, 5, 5, 5, 5, 5
7–10 3700 1, 1, 1, 4, 4, 6, 6, 6, 6, 6
8–10 3610 1, 1, 1, 4, 4, 4, 7, 7, 7, 7

Table 8.11 Profit and ordering strategy in case of a firm disruption with different periods of
disruption (* means the firm is closed)
Periods during which firm is unable Cost Revenue Profit Ordering strategy jt
to produce
3–9 1250 5000 3750 1, 1, *, *, *, *, *, *,
*, 10
4–9 1370 5500 4130 1, 1, 1, *, *, *, *, *,
*, 10
5–9 1970 8000 6030 1, 1, 1, 4, *, *, *, *, *,
10
6–9 2520 10,500 7980 1, 1, 1, 4, 4, *, *, *, *,
10
7–9 2640 11,000 8360 1, 1, 1, 4, 4, 4, *, *, *,
10
8–9 2900 12,000 9100 1, 1, 1, 4, 4, 4, 4, *, *, 10

cost decreases as the length of the disruption decreases. The firm should always
order in periods 1 and 4, but whether or the not the firm orders in other periods
changes as the length of disruption changes. For most cases, the firm should order
in each period after the first disruption period. For example, if the disruption lasts
from periods 5–10, the firm should order in each period from 6 through 10.
8 Supply Chain Disruptions Preparedness Measures … 133

9500

8500

7500
Profit
6500

5500

4500

3500
3 4 5 6 7 8
IniƟal period of disrupƟon

Fig. 8.5 Profit as the initial period of disruption changes from 3 through 8

8.4 Unknown Disruption and Period

The previous section assumes that the firm plans for each disruption individually
and knows the type and timing of the disruption. In reality, the firm will not know
which disruption, if any, will occur or when it will occur. This section explores how
the chance and timing of one of these disruptions should impact the firm’s planning.
We assume that one of the three disruptions could occur: the local supplier dis-
ruption, the firm disruption, or the main warehouse disruption. Given that a dis-
ruption occurs, the probability the local supplier is disabled is 0.5, the probability
the firm is closed is 0.2, and the probability the main warehouse is closed is 0.3.
We assume there is an equal probability that the disruption will begin in period
3, 4, 5, 6, 7, or 8, equivalent to a 1/6 probability for each period. If the local supplier
is disrupted, the firm can order from the alternate supplier at a per-unit cost of 20. If
the firm is disrupted, we assume the firm cannot satisfy any demand while it is
closed. If the main warehouse is disrupted, the firm can store inventory at the
alternate warehouses, but the holding cost increases to 5. We use the probabilities of
disruption to calculate the expected costs for each possible ordering strategy. The
Wagner-Whitin algorithm is deployed to find the order policy that minimizes the
firm’s total expected cost. Since this is a planning problem, the firm establishes an

Table 8.12 Total cost, holding cost and ordering strategy in case of a main warehouse disruption
with different periods of disruption
Periods during which main warehouse is closed Total cost Ordering strategy jt
3–10 3870 1, 1, 1, 4, 5, 5, 7, 8, 9, 10
4–10 3870 1, 1, 1, 4, 5, 5, 7, 8, 9, 10
5–10 3820 1, 1, 1, 4, 4, 6, 7, 8, 9, 10
6–10 3740 1, 1, 1, 4, 4, 4, 7, 8, 9, 10
7–10 3700 1, 1, 1, 4, 4, 4, 4, 8, 9, 10
8–10 3680 1, 1, 1, 4, 4, 4, 7, 7, 9, 10
134 A. Sonar and C.A. Mackenzie

3900
3850

Total cost
3800
3750
3700
3650
3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
IniƟal period of disrupƟon

Fig. 8.6 Total cost as the initial period of disruption changes from 3 through 8

order before knowing whether a disruption occurs, which disruption will occur, or
when the disruption will occur.
We vary the probability of a disruption between 0 and 1. The optimal ordering
strategy for the firm for different probabilities of disruptions is illustrated in
Table 8.13. If the probability of a disruption is less than 0.3, the firm should not
change its ordering policy from the case without a disruption. If the probability of a
disruption is greater than or equal to 0.3, the firm should order in periods 1, 4, 8,
and 10. It becomes optimal to order in period 10 because the firm is incentivized to
plan for the firm being closed and for the main warehouse being closed. With such a
large probability of disruption, it becomes more likely that the firm will have a
disrupted warehouse, which increases its holding cost. Thus, it becomes more
advantageous to hold less inventory and order in period 10. (If the disruption
disables the primary supplier, the firm’s cost of ordering does not change based on
whether it orders in period 8 or 10 because both periods require ordering from the
more expensive alternate supplier.) The expected profit decreases in a linear fashion
as the probability of a disruption increases as displayed in Fig. 8.7.

Table 8.13 Probability of disruption and optimal planning for uncertain periods
Probability of disruption Expected profit Ordering strategy jt
0 11,420 1, 1, 1, 4, 4, 4, 4, 8, 8, 8
0.1 11,318 1, 1, 1, 4, 4, 4, 4, 8, 8, 8
0.2 11,215 1, 1, 1, 4, 4, 4, 4, 8, 8, 8
0.3 11,121 1, 1, 1, 4, 4, 4, 4, 8, 8, 10
0.4 11,035 1, 1, 1, 4, 4, 4, 4, 8, 8, 10
0.5 10,949 1, 1, 1, 4, 4, 4, 4, 8, 8, 10
0.6 10,862 1, 1, 1, 4, 4, 4, 4, 8, 8, 10
0.7 10,776 1, 1, 1, 4, 4, 4, 4, 8, 8, 10
0.8 10,690 1, 1, 1, 4, 4, 4, 4, 8, 8, 10
0.9 10,603 1, 1, 1, 4, 4, 4, 4, 8, 8, 10
1 10,517 1, 1, 1, 4, 4, 4, 4, 8, 8, 10
8 Supply Chain Disruptions Preparedness Measures … 135

11500
11400
11300
Expected profit 11200
11100
11000
10900
10800
10700
10600
10500
10400
0 0.2 0.4 0.6 0.8 1
Probability of disrupƟon

Fig. 8.7 Expected profit as the probability of disruption changes from 0 through 1

8.5 Discussions and Conclusions

This research addresses an important question of how a firm should plan for the
possibility of several disruptions. The Wagner-Whitin model is appropriate with the
assumption that demand is varying but deterministic. Three possible disruption
scenarios are studied: a supply disruption, a disruption in the firm’s production
facility, and a warehouse disruption. If the firm can anticipate that the supplier
cannot deliver its supplies, the firm is incentivized to hold more inventory,
depending on the cost of the alternate supplier. If the firm’s primary warehouse
closes, the firm should hold less inventory and order more frequently from its
suppliers. The application explores how the firm’s cost and order strategies change
as the parameters change.
Since a firm will not know in advance which disruption occurs, it will need to
decide for which, if any, disruption to plan. The period in which the disruption
occurs is also uncertain. The model applies probabilities to each disruption and the
timing, and the firm chooses an order policy in order to minimize its expected cost.
Total profit is calculated based on the different probabilities of disruptions. The
firm’s ordering strategy may change as the probability of a disruption increases.
A firm who uses a manufacturing resource planning system that resembles the
Wagner-Whitin model could forecast possible disruptive events and explore if its
ordering and production schedule should change based on the possible disruptions.
The incorporation of probability to account for the uncertainty in the type and
timing of disruptions allows a firm to understand how the likelihood of a disruption
should impact its planning and ordering strategy. For the illustrative example in this
chapter, the firm should slightly modify its ordering strategy as the probability of a
disruption occurs. Further research can seek to understand if generalized results can
be derived from the model about how the probability of disruption should impact a
firm’s ordering strategy. Though the Wagner-Whitin model generates an optimal
136 A. Sonar and C.A. Mackenzie

planning horizon, it has some drawbacks. It has a fixed setup cost and deterministic
demand.
In the future, we plan to extend our methodology to more complex supply
chains, which may involve multiple suppliers. Future extensions can apply the
algorithm to a real case study rather than considering notional data. Having longer
planning horizons and allowing the firm to respond based on what disruption occurs
may also impact the firm’s optimal planning.

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Chapter 9
A Quantitative Model for Analyzing
Market Response During Supply Chain
Disruptions

Arun Vinayak and Cameron A. Mackenzie

Abstract Supply chain disruptions can lead to firms losing customers and con-
sequently losing profit. We consider a firm facing a supply chain disruption due to
which it is unable to deliver products for a certain period of time. When the firm is
restored, each customer may choose to return to the firm immediately, with or
without backorders, or may purchase from other firms. This chapter develops a
quantitative model of the different customer behaviors in such a scenario and
analytically interprets the impact of these behaviors on the firm’s post-disruption
performance. The model is applied to an illustrative example.

9.1 Introduction

Supply chain disruptions have garnered increased attention, both in academia and in
practice, since the early 2000s. Modern production methodologies, globalized
supply chains, shorter product life cycle, and the emphasis on efficiency have
increased the risk faced by many supply chains. Managing the risk facing a supply
chain is vital to the success of any company.
A supply chain is an integrated system of companies involved in the upstream
and downstream flows of products, services, finances, and/or information from a
source to a customer (Mentzer et al. 2001). Figure 9.1 presents a basic supply chain
model from the firm’s perspective. A supply chain is characterized by the flow of
resources—typically material, information, and money—with the primary purpose
of satisfying the needs of a customer, who are the source of revenue for a firm.
A supply chain will ideally maximize the total value generated from customers and
minimize the cost of meeting consumer demand.

A. Vinayak (&)
C.A. Mackenzie

Department of Industrial and Manufacturing Systems Engineering,
Iowa State University, Ames, USA
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 139

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_9
140 A. Vinayak and C.A. Mackenzie

Fig. 9.1 A simple supply chain model

Major disruptions, such as those that occur from natural disasters, terrorist acts,
and labor strikes, can interrupt the flow of materials for several firms. Sodhi and
Tang (2012) categorized supply chain risk into supply risks, process risks, demand
risks, and corporate-level risks. These risks often materialize all together during a
major supply chain disruption, and decision makers need to consider all of these
risks. Kilubi and Haasis (2015) conducted a systematic literature review on supply
chain risk management (SCRM) and identified ten different definitions of SCRM.
Lavastre et al. (2012, p. 839) defined SCRM as “the management of risk that
implies both strategic and operational horizons for long-term and short-term
assessment.” As implied by this definition, decision makers need to consider both
the long-term and short-term impacts from a supply chain disruption.
The marketplace or customers can play a significant role in the long-term
impacts as their needs, values, and opinions will affect the firm’s decisions during
the disruption. The volatility of consumer demand is a major form of risk (Jüttner
et al. 2003). Firms face a risk of being penalized by their customers if their suppliers
default and firms are unable to deliver on their obligations. Assessing how con-
sumers react to such disruptions helps to forecast the long-term profits for the firm
and can help it make sound risk management decisions. Modeling consumer
behavior is useful not only when a disaster occurs but also to build flexibility within
the supply chain as a proactive measure to anticipate such threats and quickly
respond.
This chapter presents a probabilistic model to quantify the risk from a severe
supply chain disruption with an explicit focus on how consumers or the market-
place’s demand for a product should influence a firm’s risk management strategies.
Many supply chain disruption models assume some type of demand function,
which may be constant or random. However, that demand function does not usually
change when the disruption occurs, or simple assumptions are made about whether
or not customers are willing to wait for a final product. Less research has focused on
how the final customers should influence how a firm determines what risk man-
agement strategies are appropriate. This chapter models the demand function using
a probabilistic approach to customer behavior in a post-disruption scenario. The
model assumes that a disruption causes a supplier to default, and a firm is unable to
deliver its product to consumers. The market responds with defined probabilities
and time delays. The model attempts to measure the extent to which a firm can be
penalized due to a default from its supplier and recommends strategies or practices
to build resilience to such disruptions.
9 A Quantitative Model for Analyzing Market Response … 141

This chapter is organized as follows: a literature review is given in Sect. 9.2.

Section 9.3 presents the mathematical model framework, and Sect. 9.4 describes an
illustrative example and performs sensitivity analysis. Section 9.5 concludes the
chapter with recommendations, insights, and conclusions drawn from the study.

9.2 Literature Review

Supply chain management has seen a variety of trends, including Just-in-Time,

global sourcing, and outsourcing. These methods are aimed at cutting costs in a
firm’s supply chain and enabling the firm to compete more effectively. Increasing
supply chain efficiency can also make supply chains more vulnerable to disruptions
(Christopher 2005). In the race to increase their market share, firms may ignore that
their supply chains are susceptible to disruptions.
A wide variety of events can disrupt a supply chain, including supply-side
difficulties, demand-side variability, operational problems, and large-scale disrup-
tions such as natural disasters (Manuj et al. 2007). Qualitative studies to manage
these disruptions recommend excess inventory, additional capacity, redundant
suppliers, flexible production and transportation, and dynamic pricing (Sheffi and
Rice 2005; Stecke and Kumar 2009). Managing one type of risk may exacerbate
another risk, and identifying the best strategy relies on the manager’s ability to
identify the most crucial risk and understand the trade-offs in SCRM (Chopra and
Sodhi 2004). Quantitative studies in SCRM generally model the trade-off between
purchasing from alternate suppliers and holding inventory (Tomlin and Wang
2005), or they model the interaction between suppliers and customers (Babich et al.
2007; Xia et al. 2011). MacKenzie et al. (2014) used simulation to model the
interactions among supply chain entities where each entity can take different actions
such as holding inventory or purchasing from alternate suppliers. Interested readers
should refer to Snyder et al. (2016) for an in-depth review of the recent models of
supply chain disruptions and disruption management strategies.
Although research has focused on the impacts of supply chain disruptions based
on stock returns (Hendricks and Singhal 2005) or based on the economic linkages
(MacKenzie et al. 2012), less research has focused on how customers behave during
and after a supply chain disruption. Nagurney et al. (2005) examined the impact of
unforeseen customer demands on the supply chain, but this research assumes the
customer behavior causes the disruption. Ellis et al. (2010) surveyed managers and
buyers of materials to study how customers may perceive supply chain risk.
Modern supply chain management is very sensitive to customer demand (Nishat
Faisal et al. 2006), but examining the relationship between customer demand
sensitivity and a manufacturer or retailer during a disruption has not been fully
explored. An important exception to this lack of research is the modeling and
analysis of consumer behavior following a food contamination (Beach et al. 2008;
Arnade et al. 2009).
142 A. Vinayak and C.A. Mackenzie

This chapter seeks to fill the gap in the existing literature by probabilistically
modeling customer behavior following a supply chain disruption. Whereas much of
the current literature focuses on the interaction between the supplier and the firm,
the focus of this chapter is the market response to the disruption and its impact on
the firm. The model examines the decisions customers make after the interruption of
a firm’s service due to a supply chain disruption. Possible customer behaviors are
fused within a probabilistic model to assess the expected lost revenue of the firm.
A firm can use this forecasted measure of average lost revenue to decide what it
should do to prepare and respond to such a disruption in its supply chain.

9.3 The Model

This section presents an overall profile of a supply chain disruption and develops a
probabilistic model to focus on the market response to the disruption. A supply
chain disruption occurs when a firm’s supplier defaults. A major disruption impacts
a firm in distinct phases (Sheffi and Rice 2005). It may take time for the final
consumer to be impacted by the supply disruption. If the firm does not have enough
inventory or cannot purchase from alternate suppliers, it will not be able to satisfy
demand for its goods. Consequently, consumers may choose to purchase from other
firms. The consumers’ loyalty depends on a number of factors such as their rela-
tionship to the product. To get back to standard performance levels, a firm may
adopt various response actions such as working at over-capacity levels. If the firm is
prepared for such a disruption (e.g., having multiple suppliers or having more
inventory), it should be able to respond more effectively (Yu et al. 2009).

9.3.1 Model Framework

We develop a probabilistic model to quantify the reaction of customers following a

supply chain disruption that causes a temporary production shut down. Before the
disruption, there are n customers (they could also be retailers) who purchase from a
firm in each time period before a disruption. In the base model, we assume the
demand equals the number of customers. In other words, every customer buys
exactly one product. This assumption is relaxed in Sect. 9.4.3, which considers
varying demands from each customer. An unexpected disruptive event causes one
or more of the firm’s suppliers to default, and the firm is unable to satisfy any
demand beginning at time period t ¼ 1. The disruption continues for M time
periods, and the firm does not deliver to its n customers for t ¼ 1; 2; . . .; M. The
firm recovers from the disruption at t ¼ M þ 1 and will be able to deliver at its full
capacity C orders per time period, where C  n.
In the post-disruption time period beginning at t ¼ M þ 1, each customer
decides whether or not to return to the firm in each time period t ¼ M þ i. Note that
9 A Quantitative Model for Analyzing Market Response … 143

i ¼ 1; 2; . . . since the customer cannot buy from the firm during time periods
t ¼ 1; 2; . . .; M. Each customer comes back to the firm with a constant probability p
in each time period. The value of p depends upon the type of product as well as the
firm’s response actions such as qualifying alternate suppliers and making up for lost
production by running at maximum capacity. If a customer decides not to return to
the firm at a particular time period, the model assumes that it will return to the firm
in the next period with the same probability p. Once a customer returns to the firm,
it will continue to purchase from the firm in all future time periods.
If a customer buys from the firm at time t ¼ M þ i, it will return with one of the
following behaviors:
1. Customers can return right away without backorders at time t ¼ M þ 1. This
category of customers might have used inventory from safety stock, not used the
product, or purchased the product from other firms during the time periods 1
through M.
2. Customers who come back immediately and have backorders.
3. Customers who do not return immediately but return later to the firm with no
backorders.
The probability q represents the conditional probability that the customer who
comes back immediately at t ¼ M þ 1 will require backorders for t ¼ 1; 2; . . .; M.
In other words, given the customer has returned to the firm, the probability that he
or she will have backorders is q. The revenue from backorders is accounted for at
t ¼ M þ 1 since backorders are taken only in that time period. We assume that
customers who wait longer to return do not have backorders (behavior number 3).
The initial model assumes the firm can satisfy all the backorders. This could be
because the firm is able to monitor activity and make plans to increase capacity to
satisfy backorders. If q is small, the firm can be reasonably confident the backorders
will not exceed its capacity. Since this assumption may not be realistic, Subsection
9.3.3 discusses how the model might change if a capacity constraint limits the
number of backorders the firm can accept. Even if the lack of a capacity constraint
may not be realistic, modeling the situation without this constraint generates useful
insights into the potential benefits of increasing capacity after reopening.

9.3.2 Calculating the Firm’s Post-impact Revenue

The revenue at time periods t ¼ 1; 2; . . .; M is zero since the firm is not delivering
any product to its customers. The total expected revenue after the firm reopens is
calculated by estimating the number of customers who decide to buy from the firm
at each period after it reopens at t ¼ M þ 1. Let Xt be the number of customers who
decide to come back and purchase from the firm at time t. Xt ¼ 0 for t ¼ 1; 2; . . .; M
144 A. Vinayak and C.A. Mackenzie

For t ¼ M þ 1; M þ 2; . . . each of the n customers returns with a constant

probability p and Xt follows a binomial distribution.

At t ¼ M þ 1; XM þ 1  Binomðn; pÞ
withE ½XM þ 1  ¼ np
At t ¼ M þ 2; XM þ 2  Binomðn  XM þ 1 ; pÞ
withE ½XM þ 2  ¼ npð1  pÞ
At t ¼ M þ 3; XM þ 3  Binomðn  XM þ 1  XM þ 2 ; pÞ
withE ½XM þ 3  ¼ npð1  pÞ2
!
P
i1
At t ¼ M þ i; XM þ i  Binom n  XM þ j ; p
j¼1

with E ½XM þ i  ¼ npð1  pÞi1

Since the model assumes that a customer who returns to the firm will continue to
purchase from the firm in subsequent periods, the expected number of customers
who purchase from the firm at t ¼ M þ i is:
 
np 1 þ ð1  pÞ þ ð1  pÞ2 þ ð1  pÞ3 þ


þ ð1  pÞði1Þ
!
1  ð 1  pÞ i
¼ np
1  ð 1  pÞ
¼ nð1  ð1  pÞi Þ

Since customers that return at t ¼ M þ 1 may return with backorders, the

number of orders for the firm may exceed the number of customers XM þ 1 . The
number of customers who return with backorders is represented by the random
variable Z. The model assumes that backorders are placed only once at time t ¼
M þ 1 and Z  BinomðXM þ 1 ; qÞ.
Although it makes intuitive sense to assume that customers who did not return to
the firm immediately satisfied their demand during the shutdown period,
t ¼ 1; 2; . . .; M, from another firm, a further extension to this model may consider
situations where customers who do not return immediately but return later to the
firm also places backorders. In that case Z would need to be indexed by time t.
Since each customer orders exactly 1 product in each time period, a customer
who returns with backorders is assumed to have M backorders (one backorder for
each period that the firm was closed). Thus, the total number of orders at time
M þ 1 is M  Z þ XM þ 1 . Using the expected number of customers from the above
results and the conditional probability of placing a backorder, we calculate the
expected number of orders at t ¼ M þ 1:
9 A Quantitative Model for Analyzing Market Response … 145

0 1
Backorder
B quantity C
B C
0 1 B C
Expected number of B C
B per customer C
B C B C
¼ @ customers who return A  B þ C
B C
with backorders B C
B Regular order C
B C
@ quantity per A
customer
0 1 0 1
Expected number of Regular order
B C B C
þ @ customers who return A  @ quantity per A
without backorders customer
¼ ðnp  qÞ  ðM þ 1Þ þ np  ð1  qÞ  1
¼ npðqM þ q þ 1  qÞ
¼ npðqM þ 1Þ

The expected cumulative orders at time t ¼ M þ i for i [ 1 equals

nð1  ð1  pÞi Þ, which is equivalent to the expected cumulative number of cus-
tomers who have returned by time t ¼ M þ i.
If the firm’s per-unit selling price is c, we calculate Rt the lost revenue at time t:
8
>
> cn if t ¼ 1; 2; . . .; M
< cðnX  Z Þ if t ¼ M þ 1
Rt ¼  M þ 1 
> Pt
>
: c n XM þ i if t ¼ M þ i; i [ 1
i¼1

t.
The expected lost revenue at time t is denoted by R

9.3.3 Production Capacity Considerations

In the proposed model, it is important to look at the production capacity of the firm,
especially at time t ¼ M þ 1, when backorders may be received. The number of
orders M  Z þ XM þ 1 must not exceed the available capacity C. If
M  Z þ XM þ 1 [ C, the excess orders will be carried forward to the next time
period, t ¼ M þ 2, but capacity restrictions require that M  Z þ XM þ 1 þ
XM þ 2  2C.
Similarly, the firm can estimate and forecast the production capacity levels for
future time periods. Depending on the willingness of customers to wait for the
backorder delivery, the firm needs to prioritize production with the goal of meeting
customer needs. If customers are likely to be lost in case of a late delivery, the firm
146 A. Vinayak and C.A. Mackenzie

will have to consider whether it can temporarily increase its production capacity or
other alternatives to meet the spike in demand due to backorders.

9.4 Illustrative Example

This model can be applied to several situations. For example, a consumer-product

manufacturing firm could face a supply chain disruption forcing it to shut down
production. The firm’s customers could react in different ways. One, a retailer who
uses inventory during this period may come back to the firm immediately with
backorders to replace its inventory. Two, a retailer who temporarily switches to
another supplier may decide to come back when the firm starts producing again.
Three, a retailer who switches to another supplier may decide not to come back
when the firm starts producing again. The latter retailer may come back at a later
stage depending on the firm’s performance. By estimating the probability that the
retailer takes any of these actions, the model can account for each of these
scenarios.

9.4.1 Lost Revenue with Backorders

We illustrate the application of this model to a scenario in which a firm experiences

a supply disruption and must stop production for M ¼ 4 periods. Table 9.1 pro-
vides values for the parameters in this example.
The average value and standard deviation of lost revenue at each time period
were obtained via 10,000 simulations of the supply chain disruption model for
customer reactions using the parameters in Table 9.1. Since the firm is unable to
produce during t ¼ 1; 2; . . .; M, the lost revenue at each time period equals the total
revenue per period at undisrupted production rates. Because some of the lost rev-
enue in the first M periods may be recaptured via backorders, the lost revenue may
not actually be completely lost. In the model, this is accounted for at t ¼ M þ 1.
Since the binomial distribution can be approximated by the normal distribution,
we calculate 90% probability intervals for the lost revenue R  t 1:64St , where R
 t is
the average lost revenue and St is the standard deviation for time period t.

Table 9.1 Parameters

Symbol Value
Number of customers or demand per period n 100
Per unit selling price in dollars c 1000
Probability with which customers return in each period p 0.15
Conditional probability of backorder requirement q 0.50
Duration of the disruption in periods M 4
9 A Quantitative Model for Analyzing Market Response … 147

90% probability interval

120,000

100,000
Lost revenue in dollars

80,000

60,000

40,000

20,000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
Time period

Fig. 9.2 The firm’s expected lost revenue per period from the supply chain disruption

The results are illustrated in Fig. 9.2. The expected lost revenue reduces to less than
1% of the total pre-disruption revenue after t ¼ 34, and the revenue from sales is
almost completely restored to pre-disruption levels. If each time period is a week,
the firm returns to its full performance in approximately 8 months.
As depicted by the probability interval, there is a 5% probability the lost revenue
will be less than $1000 within 24 periods and a 5% probability the lost revenue will
be greater than $1000 for at least 42 time periods. The expected lost revenue is at its
maximum value for the first four periods, which is equal to the total pre-disruption
revenue per period and then drops from $100,000 to $55,000. The downward spike
in the expected lost revenue is due to the backorders. The lost revenue at t ¼ 5 has a
5% probability of being as low as $33,444, which would occur if many customers
return with backorders. If very few customers return with backorders, the lost
revenue could be $76,556, which is the 95% upper bound for lost revenue in that
time period. At time t ¼ 6, the expected lost revenue increases to $72,250 and then
gradually decreases over time as the firm recovers from the disruption.

9.4.2 Lost Revenue Without Backorders

Certain disruptions may not allow for backorders. For instance, a restaurant could
be closed for a period of time because of food poisoning, and when it reopens,
backorders are not realistic because the delivered product is a service that cannot be
backordered. We can assign q ¼ 0 in the simulation model to reflect such a situ-
ation. Figure 9.3 illustrates this scenario without backorders. Here, the expected
cumulative lost revenue is higher because of the lack of backorders.
148 A. Vinayak and C.A. Mackenzie

90% probability interval

120,000

100,000
Lost revenue in dollars

80,000

60,000

40,000

20,000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
Time period

Fig. 9.3 The firm’s expected lost revenue without backorders

90% probability interval

350,000

300,000
Lost revenue in dollars

250,000

200,000

150,000

100,000

50,000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
Time period

Fig. 9.4 The firm’s expected lost revenue with varying demand from customers

9.4.3 Customers with Varying Demand

The assumption that each customer buys exactly one product may not be valid. This
sub-section extends the simulation model to accommodate varying demands from
the firm’s customers. The demand from customer l is nl where l ¼ 1; 2; . . .; n. We
assume each nl follows a discrete uniform distribution between 1 and 5, i.e.,
nl  U ð1; 5Þ. Backorders are ignored for simplicity. Parameters from Table 9.1
along with a simulation of nl  U ð1; 5Þ were used in the model with varying
demand from different customers to run 1000 simulations. The results are illustrated
in Fig. 9.4.
9 A Quantitative Model for Analyzing Market Response … 149

The maximum total expected lost revenue is much higher than the previous cases
because the total initial demand is more than in the previous cases. The shape of
recovery is very similar to the model in Sect. 9.4.1 because each customer returns
with the same probability. The expected lost revenue reduces to less than 1% of the
total pre-disruption revenue after time period 25. This is comparable to the results
from the model in Sects. 9.4.1 and 9.4.2. The results might look different if cus-
tomers returned with different probabilities. For example, perhaps customers with
more demand from the firm might be more likely to return because it may be more
difficult for these customers to get all of their demand satisfied from the firm’s
competitors.

9.4.4 Risk Management Insights

A firm can use this model to understand how parameters impact the firm’s expected
lost revenue. The results discussed are highly sensitive to the value of p. As
illustrated in Fig. 9.5, the firm recovers more quickly when the probability with
which customers are gained back in each period is larger. This makes intuitive sense
since firms with loyal customers tend to recover faster. We observe that the
downward spike at time t ¼ M þ 1 is directly correlated with p. At t ¼ M þ 1, the
cumulative expected number of orders including the backorders is directly pro-
portional to the probability of customers buying from the firm at a given time period
after the disruption.
The expected lost revenue in time period t ¼ 5 is negative when p ¼ 0:4. This
negative value represents revenue greater than $100,000 in that period, a trend that
continues as the value of p increases. Such situations may require the firm to work

120,000

100,000
Expected lost revenue in dollars

80,000

60,000

40,000

20,000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
-20,000

-40,000
Time period

p = 0.15 p' = 0.05 p'' = 0.40

Fig. 9.5 Sensitivity of expected lost revenue to p

150 A. Vinayak and C.A. Mackenzie

Lost revenue in Dollars ($) 120,000

100,000

80,000

60,000

40,000

20,000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
Time period, i

q = 0.5 q' = 0.20 q'' = 0.80

Fig. 9.6 Sensitivity of expected lost revenue to q

at overcapacity immediately after reopening to meet the sudden increase in demand,

which is an integral part of the firm’s recovery process (Sheffi and Rice 2005). This
provides an important insight to the firm’s management that in case of a production
shut down, it may need to be prepared to temporarily increase its production
capacity after reopening. The model also helps to estimate the maximum production
the firm would need in order to meet the demand.
A similar trend can be observed with the sensitivity analysis on q, as illustrated
in Fig. 9.6. The time of recovery remains the same since p is constant. This is also
an important insight since firms need to think about the likelihood that their cus-
tomers will place backorders. Accordingly, they can devise suitable production
plans.
Firms can prepare for disruptions by using this quantitative model to estimate the
potential loss in revenue due to a shutdown of operations from a supply chain
disruption. Moreover, the model can be used to evaluate whether preparation
strategies are economical. Investments to reduce the chances of a supply chain
disruption itself may not be practical or economically reasonable. In such cases,
firms can use the expected lost revenue from the model to decide whether or not
investments to reduce the risk of a disruption are cost effective. Preparedness
measures can help reduce the probability of a disruption and/or allow the firm to
regain more of its revenue following a disruption. Even if the disruption cannot be
avoided, preparedness measures could reduce the shutdown length M. It is logical
to assume that the probability of customers returning depends on M. Decision
makers can make decisions about investing in preparedness measures based on
understanding how much revenue will be lost if the disruption occurs as well as the
chances of the disruption itself.
For example, the cumulative expected lost revenue in the illustrative example is
$536,667. A risk-neutral firm should spend at most $536,667 in preparing for this
9 A Quantitative Model for Analyzing Market Response … 151

type of disruption and should spend much less once the probability of a disruption
is considered. Investing in risk reduction strategies such as inventory or an addi-
tional supplier could reduce the time the firm is closed. The chances of customers
returning immediately to the firm are higher if the firm is not closed as long. This
would increase the probability p and reduce the cumulative expected lost revenue.
In the example, increasing the value of p from 0.15 to 0.2 decreases the total
expected lost revenue from $536,667 to $360,000. Strategies that could reduce
p from 0.15 to 0.2 are economically wise if these strategies cost less than $176,667,
assuming an extremely high probability of disruption.

9.5 Conclusions

This chapter proposes a model to quantitatively represent the way customers or the
marketplace reacts to a supply chain disruption. The model is used to identify the
impact of such an event on the firm’s revenue. From the firm’s perspective, the total
expected lost revenue is a measure of the impact of the supply chain disruption and
can be analyzed to draw useful insights to manage the risk of such an event.
The results obtained from applying the model serves as an illustration of the
usefulness of the model. The simulation of the customer response model allows the
firm to anticipate how customers might react to a supply chain disruption. The
model can inform decision making to manage the risks of a supply chain disruption.
Insights from the model can reveal how a disruption can affect the firm’s revenue
depending on the customers’ decisions and the time a firm takes to recover to its
pre-disruption revenue levels. Sensitivity analysis on the model parameters reveals
how the probability at which customers return to the firm impacts the recovery time.
Firms that expect most of its customers to return with backorders may need to
temporarily increase production capacity. Management can use the cumulative
expected lost revenue projections to evaluate investments aimed at increasing the
firm’s resilience to supply chain disruptions.
The proposed model could be developed further by relaxing some of the
assumptions. For instance, customers may return with different probabilities or
probabilities that change over time. Further extensions to this research can include
the development of a decision-making framework to utilize the mathematical model
to determine the most effective risk management decisions during a supply chain
disruption. Another extension is to model the probability of a supply chain dis-
ruption along with the total expected lost revenue to make sound management
decisions regarding investments in preparedness measures. An optimization model
that minimizes the lost revenue during the disruption periods can also serve as a
future extension to this chapter.
152 A. Vinayak and C.A. Mackenzie

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Chapter 10
Supply Chain Risk Management
in the Transmission and Amplification
of Disruptions

Artur Swierczek

Abstract The concept of risk management within the supply chain framework
ought to involve indirect effects of disruptions. In other words, not only should it
take into consideration the risk sources and their direct consequences, but also look
into the indirect disruptions that may be transmitted and amplified in the supply
chain structure. The transmission of disruptions means that the negative effects of
risk are extended to a larger number of participants in a supply chain. If the negative
risk effects are additionally magnified during the transmission, this suggests the
occurrence of the amplification of disruptions. In other words, the subsequent links
in a supply chain are exposed to a stronger impact of disruptions in the transmis-
sion. Thus, the supply chain management needs to apply a certain approach that
enables to mitigate the negative consequences of the transmission and amplification
of disruptions in supply chains. In this chapter, we review the extant literature on
the essence, sources and factors of the transmission and amplification of disruptions
in supply chains. In particular, we put emphasis on the issue of supply chain
integration that may either drive or inhibit the transmission and amplification of
disruptions. Having linked the obtained findings with the classical concepts of risk
management, we develop and assess a framework of risk management that aims at
mitigating the transmission and amplification of disruptions in supply chains.

10.1 Introduction

A myriad of examples derived from the practice of supply chain management

evidence that risk consequences at the interorganizational level may be very pricey,
especially when they take the form of transmission and amplification of disruptions.
For instance, the supply chain of Ericsson lost an estimated $2 billion in 10 min

A. Swierczek (&)
Department of Business Logistics, University of Economics in Katowice, Katowice, Poland
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 155

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_10
156 A. Swierczek

when a fire that happened at its manufacturer of chips left Ericsson with no alter-
native source of supplies (Norrman and Jansson 2004). On the other hand, the
supply chain of Boeing was affected by the loss of $2.6 billion when its two key
suppliers failed to deliver critical parts on time (Radjou et al. 2002). The afore-
mentioned and other examples, not cited here, indicate the magnitude of losses that
affect supply chains in the result of the transmission and amplification of disrup-
tions. However, the literature concerning this issue is still scarce, and the existing
works refer to the problem partially, without employing a holistic approach.
Consequently, to the best of our knowledge, there is no framework that shows how
to deal with the phenomenon of the transmission and amplification of disruptions in
supply chains.
The core issue for mitigating the transmission and amplification of disruptions is
to establish the appropriate level of integration in supply chains. The transmission
of disruptions is determined by its range, while the amplification is indicated by the
strength of disruptions. Therefore, this phenomenon refers to supply chain inte-
gration that may either drive or inhibit the range of transmission and strength of
disruptions. In other words, the supply chain integration demonstrates a trade-off
between the pursuit of efficiency/effectiveness and the negative consequences of
transmitted and amplified disruptions. Consequently, the concept of risk manage-
ment in the transmission and amplification of disruptions should take into account
that integration contributes to mitigating the transmission and amplification of
disruptions, without an excessive drop in the supply chain efficiency/effectiveness.
Based on the traditional risk management concepts, we develop subsequent steps
in the process of risk management in the transmission and amplification of dis-
ruptions, including identification of potential and actual disruptions, estimation of
disruptions, evaluation of the most appropriate approach to deal with the identified
and estimated disruptions, as well as application of the mitigating strategy. Having
described the activities performed in each of the steps, we assess the research model
of risk management in the transmission and amplification of disruptions, and draw
conclusions significant for the practice of supply chain risk management.

10.2 The Phenomenon of the Transmission

and Amplification of Disruptions in Supply Chains

The concept of the transmission and amplification of disruptions in supply chains

has not yet been a subject of intense research either in theoretical or empirical
frameworks. Therefore, there are very few previous works describing multidi-
mensional aspects of this issue. This problem was partially raised by Juttner et al.
(2003) who mention the “network effect” which is linked to the negative conse-
quences of risks emanating from the supply chain relationships. Similarly, Kersten
et al. (2012) mention that supply chain risks are the risks that affect at least two
10 Supply Chain Risk Management … 157

companies in a supply chain, and it is irrelevant whether a company is affected by

supply chain risk directly or indirectly. Therefore, the transmission of disruptions is
not limited to one level of a supply chain, and the companies that are only affected
indirectly emit these risks to subsequent links of their network (Kersten et al. 2012).
The problem has also been addressed by Cheng and Kam (2008) who suggest that
risk may arise at the node or link and affect other links and nodes in the structure of
a supply chain. In general, the transmission of disruptions means that the negative
effects of risk are extended to a larger number of participants in a supply chain. The
primary sources of these disruptions are external and internal risk factors. The
external risk factors are located outside the supply chain, while the internal factors
remain within the supply chain (Rao and Goldsby 2009).
The transmission of negative effects originating from the risk factors requires at
least two companies in a supply chain to be involved in a process. One company is
affected by a direct impact of these risk factors, whereas the other one is affected by
an indirect influence. The risk factors affect a supplier directly, causing a certain
disruption, which is then transmitted to other participants inside the structure of the
supply chain. In this case, the supplier is the initial link, while the actors at the other
levels of the physical flow of products in the supply chain—producer and customer
—are exposed to an indirect impact of these risk factors. Consequently, an indirect
impact of risk factors constitutes the transmission of disruptions.
The negative risk effects may spread out to a larger number of participants in a
supply chain. Following the opinion of Svensson (2000), the range can be varied,
but it generally falls within two types of disruptions located at the extreme positions
of the continuum:
• limited range of disruptions, usually bilateral;
• widespread disruptions, generally holistic.
In the limited range of disruptions, the negative effects of risks are transmitted to
a small number of links in a supply chain (Svensson 2000). For the purpose of this
chapter, this range consists of only two companies, which indicates the transmission
of disruptions from one company to the other (Kersten et al. 2007). At the other
extreme continuum outlining the range of the transmission of negative effects are
widespread disruptions. The transmission of these disruptions affects all actors in a
supply chain structure. In general, the effects of risks are positioned between the
two poles of limited range and widespread disruptions. As a result, a certain number
of actors participating in a supply chain will be exposed to the negative effects of
risk (Swierczek 2014). In terms of the direction of transmission, the propagation of
supply chain disruptions may take the form of forward or backward transmission
(Swierczek 2012). The forward transmission denotes that the disruptions caused by
the risk factors in the initial link are then transferred to the other echelons down-
stream in a supply chain. The backward transmission is originated when disruptions
in the ultimate link of a supply chain are transferred upstream to the initial echelons.
The transmission of negative risk effects often results in the amplification of
disruptions. This is consistent with the outcome of the analysis carried out by
158 A. Swierczek

Juttner (2005) who points out that supply chain risk is likely to affect several
organizations through the ‘rippling effect’. According to Juttner et al. (2003), the
strength of disruptions may be either absorbed or amplified during transmission. In
general, the amplification of disruptions means that each affected link in a supply
chain can be exposed to stronger effects of risks. In other words, smaller disruptions
can snowball into stronger effects (Tsai et al. 2013), setting off the ‘snowball effect’.
It means that subsequent links are exposed to a stronger impact of disruptions in the
forward transmission. The transmission and amplification of disruptions may also
be manifested in the form of new disruptions, different from the original ones.

10.3 The Concept of Risk Management

in the Transmission and Amplification of Disruptions

10.3.1 Conceptual Framework of the Risk Management

Concept

Risk management is the concept used to identify, characterize, quantify, evaluate

and mitigate risk and its negative consequences that may produce undesired out-
comes (Aven and Kristensen 2005). The framework of risk management in the
transmission and amplification of disruptions might be developed on the basis of
traditional risk management concepts. However, in practice, the accurate use of risk
management in the transmission and amplification of disruptions is a daunting task.
Based on the previous concepts of risk management, we identify the following
steps in the process of risk management in the transmission and amplification of
disruptions: formulation of the goals of risk management, analysis of the envi-
ronment in terms of disruptions that either currently exist or will emerge in the near
future, including: identification of potential and actual disruptions that may be
transmitted to and amplified in other supply chain links, estimation of disruptions,
evaluation of the most appropriate approach for each of the identified and estimated
disruptions, and finally, application of mitigating strategies congruent with one of
the following approaches: passive, reactive or proactive. The conceptual framework
of risk management in the transmission and amplification of disruptions is depicted
in Fig. 10.1.
The concept consists of five constructs and relationships. The constructs,
described in the following sections of the chapter, are anchored in the literature and
embrace a number of activities performed in each step. In general, the model
investigates whether and how subsequent steps are determined by the risk man-
agement activities, and how each step in the sequence of activities affects the
following step of the risk management process in the transmission and amplification
of disruptions.
10 Supply Chain Risk Management … 159

Fig. 10.1 Conceptual

framework of supply chain Formulation of the goals
risk management in the of risk management
transmission and
amplification of disruptions
H1+

R Identification of potential
and actual disruptions
I
S
K H2+

A
Estimation of disruptions
N
A
L
H3+
Y
S Evaluation of the most
I appropriate approach to
S deal with the identified
and estimated disruptions

H4+

Application
of the mitigating strategy

10.3.2 Formulation of the Goals of Risk Management

Formulation of the goals is the first step in the process of risk management. As the
phenomenon of the transmission and amplification of disruptions is determined by
the range of transmission and strength of disruptions, it is inextricably linked to the
issue of supply chain integration. In other words, the supply chain integration may
either drive or inhibit the range of transmission and strength of disruptions. For
instance, the study carried out by Swierczek (2014) suggests that the intensity of
supply chain integration contributes to increasing the strength of disruptions in the
flow of product and information. This issue has also been highlighted by Spekman
and Davis (2004) who suggest that interdependency carries risk and its negative
effects into supply chains. Juttner et al. (2003) demonstrates that the ‘network
effect’ in the transmission of disruptions may arise from the relationships among
supply chain partners. In the same vein, Swierczek (2016) asserts that based on the
relationships between integration and the transmission and amplification of dis-
ruptions, one may identify specific clusters of supply chains demonstrating that the
more intense supply chain integration contributes to the amplification of disruptions
in the material flows in the forward and backward transmission. Drawing on these
160 A. Swierczek

findings, we posit that a lower level of integration may mitigate the phenomenon of
the transmission and amplification of disruptions by decreasing the mutual
dependence of companies in a supply chain (Tang 2006). However, it will simul-
taneously bring a lower level of the supply chain efficiency/effectiveness.
In the light of the aforementioned, supply chain integration, to a different extent,
contributes to the transmission and amplification of disruptions, having both aug-
mentative and mitigating character. Therefore, supply chain integration is a mile-
stone in searching for the appropriate strategy to deal with the transmission and
amplification of disruptions in contemporary supply chains.
The establishment of optimal integrative relationships among the supply chain
partners may contribute to mitigating the negative effects of the transmission and
amplification of disruptions (Hult et al. 2004), thus ensuring the satisfactory
efficiency/effectiveness. Consequently, the concept of supply chain risk manage-
ment in the transmission and amplification of disruptions should pertain to supply
chain integration. Therefore, we posit that ensuring the appropriate level of inte-
gration may contribute to obtaining the goals of risk management. The optimal
level of integration allows to mitigate the transmission and amplification of dis-
ruptions, without an excessive drop in the supply chain efficiency. Most of the
relationships between the factors concerning supply chain integration demonstrate a
trade-off between the efficiency/effectiveness and disruptions (Zsidisin and Ritchie
2009), which requires looking for balance between the extreme values of a specific
factor.
Consequently, we highlight the specific role of the relationship between the
efficiency/effectiveness of supply chain management on the one hand, and the
extent of transmission and strength of disruptions on the other hand. Christopher
(2002) mentions the following major factors of supply chain integration that
indicate a specific relationship between the supply chain efficiency/effectiveness,
and the transmission and amplification of disruptions: the number of supply chain
partners, outsourcing, globalization of supply chains, backup infrastructure and
extra capacity/inventory, as well as transparency of the flow of information among
the supply chain links. The first three factors concern the structure of links con-
stituting integrative relationships, whilst the remaining factors refer to the intensity
of supply chain integration. For instance, decreasing a number of supply chain
partners may lead to single sourcing, whereby one supplier is solely responsible for
all supplies of an item. Several well-documented studies show that the major supply
chain disruptions have been caused by a failure at a single source (Nishiguchi and
Baaudet 1998). Even though there are many benefits of reducing the partner base of
supply chains, it is also widely recognized that it brings an increased risk
(Christopher 2002).
Outsourcing, as another factor of integration, produces the higher
efficiency/effectiveness of supply chain management; however, it also simultane-
ously results in the increased supply chain complexity that may be a driver of the
transmission and amplification of disruptions (Peck 2004). The study conducted by
Juttner (2005) shows that globalization is the most important factor increasing the
exposure of supply chains to disruptions. The next factor—an increased level of
10 Supply Chain Risk Management … 161

inventory—usually goes hand in hand with the tendency to maintain excessive

capacity of technical infrastructure used in the physical flow of products. This is
another way to reduce the increased susceptibility of contemporary supply chains to
the transmission and amplification of disruptions.
Therefore, the fundamental goal of risk management in the transmission and
amplification of disruptions is to achieve two tightly-related objectives of the
efficient/effective supply chain management and limited transmission and amplifi-
cation of disruptions. The first step of risk management should then be followed by
the analysis of risk, including identification of potential and actual disruptions,
estimation of disruptions and evaluation of the most appropriate approach to deal
with the identified and estimated disruptions. Therefore, we hypothesize as follows:
H1 Formulation of the goals of risk management is positively related to the
identification of potential and actual disruptions.

10.3.3 Identification of Potential and Actual Disruptions

The purpose of the identification of disruptions is to determine all disruptions that

are likely to be transmitted and amplified in the structures of supply chains (Khan
and Burns 2007). In practice, one can use several methods for collecting infor-
mation about the negative risk effects. These include: experience of managers, use
of decision support systems, performance of surveys, “brainstorming” or recourse
to the external consultants (Hillson 2002). However, from the institutional point of
view, the use of such methods should be complemented with determination of the
scope of diagnosis. In other words, it is important to identify the specific charac-
teristics of links relevant from the perspective of the transmission and amplification
of disruptions. Gilbert and Gips (2000) argued that while it makes sense to consider
potential disruptions at the supplier’s suppliers, it is less understandable and may be
more costly to read the effects of risk at further stages of a supply chain structure.
Hence, the key issue is to determine the scope of diagnosis for the purpose of
outlining how many links are to be involved in the identification process. The
problem is that the phenomenon of the transmission and amplification of disrup-
tions may not even be observable in particular situations. It means that the negative
risk effects occurring in a specific link of a supply chain are not necessarily
amplified during the transmission. In this case, time and financial expenditures
incurred in connection with identification of such disruptions are not justified,
because they do not lead to a higher level of efficiency in the entire supply chain.
The issue of the transmission and amplification of disruptions in supply chains is
complex and multifaceted, as there are two closely related phenomena involved,
namely the range of transmission and the amplification of disruptions. The most
interesting situation concerns the disruptions which were amplified and transmitted
to a larger number of firms in a supply chain. However, the relations between the
range of transmission and the strength of disruptions are only illustrative—Fig. 10.2.
162 A. Swierczek

Fig. 10.2 Matrix of the range High

of transmission and the Amplification Amplification
of disruptions of disruptions
strength of disruptions. in the transmission in the transmission

Strength of disruptions
Source Reproduced from to a smaller number to a larger number
Swierczek (2013) of firms of firms
in a supply chain in a supply chain

Mitigation Mitigation
of disruptions of disruptions
in the transmission in the transmission
to a smaller number to a larger number
of firms of firms
in a supply chain in a supply chain
Low

Limited range Widespread disruptions

Range of transmission

It is rather uncommon that the effects of risk are transmitted to all companies in a
supply chain, having a holistic impact. On the other hand, the disruptions are not
only amplified in the transmission, but they may also be mitigated.
It is also important to identify the risk factors that form the sources of disruptions
amplified during the transmission. The most difficult to identify is the transmission
of disruptions caused by the risk factor which directly affects a larger number of
companies in a supply chain (Cheng and Kam 2008). The risk factors such as
natural disasters or financial crises often simultaneously and directly affect a larger
number of links (van Dorp 2004). The disruptions caused by this group of risk
factors are not sequential in nature and they are often interdependent (van Dorp and
Duffey 1999).
The particular risk factor which affects a larger number of companies in a supply
chain may be referred to as ‘common risk factor’. The identification of potential and
actual disruptions is a critical step in the risk management process (Kliendorfer and
Saad 2005) that should then be followed by the estimation of disruptions (Berg
et al. 2008). Kern et al. (2012) argues that supply chains have to develop the
capability to predict disruptions early, so that they can be duly assessed and miti-
gated. Therefore, risk estimation is highly dependent on the quality of risk iden-
tification. Consequently, we define the following hypothesis:
H2 Identification of potential and actual disruptions has a positive effect on the
supply chain risk estimation.

10.3.4 Estimation of Disruptions

The estimation of the phenomenon of transmission and amplification of disruptions

should be preceded by the identification of risk factors, whose negative effects can
be transferred with amplified strength to the subsequent supply chain links.
10 Supply Chain Risk Management … 163

The managers usually pay special attention to the effects caused by the impact of
a specific factor, at the same time underestimating its indirect impact. It may
suggest that the strength of disruption caused by the direct impact of an external risk
factor is similar to the strength of impact of the same disruption during the trans-
mission. This evokes the tendency to ignore the phenomenon of amplification
during transmission and to focus attention solely on the strength of disruptions
caused by the direct impact of an external risk factor. It is also more difficult to
determine the degree of amplification of a disruption caused by a ‘common risk
factor’ as a result of transmission from one unit to another, if the same disruption
has a direct impact on the other link, causing a higher level of disruptions in this
link. In such a situation, the estimation intended to determine to what degree the
disruption transferred from one link caused the amplification of disruption in
another link is practically impossible.
The strength of disruption in a particular link depends on the effects caused by
the direct impact of the risk factor on this link, as well as on the same disruption
transferred during the transmission. The determination of the degree of the
amplification of disruption is additionally hindered by the fact that common risk
factor effects can be potentially transferred from several companies at the same
time. Christou and Amendale (1998) propose to include the following activities in
the estimation of disruptions: considering the goals of risk management, deter-
mining the probability of failure to achieve these goals, and finally, defining con-
sequences resulting from any failure to achieve the goals of risk management.
In order to estimate the extent of the transmission of disruptions, Juttner (2005)
asked the respondents to rate the extent to which each of a range of prominent
disruptive events affected their own organization, their suppliers and customers.
The analysis concerning the extent of the transmission of disruptions may also be
determined by the number of supply chain links indirectly affected by the negative
risk effects. The estimation of the amplification of transferred disruptions may in
turn consist in assigning the scores indicating the strength of risk effects that
indirectly affect all supply chain partners. If no difference between the scores in the
subsequent links is revealed, the crisis affects the whole supply chain equally. On
the other hand, an increase in the value of scores between suppliers, manufacturers
and customers demonstrates the amplification of transmitted disruptions.
The estimation should serve in the first place as a reliable foundation for taking
decisions concerning the mitigation of the transmission and amplification of dis-
ruptions. The main idea is to enable the comparison of the estimation results
concerning the range of transmission and strength of amplified disruptions with the
purpose of risk management. As a result of this comparison, a specific attitude
should be adopted towards the identified and potential disruptions, in the form of a
developed and implemented strategy (Khan and Burnes 2007). This will enable
taking efficient and effective decisions that will make the supply chain unsuscep-
tible to risk factors and their negative effects, whose range of transmission may
164 A. Swierczek

increase and strength may be amplified (Stecke and Kumar 2009). Kern et al.
(2012) demonstrate that the estimation of disruptions should result in classifying all
identified disruptions and putting them in order of priority to select the most
appropriate approach to deal with the identified and estimated disruptions. Thus, the
following relationship is hypothesized.
H3 Estimation of disruptions has a positive impact on evaluation of the approach
that is supposed to deal with the identified and estimated disruptions.

10.3.5 Evaluation of the Most Appropriate Approach

to Deal with the Identified and Estimated Disruptions

Evaluation should follow the estimation of disruptions and pertain to integration as

a driver of the transmission and amplification of disruptions. Based on the study of
Rice and Caniato (2003), we distinguish between the following types of attitudes as
ways to deal with disruptions: passive, reactive and proactive.
Employing the passive approach denotes avoiding any activities that would
potentially or effectively contribute to the transmission and amplification of dis-
ruptions. This approach is more popular if the likelihood of risk and severity of its
negative effects are high. The reactive approach tends to ensure the optimal
structure and intensity of supply chain integration (Mentzer 2004). In practice, it
pertains to classical means of mitigating the transmission and amplification of
disruptions in supply chains, such as establishing an appropriate structure of supply
chain network, increasing the transparency in the information flow, maintaining
backup infrastructure and excessive capacity/inventory. The proactive approach
denotes ensuring responsiveness and time compression of information and physical
flow of products (Christopher and Peck 2004). In line with the opinion of Smeltzer
and Siferd (1998), the proactive approach provides unique capabilities for supply
chains operating worldwide. As demonstrated by the study of Blackhurst et al.
(2005), the tenets of proactive initiatives enable to mitigate the severity of dis-
ruptions. The identification and estimation of the negative risk effects, followed by
evaluation of the relevant approach to deal with the disruptions, are necessary to
initiate the mitigating activities. The selected mitigating strategy will only work
well if all previous steps of risk management are performed carefully and correctly
(Kern et al. 2012). Therefore, we define the following hypothesis.
H4 Evaluation of the most appropriate approach that tends to deal with disrup-
tions has a positive effect on the application of the mitigating strategy in supply
chains.
10 Supply Chain Risk Management … 165

10.3.6 Application of the Mitigating Strategy

The application of the mitigating strategy is the last step of risk management in the
transmission and amplification of disruptions. The mitigating strategy should follow
the appropriate approach that aims to deal with the identified and estimated dis-
ruptions. The application of the mitigating strategy consistent with the passive
approach denotes that some business opportunities are too risky as compared to the
potential benefits. For instance, supply chains may refuse to sell products to the
customers with unhealthy financial standing, abandon the markets whose future
perspective is uncertain, or give up the idea to enter the international markets due to
high risk and strength of negative effects (Sheehan 2009). Therefore, employing the
mitigating strategy consistent with the passive approach may result in lowering the
intensity of integration among geographically-dispersed supply chain partners, or
dropping the idea of closer collaboration with other companies in manufacturing
and product distribution.
Among the strategies consistent with the reactive approach, one may enumerate
the following: joint efforts to share risk-related information, increased stockpiling
and use of buffer stock, maintaining the excess capacity of technical infrastructure
and selective outsourcing operations (Soler and Bassetto 2008). These strategies
ought to ensure balance between the supply chain efficiency and the negative
consequences of the transmission and amplification of disruptions.
Mitigating strategies consistent with the proactive approach include establishing
a flexible base of partners, flexible transportation and manufacturing, as well as an
agile configuration of the supply chain structure. The cornerstone of the proactive
approach is flexible and agile integration in supply chains. For instance, main-
taining a flexible base of partners is described by Billington et al. (2002) who give
the example of a supply chain that uses double sourcing for its manufacturing
process. The first manufacturing facility assembles the product in the quantity that
meets the base (average) customer demand, while the second one delivers the
product if the demand exceeds its base value. Similarly, as noted by Tang (2006),
the strategy of flexible transportation consists in using multi-modal transportation,
multi-carrier transportation and multiple routes.
Aside from the strategy of flexible resources, it is also worth mentioning the
strategy of agile configuration of a supply chain structure. As highlighted by
Blackhurst et al. (2005), if one link in a supply chain structure may cause a certain
risk, then it is necessary to conduct quick reconfiguration of the supply chain
structure in order to prevent the transmission of disruptions.
The aforementioned strategies are not unique in the sense that they serve as a
means of mitigating the transmission and amplification of disruptions (Ellegaard
2008). On the contrary, they may be successfully used in other decision making
situations. However, from the standpoint of using supply chain integration to deal
with the transmission and amplification of disruptions, the described strategies
appear to be the most suitable and adequate, as they concern both the structure and
the intensity of integration.
166 A. Swierczek

10.4 Methodology

10.4.1 Sample and Measures

In order to assess the research model that depicts the concept of risk management in
the transmission and amplification of disruptions, we conducted an exploratory
study with a quantitative survey as a method of data collection. The structure of the
interview questionnaire corresponds to the goal of the paper and enables to test the
research hypotheses. It consists of several sections examining subsequent steps in
the concept of risk management: formulation of the goals of risk management,
identification of potential and actual disruptions that may be transmitted to and
amplified in other supply chain links, estimation of disruptions, evaluation of the
most appropriate approach for each of the identified and estimated disruptions, as
well as application of the mitigating strategy. Each step consisted of detailed
variables demonstrating certain managerial activities. The variables were measured
with the 7-point Likert scale, indicating the intensity of particular activities in the
risk management process, and anchored between the values of “never” and
“always”.
The research had a non-exhaustive character. The set of data was collected in
2015. The target sample included 122 companies operating in European supply
chains. The companies had at least one supplier and one customer, and were leaders
or major links in their respective supply chains, having a relatively strong position
as compared to the preceding and subsequent links in the supply chain structure.
The obtained responses were additionally processed in order to reveal if the man-
agers of companies were aware of risk factors, their sources and consequences that
may potentially affect the investigated companies and their upstream and down-
stream partners. The solicited companies represented the manufacturing (55% of the
sample) and trading (45% of the sample) sectors. Most manufacturers operated in
the fabricated metal products sector, mining industry, industrial and commercial
machinery sector and automotive industry. The trading companies distributed
cross-industry products, mainly household goods and clothes, chemicals, groceries
and electronic equipment. In terms of size, the sample consisted of medium and
large companies. The prevailing share of 37% of the sample employed from 50 to
249 staff, while the rest employed above 250 people.

10.4.2 Partial Least Square (PLS) Path Model

In order to assess the research model, the PLS Path Model procedure was
employed. In the opinion of Ainuddin et al. (2007), the use of PLS is especially
suited to exploratory studies, where the measures are new and the relationships have
not been previously tested. This is confirmed by Tsang (2002) who argues that the
PLS procedure is particularly suitable for data analysis at the early stage of a theory
10 Supply Chain Risk Management … 167

development, where the conceptual model and its measures are not well developed.
In addition, the study carried out by Kern et al. (2012) used the PLS Path Model to
investigate the relationships between the steps in the classical risk management
concept in supply chains. All these support the use of PLS as a method of model
assessment. As a rule of thumb for PLS, the sample size should be ten times larger
than the largest number of indicators of the construct in the outer model, or ten
times larger than the largest number of structural paths directed at a particular
construct in the inner path model (Chin 1998).
The sample size used in the study is 122, whereas the largest number of indi-
cators in the proposed outer model is 5, and the largest number of structural paths
directed at a particular construct in the proposed path model is 1. Therefore, the
study meets the criterion of a sample size.
PLS requires that the dependent and independent variables should be specified
before carrying out any analysis. In order to check the hypothetical structure of
constructs in the model, the Exploratory Factor Analysis (EFA) with the Principal
Component Analysis (PCA) and Varimax Rotation was conducted. There were 5
factors chosen for the analysis. The inspection of anti-image correlation matrix
demonstrated that the measure of individual sampling adequacy (MSA) was above a
nominal cut-off point of 0.5. In addition, the factor analysis confirmed that variables
demonstrated sufficient factor loadings above the value of 0.6. Consequently, the
model presented in Fig. 10.3 was obtained and used for the further PLS analysis.
The PLS Path Model of this study consists of the inner model, which is com-
prised of constructs and their hypothesized relationships, and the outer model,
describing the relationship between latent and manifest variables (Tenenhaus et al.
2005). The reliability and validity of the outer model was assessed first, and then
followed by the assessment of the inner model (Hulland 1999).

10.5 Results

10.5.1 Outer Path Model

The proposed model has reflective items from the latent variable to the manifest
variables in their blocks. An in-depth study of the theory provides a clarification of
the generative nature of constructs (Fornell and Bookstein 1982). In the study
conducted by Kern et al. (2012), the steps in the classical concept of risk man-
agement in supply chains are also manifested by reflective items. The application of
the reflective outer model posits that changes in constructs are expected to be
manifested by changes in all of their indicators. In the model, the observed items
ought to be highly correlated, as they explain the same construct (Jarvis et al. 2003).
Consequently, removing any item from the block of variables should not have a
significant effect on the latent variable. In other words, the observed items con-
stituting a reflective block do not need to represent all the aspects that form the
168 A. Swierczek

Formulation_1

Formulation_2
Formulation of the goals
Formulation_3 of risk management

Formulation_4 FORMULATION

Formulation_5
H1+

Identification_1

Identification_2
Identification of potential
Identification _3 and actual disruptions
IDENTIFICATION
Identification _4

Identification _5
H2+

Estimation_1

Estimation _2
Estimation of disruptions
Estimation _3 ESTIMATION

Estimation _4

H3+
Evaluation_1

Evaluation_2
Evaluation of the most
Evaluation_3 appropriate approach
to deal with disruptions
Evaluation_4 EVALUATION

Evaluation_5
H4+
Mitigation _1

Mitigation_2
Application
of the mitigating strategy
Mitigation_3
MITIGATION
Mitigation_4

Mitigation_5

Fig. 10.3 PLS Path model

10 Supply Chain Risk Management … 169

concept (McDonald 1996). In fact, the items are interchangeable and share the same
construct.
The reflective outer model was assessed with respect to its reliability and con-
struct validity. Reliability testing usually includes internal consistency and com-
posite reliability (CR). Each of five constructs indicates Cronbach’s alpha
coefficient exceeding 0.7. As Cronbach’s in PLS path models may provide a sig-
nificant underestimation of the internal consistency of the constructs, it is recom-
mended to complement the outcome of calculated Cronbach’s alpha with the
application of composite reliability (Werts et al. 1974). The coefficients of CR
estimated for the underlying constructs in an outer model are above the value of 0.7.
Therefore, the reliability of results is satisfactory for an early stage of the study
(Nunnally and Bernstein 1994)—Table 10.1.
For the assessment of validity, the convergent validity (Straub et al. 2004) and the
discriminant validity are examined (O’Leary-Kelly and Vokurka 1998). The con-
vergent validity, as measured by the coefficients of average variance extracted
(AVE), is equal to or above a nominal cut-off point of 0.5 across all constructs. It
indicates that all latent variables in the model are able to explain more than half of the
variance of its indicators on average (Chin 1998), which is acceptable for an
exploratory study. The discriminant validity has been assessed to explore if the
appropriate items load substantially on their hypothesized constructs and load no
larger than 0.3 on any other component (Hair et al. 2006). Although the outcome of
the analysis demonstrates that the observed items used for measuring the specified
constructs load high (above 0.6) on their assigned components, the threshold of 0.3
is not met for all cross-loadings. It may suggest that some variables load substantially
on more constructs. The discriminant validity also meets the Fornell–Larcker
criterion that posits that the AVE coefficient of one construct is larger than the highest
square of its correlation with the other constructs (Fornell and Larcker 1981).
Table 10.2 shows the AVEs in italics in the diagonal of the correlation matrix and
the values off-diagonal are the squared correlations between the constructs.
The squared values of correlations amount to less than the corresponding AVE,
which indicates discriminant validity of the measures. Employing the Fornell-
Larcker criterion, each construct in the outer model shares more variance with its
assigned indicators than with any other latent variable criterion (Fornell and Larcker
1981). Overall, as the criteria for reliability and construct validity have been met,
the obtained measurement results in the outer model are satisfactory and appropriate
for proceeding with an estimation of the inner model.

10.5.2 Inner Path Model

The reliable and valid outer model estimations are followed by the evaluation of the
inner path model. In order to assess the model, the coefficients of determination (R2)
of the constructs, standardized path coefficients and prediction relevance of the
model have been determined. In general, as shown in Table 10.3, the subsequent
170 A. Swierczek

Table 10.1 The results summary for the outer model

Latent variables a CR AVE Factor
loadings
Formulation of the goals of risk management 0.72 0.83 0.50
(FORMULATION)
We investigate over-dependency among partners in our 0.59
supply chain that may lead to the transmission and
amplification of disruptions in our supply chain
(Formulation_1)
We consider that the structure of the supply chain (e.g. supply 0.72
chain globalization, outsourcing, number of supply chain
partners) may either drive or inhibit the range of the
transmission of disruptions (Formulation_2)
We examine the effects of the intensity of supply chain 0.62
integration (ensuring backup infrastructure and maintaining
extra capacity/inventory) on the strength of disruptions in our
supply chains (Formulation_3)
We weight a trade-off between the supply chain 0.72
efficiency/effectiveness and the extent of the
transmission/strength of disruptions (Formulation_4)
We are looking for a certain degree of compromise in 0.85
ensuring both the supply chain efficiency/effectiveness and
mitigation of the transmission and amplification of
disruptions (Formulation_5)
Identification of the potential and actual disruptions 0.73 0.84 0.50
(IDENTIFICATION)
We monitor the potential and actual disruptions that may 0.78
affect our supply chain partners (Identification_1)
We try to identify the disruptions (usually induced by the 0.75
internal risk factors) that might be transferred from the other
supply chain partners (Identification_2)
We tend to identify if the effects of the direct impact of a 0.72
particular risk factor (usually external) differ from the
disruptions transmitted indirectly from other supply chain
partners (Identification_3)
We have a database storing the historical disruptions 0.62
transmitted and amplified in our supply chain
(Identification_4)
Based on our previous experience, we implement warning 0.67
indicators that may be used if disruptions are transmitted and
amplified in our supply chain (Identification_5)
Estimation of disruptions (ESTIMATION) 0.87 0.81 0.51
We investigate the extent of the transmission of disruptions in 0.75
our supply chain (Estimation_1);
We examine the severity of the strength of disruptions 0.62
transmitted from other links in our supply chain
(Estimation_2)
(continued)
10 Supply Chain Risk Management … 171

Table 10.1 (continued)

Latent variables a CR AVE Factor
loadings
While estimating the disruptions, we look into the goals of 0.75
risk management (Estimation_3)
We try to classify and prioritize the transmitted and amplified 0.73
disruptions in our supply chain (Estimation_4)
Evaluation of disruptions (EVALUATION) 0.68 0.84 0.51
We regularly evaluate the most adequate approach in order to 0.62
deal with the transmitted and amplified disruptions in our
supply chains (Evaluation_1)
We consider each transmitted and amplified disruption 0.77
uniquely and individually, and try to apply the most
appropriate approach to mitigate it (Evaluation_2)
As a result of the evaluation of disruptions, we apply the 0.59
approach that tends to avoid any activities that would
potentially or effectively contribute to the transmission and
amplification of disruptions in our supply chain
(Evaluation_3)
As a result of the evaluation of disruptions, we undertake 0.72
activities to ensure the optimal balance between the structure
of supply chain and the intensity of integration, i.e. to
establish the appropriate structure of supply chain network
and maintain the appropriate intensity of integration in our
supply chain (Evaluation_4)
As a result of the evaluation of disruptions, we focus on the 0.85
responsiveness and time compression of information and
physical flow of products in order to perform fast and agile
interorganizational activities that aim to mitigate the
transmission and amplification of disruptions in our supply
chain (Evaluation_5)
Application of the mitigating strategy (MITIGATION) 0.67 0.85 0.53
In order to mitigate the transmission and amplification of 0.62
disruptions, we refuse to sell products to the customers with
unhealthy financial standing, abandon the markets whose
future perspective is uncertain, or give up the idea to enter
into the international markets due to high risk and strength of
negative effects (Mitigation_1)
In order to mitigate the transmission and amplification of 0.79
disruptions, we conduct joint efforts to share risk-related
information, increase stockpiling and use of buffer stock,
maintain the excess capacity of technical infrastructure and
employ selective outsourcing operations (Mitigation_2)
In order to mitigate the transmission and amplification of 0.74
disruptions, we employ a flexible base of partners (e.g. by
using double sourcing for the replenishment/manufacturing
and/or distribution processes in which one source ensures the
quantity of goods that meets base or average customer
demand, while the second one provides the product if demand
exceeds its base value) (Mitigation_3)
(continued)
172 A. Swierczek

Table 10.1 (continued)

Latent variables a CR AVE Factor
loadings
In order to mitigate the transmission and amplification of 0.75
disruptions, we apply flexible transportation that consists in
using multi-modal transportation, multi-carrier transportation
and multiple routes (Mitigation_4)
In order to mitigate the transmission and amplification of 0.72
disruptions, we use an agile configuration of the supply chain
structure that denotes establishing open and reconfigurable
organizations, striving to precisely simulate the volatility of
markets and environment through a quick reconfiguration of
the supply chain structure (Mitigation_5)

Table 10.2 Correlation matrix

Constructs Formulation Identification Estimation Evaluation Mitigation
Formulation 0.50
Identification 0.42 0.50
Estimation 0.21 0.47 0.51
Evaluation 0.18 0.23 0.50 0.61
Mitigation 0.15 0.19 0.32 0.60 0.53
Note The AVE is provided in italics in the diagonal; the squared correlations between the
constructs are given off-diagonal

steps of risk management explain a diverse amount of variance in the five constructs
with R2 values of 0.412 for the identification of disruptions, 0.571 for the estimation
of disruptions, 0.477 for the evaluation of disruptions, and 0.468 for the selection of
the appropriate mitigating strategy.
The findings suggest that the coefficients of determination for the following steps
of risk management are moderate. In the opinion of Chin (1998), if any endogenous
latent variable is explained only by a few exogenous latent variables, moderate
value of R2 may be accepted. Aczel (1993) proposes using lower R2 values (around
0.5) to indicate the relationships between variables. Therefore, the R2 values for the
following five steps of risk management in the transmission and amplification of
disruptions provided an indication of the predictive ability of independent variables
(Cohen and Cohen 1975).
In order to determine the standardized path coefficients of the model and their
statistical significance, the bootstrapping re-sampling technique was employed
(Davison and Hinkley 2003). The obtained results from 500 re-samples revealed
that four links in the model were significant at the level of p = 0.05.
The PLS results depicted in Table 10.3 indicate a strong support to the proposed
hypotheses. The first step of risk management—formulation of the goals of risk
management - has a positive and significant effect on the following step consisting
in the identification of disruptions (path coefficient is +0.373 at p < 0.05).
10 Supply Chain Risk Management … 173

Table 10.3 Inner model results

Proposed Stand. path t- Significance Hypothesis
effect coefficient value (p-values)
Effects on the identification of disruptions (R2 = 0.412)
Formulation of the goals of + 0.373 3.85 p < 0.05 Supported
risk management
Effects on the estimation of disruptions (R2 = 0.571)
Identification of disruptions + 0.598 5.04 p < 0.05 Supported
Effects on the evaluation of disruptions (R2 = 0.477)
Estimation of disruptions + 0.487 6.42 p < 0.05 Supported
Effects on the application of mitigating strategy (R2 = 0.468)
Evaluation of disruptions + 0.512 6.89 p < 0.05 Supported

Consequently, the obtained findings support H1. The identification of disruptions

has, in turn, a positive and significant impact on the estimation of disruptions (path
coefficient is +0.598 at p < 0.05), offering a support to H2. The results also indicate
a positive and significant effect of the estimation of disruptions on the evaluation of
disruptions (path coefficient is +0.487 at p < 0.05), giving a support to H3. Finally,
the evaluation of disruptions has a positive and significant impact on the last step in
the proposed concept, that is, the application of mitigating strategy (path coefficient
is +0.512 at p < 0.05). Accordingly, this research outcome lends a support to H4.

10.6 Discussion of the Results and Managerial

Implications

10.6.1 Steps of Supply Chain Risk Management

in the Transmission and Amplification of Disruptions

The PLS Path analysis provides some interesting findings concerning the trans-
mission and amplification of disruptions. Based on the extensive literature review,
we have developed and empirically evaluated a conceptual framework for risk
management in the transmission and amplification of disruptions. The assessment
of the outer path model indicating the sequence of activities in the risk management
process that have been classified into a certain number of steps shows a sufficient
level of reliability and construct validity. It demonstrates that the identified man-
agerial activities are classified correctly into specific steps, filling in each step with
substantial and consistent content. Among these steps one may enumerate: for-
mulation of the goals of risk management, identification of disruptions, estimation
and evaluation of disruptions, and application of the mitigating strategy.
In the first step—formulation of the goals of risk management, supply chains
should investigate over-dependency among partners that may lead to the trans-
mission and amplification of disruptions in our supply chain, consider whether the
174 A. Swierczek

structure of a supply chain is driving or inhibiting the range of the transmission of

disruptions, examine the effects of the intensity of supply chain integration on the
strength of disruptions, weight a trade-off between the supply chain
efficiency/effectiveness and the extent of the transmission/strength of disruptions,
and finally look for a certain degree of compromise in ensuring both the supply
chain efficiency/effectiveness and mitigation of the transmission and amplification
of disruptions.
Among important activities in the identification of disruptions in a supply chain,
one may enumerate the following: monitoring the potential and actual disruptions
that may affect our supply chain partners, identifying the disruptions that might be
transferred from the other supply chain partners, determining if the effects of the
direct impact of a particular risk factor differ from the disruptions transmitted
indirectly from other supply chain partners, maintaining a database storing the
historical disruptions transmitted and amplified in a supply chain, as well as
implementing warning indicators that may be used if disruptions are transmitted
and amplified in a supply chain.
The third step of the proposed concept is the estimation of disruptions. It should
consist of the following activities: investigating the extent of the transmission of
disruptions, examining the severity of the strength of disruptions transmitted from
other links in a supply chain, considering the goals of risk management while
estimating the disruptions, as well as classifying and prioritizing the transmitted and
amplified disruptions in a supply chain.
The fourth step, the evaluation of disruptions, should include selection of the
most adequate approach in order to deal with the transmitted and amplified dis-
ruptions, unique and individual selection of each transmitted and amplified dis-
ruption, an attempt to apply the most appropriate approach to mitigate them,
application of the approach that tends to avoid any activities that would potentially
or effectively contribute to the transmission and amplification of disruptions in a
supply chain, undertaking activities to ensure the optimal balance between the
structure of a supply chain and the intensity of integration, as well as focusing on
the responsiveness in order to perform fast and agile interorganizational activities
that aim to mitigate the transmission and amplification of disruptions in a supply
chain.
The fifth step in the proposed concept of risk management, that is, the appli-
cation of the mitigating strategy, covers the combination of the following activities:
refusing to sell products to the customers with unhealthy financial standing,
abandoning the markets whose future perspective is uncertain, or giving up the idea
to enter into international markets due to high risk and strength of negative effects,
conducting joint efforts to share risk-related information, increasing stockpiling and
using a buffer stock, maintaining the excess capacity of technical infrastructure and
employing the selective outsourcing operations, employing a flexible base of
partners, applying flexible transportation that consists in using multi-modal trans-
portation, multi-carrier transportation and multiple routes, using an agile configu-
ration of the supply chain structure that denotes establishing open and
reconfigurable organizations, as well as striving to precisely simulate the volatility
10 Supply Chain Risk Management … 175

of markets and environment through a quick reconfiguration of the supply chain

structure.
Based on the estimation of convergent validity for constructs, we argue that the
list of enumerated activities classified into certain steps is demonstrative and open.
It means that it should be additionally complemented with the activities stemming
from the unique and diverse character of each supply chain. In other words, the list
of activities in the risk management process should be modified and extended to
cover the specificity of the transmission and amplification of disruptions in the
examined supply chain. The study also evidences that the employed scales of items
and the way the activities are grouped into certain steps provide a sound empirical
foundation for the evaluation of the proposed framework of risk management in the
transmission and amplification of disruptions.

10.6.2 The Relationships Between the Subsequent Steps

of Supply Chain Risk Management

The analysis of the inner path model shows that the coefficients of determination for
the subsequent steps in the concept of the transmission and amplification of dis-
ruptions are moderate, meaning that they enable to indicate general relationships
between the subsequent steps of risk management in the transmission of disrup-
tions. It means that each construct manifesting a certain step in risk management is
closely connected with its preceding and following steps, which supports the sig-
nificance of the issue of integration in the risk management process. For instance,
the estimation step requires to identify the disruptions that may be transmitted to
and amplified in other supply chain links, and concomitantly provides a basis for
the next step of evaluation of the most appropriate approach for each of the
identified and estimated disruptions. In other words, the bundle of the activities of
risk management ought to be performed in a certain logical sequence due to a high
level of interdependence between the steps and corresponding activities of risk
management. Moreover, we investigated potential relationships among all steps of
risk management in order to highlight the importance of performing the activities in
the correct sequence. The obtained variances demonstrate a significantly lower level
of the strength of relationships among all constructs. It additionally supports the
necessity to perform the activities of risk management in the right order.
The findings also show that in order to mitigate the transmission and amplifi-
cation of disruptions, managers should employ the traditional risk management
concept, adapted to the new content-related circumstances and managerial condi-
tions. In other words, if the companies already use a certain model of risk man-
agement in their supply chains, there is no necessity to build the concept of risk
management in the transmission and amplification of disruptions from scratch. It
should rather be extended to involve a wider analysis of disruptions that might be
transmitted and amplified in the supply chain structure. In other words, the
176 A. Swierczek

proposed concept complements the existing, traditional frameworks of risk man-

agement with new, hitherto disregarded and unappreciated aspects.
The traditional concept of risk management in supply chains has ex-ante char-
acter, as it focuses on decreasing the probability of occurrence of risk and miti-
gating its direct negative consequences. On the other hand, risk management in the
transmission and amplification of disruptions should provide a response to the
disruptions, amplified during the transmission, whose sources and direct effects
have not been captured and neutralized in a timely manner by the traditional risk
management process. In this vein, the concept of risk management in the trans-
mission and amplification of disruptions has ex-post character aimed at reducing the
negative effects of deviations from the desired condition. This is particularly
important when a supply chain is exposed to the risk effects that have a strong and
devastating impact, or there is a lack of effectiveness in preventing disruptions at
the earlier stages of risk management.

Acknowledgements The study was financed by the National Science Centre as a research project
no. DEC-2012/05/E/HS4/01598.

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Chapter 11
Strategic Sourcing Under Supply
Disruption Risk

S. Prasanna Venkatesan and Mark Goh

Abstract Disruption in the upstream of any supply chain affects the productivity and
reputation of suppliers in that chain. Supply disruption risk is prevalent and affects
more suppliers especially since these suppliers tend to be grouped geographically or
as clusters for greater economies of scale. With attention paid to disaster management
and business contingency planning, many firms are reassessing their supply chain
strategies to effectively handle such risks, contain cost, and maintain service levels.
This chapter presents a Mixed Integer Linear Programming (MILP) model for sup-
plier selection and order quantity allocation (SSOA) for suppliers who bear different
disruption likelihood, capacity, upside flexibility and operate under different price
discount regimes. The objective is to minimize the expected total cost comprising
supplier management cost, purchasing cost, and an expected loss if a supplier’s
reliability to serve is compromised by disruptions. As the SSOA problem under
supply disruption risk is NP-hard, particle swarm optimization with time varying
inertia weight and acceleration coefficients is applied. Numerical tests are conducted
to illustrate the proposed approach and the results obtained are compared with
Genetic Algorithm (GA). Sensitivity analysis is conducted on the disruption likeli-
hood, supplier upside flexibility, and the price discount regimes.

11.1 Introduction

Today’s supply chain being global suffers from more risks which come from
sources within and outside of the chain. Indeed, empirical studies suggest that
supply chain risk is an important component of a firm’s strategic decision-making

S. Prasanna Venkatesan (&)

Department of Production Engineering, National Institute of Technology,
Tiruchirappalli, TamilNadu, India
e-mail: [email protected]
M. Goh
NUS Business School, National University of Singapore, Singapore, Singapore
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 179

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_11
180 S. Prasanna Venkatesan and M. Goh

process (Marchese and Paramasivam 2013). The literature categorizes supply chain
risks to be either operational or disruption. Operational risks are the inherent
uncertainties in the system e.g., demand, supply, and cost. Disruption risks are the
outcomes of natural or man-made disasters. The effort to identify and mitigate
supply chain risks has traditionally focused on operational risks as disruption risks
often had a small likelihood of occurrence. Recently, disruption risks occur more
frequently and as such receive more attention as suppliers tend to be grouped
geographically or as clusters for greater economies of scale. Succumbing to dis-
ruption risk can affect the productivity, market share, and reputation of the suppliers
(Chopra and Sodhi 2014). For instance, the disasters (Japanese tsunami and
Thailand flood) in 2011 have forced many leading automotive and computer
manufacturers to reassess their supply network strategies in Asia to effectively
mitigate the risks arising from the clustering of suppliers in these two locations, so
as to contain disruption cost and maintain service levels (Matsuo 2015). Thus far,
the literature on SSOA tends under disruption is scant and tends to overlook supply
disruption (Meena and Sarmah 2014; Sawik 2014). Planning for disruptions typi-
cally requires a proactive process to identify the key locations for catastrophic risks
in a supply chain and to estimate the likelihood of its occurrence and the impact
(Knemeyer et al. 2009).
Supply disruption can be modeled as either a super, semi-super, or unique event
(Sarkar and Mohapatra 2009). A super event occurs when the suppliers at all
locations are disrupted i.e. they all fail at the same time exhibiting a total effect.
A semi-super event is location/region specific and occurs when a set of suppliers at
a location are disrupted exhibiting a regional effect. A unique event occurs when
only one supplier at a location is disrupted exhibiting a local effect. The literature on
supply disruptions concerns mostly super and unique events with equal and unequal
failure likelihoods (see Table 11.1). Disruption risks can be measured by the
expected monetary loss to the supply chain (Heckmann et al. 2015). The SSOA
models under supply disruption risk are classified based on the objective, decision
variables, model parameters, and solution methodology. Usually such SSOA
models are formulated to minimize the expected total cost considering either all or
partial supplier disruptions as shown in Table 11.1. Only some studies have
simultaneously considered supplier location, selection and order allocation under
disruption. For completeness, Chai et al. (2013) presented a good review of the
techniques used to select suppliers. While the decision tree technique is most used
to capture the different disruption scenarios an arbitrary allocation of orders is
proposed to determine the optimum supply base. Meena and Sarmah (2013)
showed that the SSOA problem under supply disruption risk is NP-hard as the
computational complexity increases with the number and locations of suppliers,
disruption likelihoods, supply capacity, price discounts, and supplier flexibility;
hence, they proposed a Genetic Algorithm (GA) approach.
Particle Swarm Optimization (PSO), drawn from swarm intelligence, is another
technique used by researchers given its simplicity and performance (Poli 2008).
However, the work on PSO for SSOA under disruption is scant. Kamali et al.
(2011) applied PSO on multi objective buyer-vendor coordination. Che (2012) used
Table 11.1 SSOA models under supply disruption risk
11

Source Model description

Objective Decision variables Parameters Solution
Number Order allocation Cost Supplier Supplier Supply disruption events Suppliers approach
of location disruption upside
suppliers Equal Unequal FC VC LC CD All Partial Su Se Uq flexibility
Equal Unequal
Berger et al. ETC ● – – ● – ● – – ● – ● – ● – – Decision tree
(2004)
Zeng et al. ETC ● – – ● – ● – – ● – ● – ● – –
(2005)
Ruiz-Torres ETC ● – ● ● ● ● ● ● – ● – – ● ● ● Decision tree
and and arbitrary
Mahmoodi order allocation
(2006)
Ruiz-Torres ETC ● – – ● – ● – – – ● ● – ● ● ● Decision tree
and
Strategic Sourcing Under Supply Disruption Risk

Mahmoodi
(2007)
Sarkar and ETC ● – – ● ● ● – ● ● – ● ● ● – – Decision tree
Mohapatra and tabular
(2009) method
Meena et al. ETC ● ● – ● ● ● – – – ● ● – ● – ● Problem
(2011) specific
algorithm
(continued)
181
Table 11.1 (continued)
182

Source Model description

Objective Decision variables Parameters Solution
Number Order allocation Cost Supplier Supplier Supply disruption events Suppliers approach
of location disruption upside
suppliers Equal Unequal FC VC LC CD All Partial Su Se Uq flexibility
Equal Unequal
Meena and ETC ● – ● ● ● ● ● – – ● ● – – ● ● GA
Sarmah
(2013)
Ruiz-Torres ETC ● ● ● ● ● – – – ● – – ● – ● Decision tree
et al. (2013) and Excel
solver
Meena and ETC ● – ● ● ● ● ● – ● – – ● ● GA, BONMIN
Sarmah solver
(2014)
Sawik ETC/CSL ● – ● ● ● ● – ● ● – – ● – ● – Stochastic
(2014) programming
Note: ETC Expected Total Cost, CSL Customer Service Level, FC Fixed Cost, VC Variable Cost, LC Loss Cost, CD Cost Discount, Su Super event, Se Semi-super event,
Uq Unique event, BONMIN Basic open-source Mixed Integer Non-Linear programming
S. Prasanna Venkatesan and M. Goh
11 Strategic Sourcing Under Supply Disruption Risk 183

PSO to solve a multi-echelon unbalanced supply chain planning problem.

PrasannaVenkatesan and Kumanan (2012) applied a multi objective binary PSO
algorithm on sourcing with price and exchange rate risks.
In this chapter, we formulate an MILP model for SSOA under disruption risk for
super, semi-super, and unique events. We minimize the expected total cost
(ETC) comprising supplier management cost, raw material purchase cost, and
expected supplier loss.
This chapter is organized as follows. Section 11.2 presents an overview of PSO
and GA. Section 11.3 describes the problem and model formulation. Section 11.4
details the adoption of PSO and GA for the SSOA problem. Section 11.5 provides
an illustrative example. Section 11.6 discusses the results. Section 11.7 concludes
with some future research directions.

11.2 Overview of PSO and GA

In this section, we present a brief description of the PSO and GA algorithms

11.2.1 Particle Swarm Optimization (PSO)

Developed by Kennedy and Eberhart (1995), PSO is inspired by the social behavior
of a flock of migrating birds trying to reach an unknown destination. In PSO, each
solution is a ‘bird’ in the flock and is referred to as a ‘particle’. Each bird looks in a
specific direction. When communicating with each other, they identify the bird that
is in the best location. Accordingly, each bird speeds towards the best bird with a
velocity that depends on its current position. Each bird, then, investigates the search
space from its new local position, and the process repeats until the flock reaches
their desired destination. The search process involves both social interaction and
intelligence so that the birds learn from their own experience (local search) and
from the experience of the others around them (global search).
The pseudo code for the PSO algorithm is as follows:
Begin
Initialize the swarm of size (N);
While maximum iteration (max_it) is not attained
Do
For each particle in the swarm;
Calculate fitness value;
If fitness value is better than best fitness value (pBest) in history;
Set current value as new pBest;
Choose particle with best fitness value of all particles as the gBest
184 S. Prasanna Venkatesan and M. Goh

For each particle

Calculate particle velocity using velocity update equation
Update particle position using position update equation
End
End

11.2.2 Genetic Algorithm (GA)

GA is a stochastic search technique inspired by a biological system’s improved

fitness through evolution (Goldberg 1989). GA starts with a random population of
solutions (chromosomes). The chromosomes are evaluated using the given objec-
tive function. The best chromosomes exchange information through selection,
crossover and mutation to produce offspring chromosomes. The offspring chro-
mosomes are then evaluated and used to evolve the population if they provide better
solutions than a weak population (Gen and Cheng 1997). The process is continued
until the maximum number of generations or the termination criteria is attained.
The pseudo code of the GA algorithm is as follows:
Begin
Initialize population of N′ chromosomes;
Evaluate fitness for each chromosome;
While maximum iteration (max_it) is not attained
Do
Recombine N′ using selection, crossover and mutation;
Generate offspring N″;
Evaluate offspring;
Remove worst chromosome from N′ and N″
Select population of size N′ for next iteration
End
End

11.3 Problem Description and Model Formulation

Firms keep a set of preferred suppliers based on cost, quality, and service level.
Such suppliers tend to be clustered geographically, for reasons of pooling of labor
and technology sharing (Fig. 11.1). Siting reliable alternative suppliers and sour-
cing from both preferred and alternate suppliers is common when minimizing ETC.
11 Strategic Sourcing Under Supply Disruption Risk 185

Geographical regions
Market

Manufacturer
2

Fig. 11.1 Typical supply chain setup

Model formulation: An MILP model is formed to find the choice of suppliers

and their order allocations subject to the constraints on capacity and demand. The
objective is to minimize the ETC. ETC includes supplier management cost, pur-
chasing cost, and an expected loss cost (ELC) if a supplier is disrupted. While
sourcing from multiple suppliers increases the supplier management cost with
supply disruption, the expected loss incurred by the manufacturer is less, as the
order is now allocated to many suppliers.
We assume the followings in our model:
1. Single product with quantity discounts and a single period planning horizon;
2. Manufacturer produces functional products which have stable demand;
3. We include only Tier-1 suppliers who are independent;
4. Number of suppliers and their geographical regions, capacities are known and
fixed;
5. Acquisition and transportation cost of raw materials from suppliers to manu-
facturer is known and fixed;
6. A semi-super event is region specific and each region has its disruption
likelihood;
7. If some supplier(s) fails to deliver the units ordered due to a disruption, the
other un-disrupted suppliers will make up the shortfall at no extra cost (Meena
and Sarmah 2013);
8. Each supplier has a different capacity, unique event likelihood, and compen-
sation potential (which is the ability of the supplier to make up for the supply
shortfall);
186 S. Prasanna Venkatesan and M. Goh

9. We estimate the disruption likelihood of super, semi-super, and unique events

by combining the expert/decision maker’s opinion with historical data
(Knemeyer et al. 2009);
10. Supplier management cost comprising the cost of meetings, negotiation and
quality monitoring is a linear function of the number of suppliers (Meena and
Sarmah 2013);
Indices
s Supplier ðs ¼ 1; 2; . . .; SÞ
l Region ðl ¼ 1; 2; . . .; LÞ; xsl denotes supplier s in region l
Parameters
D Total demand of raw materials for the planning period
Cs Capacity of supplier s
tsl Total number of suppliers in region l
Fs Fixed cost of managing supplier s
rs Base purchasing cost per item from supplier s
dpb
s
Percentage discount offered by supplier s in price break pb
r′ Financial loss per item due to the failure of a supplier(s) to deliver
psu Likelihood of a super event causing all suppliers to disrupt
pse
l Likelihood of a semi-super event causing all suppliers in region l to disrupt
puq
s Likelihood of a unique event causing only supplier s to disrupt
Qmins
Minimum order for supplier s as a proportion of the total demand
B(f) Set of all subsets (different from the empty set) of region l {l = 1, 2, …, L}
in which all suppliers fail due to a semi-super event with,
Bðf Þ ¼ fBðf 1 Þ; Bðf 2 Þ; . . .; Bðf L Þg, where
Bðf 1 Þ = Subset containing each single region in which all suppliers are
disrupted;
Bðf 2 Þ = Subset containing each pair of regions in which all suppliers are
disrupted;
Subsets of regions that can be affected by a semi-super event are ð2L  1Þ
being the number of subsets of the set of regions {1, 2… L} and assuming
at least one supplier from a region is selected (Sarkar and Mohapatra 2009).
For example with three regions l1, l2, and l3, B(f1) = {{l1},{l2},{l3}}; B
(f2) = {{l1, l2},{l1, l3},{l2, l3}} and B(f3) = {l1, l2, l3}.
B0 ðf 0 Þ Set of all subsets of regions in which 
all suppliers

 are not
disrupted
 due to a
semi-super event where B0 ðf 0 Þ ¼ B0 f 01 ; B0 f 02 ; . . .; B0 f 0L , where
11 Strategic Sourcing Under Supply Disruption Risk 187


B0 f 01 = subset containing un-disrupted regions when all suppliers at a


single region are disrupted; and B0 f 02 = Subset containing un-disrupted
regions when all suppliers
ata pair of regions are disrupted;

For the above example, B0 f10 = {{l2, l3}, {l1, l3}, {l1, l2}}; B0 f20 = {{l3},


{l2}, {l1}} and B0 f30 = {};
A(f) Set of all subsets (different from the empty set) of suppliers (s = 1,…,S)
who are disrupted due to a unique event, Aðf Þ ¼ fAðf 1 Þ; Aðf 2 Þ; . . .; Aðf S Þg
where
Aðf 1 Þ = Subset containing each of a single supplier who are disrupted;
Aðf 2 Þ = Subset containing each of a pair of suppliers who are disrupted etc.
The total number of subsets composed of fs suppliers that can be subjected
P
to a unique event is f ! SS! f ! where S ¼ Ll¼1 tsl (Ruiz-Torres and
s ð s Þ
Mahmoodi 2007). For example, with 6 suppliers, A(f1) = {{1}, {2}, {3},
{4}, {5}, {6}}; Similarly A(f2) has 15 elements with two suppliers who fail.
0
0
A f Set of all subsets
 0
of suppliers

 who

are
 undisrupted

 due to a unique
0 0 0 0 0 0 0 0 0
event,A ðf Þ ¼ A f 1 ; A f 2 ; . . .; A f s A f 1 = Subset of undisrupted


suppliers when one of S suppliers is disrupted; A0 f 01 has 6 elements with 5
un-disrupted

 suppliers in each
0 0
A f 2 = Subset of un-disrupted suppliers when any two of S suppliers fail;
etc.
os Output flexibility index for supplier s
Decision Variables
Xs 1, if supplier s is selected; 0, else
Qs Proportion of the total demand assigned to supplier s
qs Compensation received from an un-disrupted supplier s
Objective
XS XS

Minðf 1 Þ ¼ FX þ
s¼1 s s
r
s¼1 s
1  dpb
s Qs D þ ELC, ð11:1Þ

where ELC (Expected Loss Cost) is given by

0
ELC ¼ fELCsu þ ELCse þ ELCuq gDr and
ELCsu ¼ psu
188 S. Prasanna Venkatesan and M. Goh
0 0 1
B B 0 1 C
B B  ts   tsj  C
B B 0 1 P P i P P C
B B I     @ Qs  qs A C
B B P P P P C
B @ @
tsi tsj
A i2Bðf 1 Þ s¼1 i j2B0 ðf 01 Þ s¼1 j C
B Qs  qs 0 C
B i j2B ðf Þ
C
B i2Bðf 1 Þ s¼1
0 0
0 0 s¼1 j
111 C
B 1
C
B P Q se Q  C
B @ @ AAA C
B pi 1  pse C
B j C
B i2Bðf 1 Þ j2B0 ðf 01 Þ C
B 0 C
B C
B B 0 1 C
B B     C
su B P P P Ptsj C
ELC ¼ ð1  p ÞB
se
B0 1 @
tsi
A C
B þ BI     Qs  qs C
B B C
@ @ P P Q  P P q  0A ð Þ i j2B ðf 2 Þ
ts tsj s¼1 0 0 s¼1
B i i2B f 2 j C
B s s C
B i2Bðf 2 Þ s¼1 i j2B ðf Þ
0 0 s¼1 C
B C
j

B 0 0
2
1 1 1 C
B P Q Q  C
B @ @ pse 1  pse AAA C
B i j C
B i2Bðf 2 Þ ð
0 f0
Þ C
B 0
j2B 2
1 C
B C
B ! ! ! C
B B   C C
B P P P Q C
B þ  þB C
tsi
BI  ts  ! Qs se
pi C where i 6¼ j C
B @ P Pi A C
@ Q 0
i2Bðf L Þ s¼1 i i2Bðf L Þ A
s
i2Bðf L Þ s¼1 i

Y
L

ELCuq ¼ ð1  psu Þ 1  pse
l
l¼1
0 0 1
0 1
B B P P C
B BI @ ðQs Þm  ðqs Þn A C
B @ P P C
B ðQ s Þm 
n2A ðf Þ
ðq s Þn  0 m2Aðf 1 Þ n2A ðf 1 Þ
0 0
C
B m2Aðf 1 Þ 0 0
C
B 0 0
1
111 C
B C
B P Q Q
 C
B @ @ uq
1  pn uq AAA
þ C
B pm C
B m2Aðf 1 Þ n2A ðf 1 Þ
0 C
B 0
C
B 0 C
B 0 1 C
B C
B
B
B
BI  @ P ðQ Þ  P ðq Þ A
C
C
B @ P P s m s n C
B ðQ s Þm  ðq s Þn  0 m2Aðf 2 Þ n2A ðf 2 Þ
0 0 C
B m2Aðf 2 Þ n2A ðf Þ
0 0 C
B 0 0
2
111 C
B C
B P Q uq Q
 C
B @ @ uq AAA C
B pm 1  pn C
B C
B m2Aðf 2 Þ n2A ðf 2 Þ
0 0
C
B 0 ! !!1 C
B C
B P P Q C
@ þ    þ @IP ðQs Þm uq
pm A where m 6¼ n A
m2Aðf L Þ
ðQ s Þm  0 m2Aðf L Þ m2Aðf L Þ

Constraints

Qs D  Cs Xs ; 8s ð11:2Þ

X
S
Qs ¼ 1 ð11:3Þ
s¼1
11 Strategic Sourcing Under Supply Disruption Risk 189

Qs  Qmin
s  0; 8s ð11:4Þ

qs  ðCs =D  Qs Þos ; 8s ð11:5Þ

The objective function defined in Eq. (11.1) minimizes the expected total cost
that includes the supplier management cost, purchasing cost from the suppliers, and
an expected loss to the manufacturer if a supplier disrupts (ELC). The loss due to a
super, semi-super, and unique event is denoted as ELCsu, ELCse, and ELCuq
respectively. To ensure a non-negative value for ELC an indicator function Iy is
used in Eq. (11.1) following Meena et al. (2011) where IðyÞ ¼ 1 if (y) holds, 0 else.
Equations (11.2) and (11.3) are the capacity and demand satisfaction constraints for
the suppliers respectively. Equation (11.4) states that the portion of the total
demand assigned to supplier s must not be less than the minimum order assigned to
the same supplier. Each un-disrupted supplier can compensate a short fall up to an
amount of ks = (Cs/D − Qs)os. Hence, the compensation received from a supplier
who does not disrupt should be less or equal to the compensation potential for the
supplier given in Eq. (11.5). The output flexibility index (os) in Eq. (11.5) refers to
a supplier’s ability to compensate for the shortfall should the other suppliers disrupt
(Ruiz-Torres and Mahmoodi 2006). The output flexibility index could be measured
based on suppliers’ production, logistics capabilities and geographic proximity.

11.4 Proposed PSO

The steps of the proposed PSO are described below. The parameters of the pro-
posed algorithms are swarm size (N), maximum number of iterations (max_it), time
varying inertia weight (xt), acceleration coefficients (C1t and C2t) and random
parameters (r1 and r2 ).
Step 1 Particle representation and Swarm initialization: In the PSO algorithm,
each particle is a feasible allocation of demand to the suppliers. The position and
velocity of each particle are initialized randomly. The length of a particle depends
on the number of suppliers and each bit of a particle represents the fraction of
demand assigned to a supplier. Figure 11.2 is an example of a particle with 2
suppliers, each sited in three regions. Supplier 1 located in Region 1 receives
maximum allocation. A set of feasible particles represents the swarm.

0.28684 0.10087 0.10066 0.2235 0.11721 0.17093 Demand allocation

1 2 3 Supplier region

Fig. 11.2 Representation of a particle for SSOA problem

190 S. Prasanna Venkatesan and M. Goh

Step 2 Fitness evaluation: The fitness values of the particles are computed. The
individual experience of the particle is captured in the pBest attribute that corre-
sponds to the best performance attained by a particle in its flight. In the first iteration
(t), the current position of particle pi[t] is set as the pBest particle pBesti[t]. In
subsequent iterations, pBesti[t] is replaced if a better fitness value is found. The best
particle in the whole swarm is selected as the global best gBest (gi[t]).
Step 3 Velocity and position update: The velocity and position update equations
are used to update the velocity and position of each particle during the iterations.
The velocity update relation is given in Eq. (11.6) with r1 and r2 uniformly dis-
tributed on (0, 1). The inertia weight xt controls the impact of the previous velocity
Vi½t on the current velocity Vi½t þ 1 and is allowed to decrease linearly with iteration
from the initial value x1 to the final value x2 as shown in Eq. (11.7). This ensures
global exploration of the search space at the initial stages and local exploration at
later stages. C1t is called the cognitive acceleration coefficient which represents the
private thinking of a particle when comparing its current position to its own best.
C2t is called the social acceleration coefficient which denotes the social collabo-
ration among the particles when comparing a particle’s current position to that of
the best particle. C1t is allowed to decrease from its initial value of C1i to a final
value C1f as shown in Eq. (11.8). C2t is allowed to increase from its initial value of
C2i to a final value C2f as shown in Eq. (11.9). The particle’s current position pi[t] is
updated with Eq. (11.10) and the particle then moves towards the new position pi
[t+1]. The particles are then evaluated for feasibility. Infeasible particles are repaired
subject to the constraints on demand, capacity, and minimum order allocation.
Equations (11.6–11.10) are defined following the work of Tripathi et al. (2007).



Vi½t þ 1 ¼ xt  Vi½t þ r1  C1t pBesti½t  Pi½t þ r2  C2t gBesti½t  Pi½t ð11:6Þ

xt ¼ ðx1  x2 Þðmax it  tÞ=ðmax itÞ þ x2 ð11:7Þ


C1t ¼ C1f  C1i ðt=max itÞ þ C1i ð11:8Þ


C2t ¼ C2f  C2i ðt=max itÞ þ C2i ð11:9Þ

Pi½t þ 1 ¼ Pi½t þ Vi½t þ 1 ð11:10Þ

11.5 Illustrative Example

A manufacturer plans to procure materials from a set of suppliers. To avoid

depending on a single supply region, the manufacturer decides to consider alternate
suppliers from multiple regions. Scenarios are generated using simulated data as
shown in Table 11.2 following the SSOA literature. The number of suppliers and
their regions vary between (6, 12) and (3, 5) respectively. The total demand varies
11 Strategic Sourcing Under Supply Disruption Risk 191

Table 11.2 Scenarios generated using simulated data

Scenario Number of Number of suppliers in Total number of Total
regions each region suppliers Demand
1 2 3 4 5
1 3 2 2 2 – – 6 7000
2 3 3 3 2 – – 8 8000
3 4 3 3 2 2 – 10 10,000
4 5 3 3 2 2 2 12 12,000

from 7000 to 12,000 units. The capacity of the suppliers is generated in the interval
(1200, 3500). Supplier management cost is selected in the interval (1000, 3500).
The unit purchase cost is drawn in the interval (12, 18). The loss per unit is set to
vary between 2 and 4 times of the purchase cost. The minimum order quantity for
any supplier is set at 10% of the total demand. All unit quantity discounts with three
price breaks are considered following Meena and Sarmah (2013). The price dis-
count varies from 5 to 25% of the base price and the order quantities for a price
break is set to vary between 1.5 and 3 times the minimum order quantity.
Table 11.3 gives the capacity, disruption likelihoods, output flexibility index of the
suppliers, supplier management cost and unit purchase cost of the materials for
Scenario 3. It is assumed that Region 1 has established suppliers with good market
reputation and is the primary procurement source. The manufacturer intends to
locate alternate suppliers from Regions 2, 3 and 4 as Region 1 is prone to disruption
risk. It is assumed that the suppliers in Regions 3 and 4 are new and expensive. The
suppliers in Regions 1 and 2 are located outside of the manufacturer’s geographical
proximity.

11.6 Results and Discussion

The proposed PSO and GA algorithms are coded in Matlab 7.1.0. The swarm size
(N)/population (N′) and the maximum number of iterations (max_it) are set as 250
and 500, respectively. Based on the random trials, the inertia weight is set to vary
linearly from 1.0 to 0.3 and the acceleration coefficients are set as C1i = 1.5,
C1f = 0.5, C2i = 0.5, C2f = 1.5. Tables 11.4 and 11.5 show the optimal solutions for
the scenarios using PSO and GA, respectively. From the results of scenarios 1 and
2, the demand is assigned to all suppliers located in Regions 1, 2 and 3 in order to
avoid the loss due to disruption. Supplier 1 located in Region 1 is assigned more
than 25% of the total demand in all scenarios except Scenario 2 solved by GA as the
purchase cost is a minimum. Suppliers located in Regions 4 and 5 are not used in
Scenarios 4 as the purchase cost is high and for the restriction of minimum order
quantity. For Scenarios 3, supplier 3 of Region 2 ðx32 ) is assigned 20% of the total
demand as the unique event disruption likelihood is less albeit at a higher purchase
cost.
 192

Table 11.3 Data for Scenario 3

Supplier Supplier Disruption likelihood of Output Supplier Base purchase Price break Associated
capacity event flexibility management cost price/unit ($) quantities discount (%)
Super Semi-super Unique index ($) (multiple of
minimum order
quantity)
Region x11 3500 0.010 0.030 0.05 0.7 2000 12 2 2.5 3 15 20 25
1 x21 3000 0.15 0.8 1000 14 2 2.5 3 12 15 18
x31 2500 0.10 0.6 2500 15 1.5 2 2.5 15 17 20
Region x12 2200 0.025 0.10 0.8 2000 15 2 2.5 3 15 20 25
2 x22 2500 0.08 0.7 1500 17 2 2.5 3 12 15 18
x32 2200 0.05 0.5 2500 16 1.5 2 2.5 15 17 20
Region x13 2000 0.020 0.06 0.6 1200 18 1.5 2 2.5 18 20 25
3 x23 1800 0.03 0.5 3500 17 1.5 2 2.5 5 7 9
Region x14 1800 0.020 0.05 0.4 2500 18 1.5 1.75 2 5 10 12
4 x24 1500 0.04 0.4 2400 15 1.5 1.75 2 5 10 12
S. Prasanna Venkatesan and M. Goh
 11

Table 11.4 Optimal solution for scenarios using PSO

Scenarios Demand allocation to suppliers SC PC ELC ETC ($)
x11 x21 x31 x12 . x22 x32 . x13 . x23 . x14 . x24 . x15 x25
1 0.28684 0.10087 – 0.10066 0.2235 – 0.11721 0.17093 – – – – 12,700 84,710 41,035 138,445
2 0.25367 0.10354 0.1 0.10204 0.10342 0.10048 0.13028 0.10657 – – – – 16,200 103,106 47,574 166,880
Strategic Sourcing Under Supply Disruption Risk

3 0.27336 0.10659 0.10416 0.20081 0.10204 0 0 0 – – 12,700 121,244 62,568 196,512

4 0.27691 0.10312 0.10271 0.10248 0.10417 0.10859 0.10202 0.1 0 0 0 0 15,000 143,938 83,503 242,441
193
 194

Table 11.5 Optimal solution for scenarios using GA

Scenarios Demand allocation to suppliers SC PC ELC ETC ($)
x11 x21 x31 x12 x22 x32 x13 x23 x14 x24 x15 x25
1 0.30176 0.10072 – 0.10103 0.21722 – 0.10784 0.17143 – – – – 12,700 84,068 41,427 138,195
2 0.20046 0.10205 0.10091 0.10531 0.10042 0.1577 0.10796 0.12512 – – – – 16,200 103,492 46,806 166,498
3 0.28677 0.10015 0.10029 0.10029 0.10021 0.21186 0.10045 0 0 0 – – 12,700 120,656 61,698 195,054
4 0.28997 0.10071 0.10045 0.10161 0.10227 0.10103 0.10071 0.10324 0 0 0 0 15,000 140,514 82,925 238,439
S. Prasanna Venkatesan and M. Goh
11 Strategic Sourcing Under Supply Disruption Risk 195

11.6.1 Comparison of PSO and GA Results

The parameters of GA are population size, maximum number of iterations, cross-

over and mutation probabilities. The strings are initialized as described in
Sect. 11.4. The population size and the number of iterations in GA are the same as
the proposed PSO. Roulette wheel selection, segment based cross over and a
mutation operator are used (Gen and Cheng 1997). In roulette wheel selection a
fitter chromosome has a large chance to be reproduced into the next generation
(Khojasteh-Ghamari 2012). Traditionally, crossover and mutation probabilities are
selected in the range (0.6, 1.0) and (0.05, 0.2), respectively. The cross over and
mutation probabilities for the GA are set as 0.7 and 0.2, respectively.
These values are set based on preliminary computations. An illustration of the
segment based cross over operator for six suppliers located in three regions is
shown in Fig. 11.3. A binary mask is generated and its length is equal to the
number of regions. The first parent will transfer its genetic material to the offspring
if ‘0’ occurs in the binary mask. Similarly parent 2 will transfer its genetic material
to the offspring if ‘1’ occurs in the binary mask. This segment based cross over
operator tends to preserve good gene segments of both parents and generate one off
spring (Altiparmak et al. 2006). An illustration of a mutation operator is shown in
Fig. 11.4. A binary mask is randomly generated and a decision about which seg-
ment will be mutated is reached. Selected segments are then mutated. Infeasible

Parent 1
0.33849 0.21416 0.11115 0.2362 0.1 0
Parent 2
0.16349 0.14734 0.23479 0.1582 0.19618 0.1
Binary mask
0 1 0
Off spring
0.33849 0.21416 0.23479 0.1582 0.1 0

Fig. 11.3 Illustration of segment based cross over operator

Parent
0.19418 0.25965 0.16642 0.17976 0.20736 0.17006
Binary mask
1 0 0
Off spring
0.25965 0.19418 0.16642 0.17976 0.20736 0.17006

Fig. 11.4 Illustration of mutation operator

196 S. Prasanna Venkatesan and M. Goh

204500
PSO
GA

Expected Total Cost (ETC)

202500

200500

198500

196500

194500
0 50 100 150 200 250 300 350 400 450 500
Iteration

Fig. 11.5 Convergence of solutions using PSO and GA for Scenario 3

strings generated after cross over and mutation are repaired. The convergence of
solutions for Scenario 3 is shown in Fig. 11.5. It is observed that PSO converges to
the optimal solution in less iteration compared to the GA. The deviation in PSO
solution quality is found to be less than 1%.
Sensitivity analysis: A sensitivity analysis is performed on Scenarios 3 to study
the effect of variations in disruption likelihood, output flexibility and price discount
offered by the suppliers on the ETC.
Disruption likelihood: The disruption likelihood of the suppliers is varied at four
levels while the other parameters presented in Table 11.3 are kept constant. The
individual and combined effect of mis-estimating the failure likelihood of super
event (psu), semi-super event (pse), and unique event (puq) on ETC are analyzed.
Figure 11.6 shows that the combined effect of all events yields a larger deviation in
ETC. The disruption likelihood of a unique event has more impact on ETC than the
other two events. Larger deviations in the ETC are observed when the error in
estimating the disruption likelihood is more than 50% in either direction. Further,
underestimating the disruption likelihood leads to a slightly larger deviation than
over-estimating the failure likelihood.
Output flexibility: The output flexibility index of the suppliers is varied at four
levels while the other parameters reported in Table 11.3 are kept constant. The ETC
is robust to changes in output flexibility as demand is allocated to multiple suppliers
to minimize the expected loss under disruption. The deviation in ETC is slightly
higher when the output flexibility of suppliers is reduced by 25% as shown in
Fig. 11.7.
11 Strategic Sourcing Under Supply Disruption Risk 197

Deviation in ETC (%)

50%
All Psu,Pse and Puq

Psu
40%
Pse

Puq

30%

20%

10%

0%
-100 -75 -50 -25 0 25 50 75 100

Under and over-estimating supplier disruption likelihood (%)

Fig. 11.6 Effect of mis-estimating supplier disruption likelihood on the ETC

Deviation in ETC (%)

2.50%

2.00%

1.50%

1.00%

0.50%
-25 -20 -15 -10 -5 0 5 10 15 20 25
Change in suppliers output flexibility (%)

Fig. 11.7 Effect of suppliers output flexibility on the ETC

Price discounts: The price discount offered by the suppliers is varied at four
levels while the other parameters reported in Table 11.3 are kept constant. The ETC
is less sensitive to variations in price discounts as shown in Fig. 11.8. This is due to
the higher allocation of the total demand (around 50%) to suppliers x11 and x32 .
198 S. Prasanna Venkatesan and M. Goh

Deviation in ETC (%)

3.50%

3.00%

2.50%

2.00%

1.50%

1.00%
-25 -20 -15 -10 -5 0 5 10 15 20 25
Change in price discount (%)

Fig. 11.8 Effect of price discounts on the ETC

11.7 Conclusions

Sourcing under supply disruption risk is an important research topic and needs
attention. We developed a MILP model to select suppliers and allocate order
quantity under disruption risk. Four scenarios were generated using simulated data
and PSO was used to minimize the expected total cost. The results were compared
against a GA generated set of results. The results suggest that to minimize the ETC,
suppliers from different regions who are less prone to disruption and offering
minimum purchase cost should be assigned greater demand. Sensitivity analysis on
ETC shows that the combined effect of mis-estimating the disruption likelihood of
super, semi-super, and unique events yields a larger deviation in ETC. The ETC is
found to be less sensitive to the variation in the output flexibility of the suppliers
when multiple suppliers are selected. The ETC is less sensitive to a variation in
price discounts when more demand is assigned to a few suppliers. We assumed that
un-disrupted suppliers have buffer capacity and will compensate the shortfall at no
extra cost. In practice, suppliers may charge a premium to supply additional
quantities. Several extensions to this work are possible. Our model could be
extended to include stochastic demand with multiple objectives considering service
level. A model for a multi-tier supply network under disruption could be also
developed.

Acknowledgements The first author acknowledges the National Institute of Technology, Trichy,
India for providing a travel grant to visit the second author under the Technical Education Quality
Improvement Programme (TEQIP-II), in which this work was done. The authors thank the editor
for the constructive comments.
11 Strategic Sourcing Under Supply Disruption Risk 199

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Chapter 12
Design and Evaluation of Global Supply
Chain Considering Disruption Risk

Yasutaka Kainuma

Abstract With the rapid advancement of businesses into overseas markets in

recent years, the scope of supply chain configuration is expanding globally. Supply
chain disruption due to natural disasters such as the 2011 Great East Japan
Earthquake and the flooding in Thailand has become a serious problem. Under the
impact of these natural disasters, risk evaluation has been recognized as an
important element of supply chain management. In this chapter, we consider dis-
ruption risk and develop a model by incorporating supplier decentralization that
assumes a global supply chain spanning two countries and consisting of three
levels: supplier, manufacturer, and customer. We assume three types of disruption
of varying frequency and effectiveness, generated by random numbers by the
Poisson process. We assess the global supply chain designed by verifying the
effectiveness of supplier decentralization in response to disruptions.

12.1 Introduction

The assumption that whatever is manufactured can be sold is no longer true. Today,
the manufacturing industry needs to determine optimal output and supply levels for
production efficiency because of factors such as diversification of consumer needs,
globalization of business competition, and decreasing life cycle of products entering
into the market. Up until now, the manufacturing industry aimed to improve pro-
duction efficiency by shortening lead time and reducing costs through efficient
management of the supply chain, from raw material procurement to manufacture,
distribution, and sales.
The breakdown in production following the Great East Japan Earthquake and the
floods in Thailand in 2011 was inevitable, especially for automobile and semi-
conductor manufacturers. This disrupted the supply chain for these manufacturers,

Y. Kainuma (&)
Faculty of System Design, Tokyo Metropolitan University, Hino, Tokyo, Japan
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 201

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_12
202 Y. Kainuma

seriously affecting not only Japan but the whole world (METI 2014). Thus, supply
chain disruption became a serious issue at the time, but it was supposedly due to the
fact that supply chain management stressed efficiency and aimed at shorter lead
times and lower costs, and risk management was not seriously considered.
However, with increasing globalization of business, the environment of supply
chain management is transforming in a significant way. This is because one must
take into account not only certain new factors, such as natural disasters, exchange
rate fluctuations, and the uncertainty of demand, but also the unique components of
a global supply chain, such as political risks, corporation taxes, and transfer prices.
In addition to optimizing the supply chain used so far, this chapter aims at
designing a global supply chain model incorporating disruption risks. We also
conduct numerical experiments using the model designed, and obtain insight about
disruption risk reduction.
The remainder of this chapter is as follows. Section 12.2 reviews the literature
and discusses some related published works. A global supply chain model is
designed and developed in Sect. 12.3. Numerical experiments are conducted in
Sect. 12.4. Section 12.5 presents the results, and Sect. 12.6 concludes the chapter.

12.2 Literature Review

Vidal and Goetschalckx (2001) determined the traffic, transfer price, and shipping
cost distribution ratio for global supply chains, and proposed a determination
process to maximize post-tax profits. Transfer price is the price applied for trans-
actions within a given company. By skillfully using this transfer price, it becomes
possible to transfer profits from one country to another. As a result, by gathering
pre-tax profits into countries with low corporate tax rates, it is possible to maximize
profits for the entire company.
Figure 12.1 shows categorized risks considered in the recent 50 studies con-
cerning supply chain risk management. Of these, 87 risks could be considered
repeated; they can be categorized, in descending order of repetition, as disruption
risk, supply risk, demand risk, and operating risk. Furthermore, Liu and Anna
(2011) considered the conceivable risks in the supply chain: (1) foreign exchange
risks, (2) quality risks, (3) production interruption risks, and (4) supplier debt
default risk. By focusing on foreign exchange risk, they developed determination
models for in-house manufacturing and outsourcing. From the viewpoint of creating
a supply chain, there is a great number of risks other than the ones considered by
Liu and Anna (2011). Christopher and Peck (2004) classified sources of supply
chain risk into four risks (supply risk, process risk, demand risk, and control risk)
and identified the relationship among them as depicted in Fig. 12.2.
Chopra and Sodhi (2004) broadly categorized risks into delays, disruptions,
forecast inaccuracies, systems breakdowns, intellectual property breaches, pro-
curement failures, inventory problems, and capacity issues. Sheffi and Rice (2005)
indicated that the significant disruption has a typical profile in terms of its effect on
12 Design and Evaluation of Global Supply Chain … 203

Others 8%
Transporta-
tion risk 4%
Disruption risk
Product risk 21%
6%

Price risk 7%

Supply risk
Operations 15%
risk 11%

Demand risk,
15%

Fig. 12.1 Classification of supply chain risks

Supply Process Demand

risk risk risk

Control
risk

Environmental risk

Fig. 12.2 Sources of supply chain risk (Christopher and Peck 2004)

company performance. They pointed out that the nature of the disruption and
dynamics of the company response can be divided into eight phases as follows:
preparation, disruptive event, first response, initial impact, time of full impact,
preparation for recovery, recovery and long-term impact.
Tang and Tomlin (2008) conducted a study on flexibility in supply chain risk
mitigation. They assumed five positions Cj ðj ¼ 1; 2; . . .; 5Þ with uncertain supply
costs ð$5; $10; $15Þ, generated by uniform random numbers. In this case, the expected
204 Y. Kainuma

cost is UC ð1Þ ¼ 1=3ð5 þ 10 þ 15Þ ¼ $10 with one supply location and UC ð2Þ ¼
E ðMinfC1 ; C2 gÞ ¼ $7:8 with two supply locations. With the same calculations, the
expected cost comes to UC ð3Þ ¼ $6:6; UC ð4Þ ¼ $5:9; and UC ð5Þ ¼ $5:6, with fur-
ther reduction possible if the number of suppliers increases.
Tang and Tomlin (2008) showed that V ðnÞ ¼ ðUC ð1Þ  UC ðnÞÞ=UC ð1Þ, where
V ðnÞ is the percentage of savings in the expected unit cost by ordering from n
suppliers instead of one supplier. Figure 12.3 shows the percentage of saving unit
cost. From the figure, the expected cost reduction rate rises with an increase in the
number of suppliers with uncertain supply costs, but because this result produces a
concave line, they concluded that a small number of suppliers is sufficient.
Sodhi et al. (2012) reported the difference among researchers’ opinions and
future directions of supply chain risk management through a literature review and a
survey. As a result, about 50% of the studies considered the risk of natural disaster
and fire, which have a big impact but a small probability to occur.
Considering the unique components of global supply chains, Kubo (2006)
covered such things as (1) the great uncertainty of demand and foreign exchange,
(2) the risk of disasters or accidents such as terrorism and flooding, (3) product
supply and production considerations such as import taxes and import substitution
rates, and (4) profit distribution legality due to differences in corporate tax. He
demonstrated approaches based on each of these factors and researched the current
status and issues of global supply chain optimization models. Lee (2004) defined
agility as the speedily reaction to sudden changes in demand or supply.
Cui (2013) determined that in order to remove supply chain vulnerability, supply
chain resilience (SCR) is necessary. He carried out a systematic analysis of supply
chain risk, investigated supply chain vulnerability, classified abilities necessary to
implement SCR, performed case analyses, and presented a decision-making model
for operational strategic determination of SCR implementation.

50%

40%

30%
V(n)

20%

10%

0%
1 1.5 2 2.5 3 3.5 4 4.5 5
Number of supplier

Fig. 12.3 Flexibility by multi-suppliers (Tang and Tomlin 2008)

12 Design and Evaluation of Global Supply Chain … 205

12.3 The Model

12.3.1 Model Design

According to the relevant studies, many risks need to be considered in a global

supply chain, but this chapter focuses only on disruption risk, and designs a model
that takes into account supplier decentralization for risk response. Figure 12.4
shows the model, which considers supplier decentralization.
This chapter supposes a global supply chain that spans two countries, a devel-
oped and a developing country, and consists of three levels: supplier, manufacturer,
and customer. In both cases, we assume one manufacturer location and one cus-
tomer location, with two locations possible for suppliers only. Of the suppliers
s1 ; s2 ; s3 ; s4 , suppliers s1 ; s3 are located in the developed country and s2 ; s4 are
located in the developing country. Similarly, manufacturers are m1 ; m2 , customers
are c1 ; c2 , with m1 ; c1 being a manufacturer and customer located in the developed
country, and m2 ; c2 being a manufacturer and customer in the developing country.

12.3.2 Notations

The following notations are used in the proposed model.

Sets
S set of all suppliers s (s 2 S)
M set of all manufacturers m (m 2 M)
C set of all customers c (c 2 C).

Goods flow

Fig. 12.4 Supply Chain Risk Model

206 Y. Kainuma

Parameters
CAPst potential supply from supplier s in period t
CAPmt potential supply from manufacturer m in period t
Dct demand from customer c in period t
TCsm shipping costs from supplier s to manufacturer m
TCmc shipping costs from manufacturer m to customer c
SPsm sales price from supplier s to manufacturer m
SPmc sales price from manufacturer m to customer c
SCm inventory costs of manufacturer m
PCs supply costs of supplier s
PCm manufacturing costs of manufacturer m
FCs fixed costs of supplier s
FCm fixed costs of manufacturer m
CTs corporate tax rate of supplier s
CTm corporate tax rate of manufacturer m
ITm import tax rate of manufacturer m
Est exchange rate concerning supplier s in period t
Emt exchange rate concerning manufacturer m in period t
CLc penalty for unmet demand for customer c
T target period.
Variables
xsmt amount of supply sent from supplier s to manufacturer m in period t
ymct amount of supply sent from manufacturer m to customer c in period t
zmt inventory level at manufacturer m in period t
nct unmet demand for customer c in period t
wsþ pre-tax profit of supplier s (when positive)
ws pre-tax profit of supplier s (when negative)
wmþ pre-tax profit of manufacturer m (when positive)
wm pre-tax profit of manufacturer m (when negative).

12.3.3 Formulation

In this section, we formulate the proposed model with the objective function of
maximizing profit. The three terms in Eq. (12.1) below represent supplier’s pre-tax
profit, manufacturer’s pre-tax profit, and the penalty for unmet customer demand,
respectively. The pre-tax profit of supplier s is wsþ ; ws , and that of manufacturer m
is wmþ ; w
m . Since the pre-tax profit of the supplier is wsþ [ 0; w s ¼ 0 when pos-
þ 
itive, and ws ¼ 0; ws [ 0 when negative, thus it can be solved as a non-negative
variable, because the model allows for appropriate levy of corporate tax.
12 Design and Evaluation of Global Supply Chain … 207

Furthermore, the equality constraints related to the supplier’s and manufacturer’s

pre-tax profits are demonstrated in Eqs. (12.2) and (12.3), respectively. Constraints
related to the volume of demand are shown in Eq. (12.4), and those related to
potential supply quantity are given in Eqs. (12.5) and (12.6). Constraints related to
inventory and output preservation are given in Eq. (12.7). Those related to unmet
demand that occurs when supply is low relative to demand are shown in formula
(12.8). Equality constraints on each variable are shown in formula (12.9).
X 
Maximize profit ¼ ð1  CTs Þwsþ  w
s
s2S
X  X
T X ð12:1Þ
þ ð1  CTm Þwmþ  w
m  CLc nct
m2M t¼1 c2C

Subject to

T X
X  T X
X 
SPsm ðPCs þ TCsm Þ
wsþ  w
s ¼ xsmt  xsmt  FCs ð12:2Þ
t¼1 m2M
Est t¼1 m2M
Est

T X
X  T X
X 
SPmc ð1 þ ITm ÞSPsm
wmþ  w
m ¼ ymct  xsmt
t¼1 c2C
Emt t¼1 s2S
Emt
ð12:3Þ
XT X  X T  
ðPCm þ TCmc Þ SCm
 ymct  zmt  FCm
t¼1 c2C
Emt t¼1
Emt
X
ymcðt2Þ  Dct ð12:4Þ
m2M
X
xsmt  CAPst ð12:5Þ
s2S
X
ymct  CAPmt ð12:6Þ
m2M
X X
zmt ¼ zmðt1Þ þ xsmðt2Þ  ymct ð12:7Þ
s2S c2C
X
nct ¼ Dct  ymcðt2Þ ð12:8Þ
m2M

xsmt ; ymct ; zmt ; wsþ ; w þ 

s ; wm ; wm  0 ð12:9Þ
208 Y. Kainuma

12.4 Numerical Experiments

12.4.1 Disruption Occurrence

We generated disruptions through random numbers using Poisson process to

hypothesize that they seldom occur. Regarding their frequency and effect, we assumed
three types of disruption. We assumed that they occur with probabilities of once in 25
periods, once in 50 periods, or once in 100 periods, each with a different impact level.

12.4.2 Recovery from Disruption

Regarding recovery from a disruption, we set ranked recovery rates of 0, 10, 40,
and 70% for the potential supply in normal times, as shown in Table 12.1. For each
recovery rate, the period of recovery varies, in the descending order of disruption
frequency, from 1 ± 1, to 2 ± 1, and to 4 ± 1. The interval from disruption to
recovery is determined as one third of the probability of the respective uniform
random numbers, regardless of frequency of occurrence. We can construct a more
realistic model not only by incorporating disruptions but also by making the dis-
ruption period probabilistic. We considered the scale of disruption damage by
setting short disruption periods with a higher frequency and long disruption periods
with a lower frequency, as shown in Table 12.1.

12.4.3 Establishment of Parameters

For the proposed model, we carry out numerical experiments using the parameters
given in Table 12.2. We generate demand Dct from customer c in period t using
random numbers by normal distribution given the assumption that the demand in
the developed country is higher than that in the developing country. Furthermore,
we set the parameter values for each cost low, assuming that the products can be
made less expensive in the developing country than in the developed country.
Concerning the exchange rates in each period, the rate of the developing
country’s currency relative to the developed country’s one is shown in Fig. 12.5.
The exchange rates were generated using uniform random numbers. We performed
numerical experiments by dividing the suppliers into four scenarios. The scenarios
are shown in Table 12.3.

Table 12.1 Period of Recovery rate 0% 10% 40% 70%

recovery from disruption
Once in 25 periods 1±1 1±1 1±1 1±1
Once in 50 periods 2±1 2±1 2±1 2±1
Once in 100 periods 4±1 4±1 4±1 4±1
12 Design and Evaluation of Global Supply Chain … 209

Table 12.2 Respective parameters

Developed country Developing country
CAPst 700 600
CAPmt 800 700
Dct N(500, 10) N(400, 8)
TCsm 20 8
TCmc 30 12
SPsm 80 27
SPmc 165 55
SCs 15 5
PCs 10 3
PCm 25 8
FCs 600,000 400,000
FCm 600,000 400,000
CTs 0.35 0.25
ITm 0.05 0.03
CLc 150 150
T 200 200

Fig. 12.5 Exchange rate of the developing country relative to the developed country

Table 12.3 Experimental scenarios

Scenarios Developed country suppliers Developing country suppliers
1 1 location 1 location
2 2 locations 1 location
3 1 location 2 locations
4 2 locations 2 locations
210 Y. Kainuma

Because we use a method that probabilistically determines both disruption

occurrence and period, we repeat the experiment 20 times in each scenario. Using
the average of these experiment results, we verify the effectiveness of supplier
decentralization by comparing the objective function values in each scenario.

12.5 Experimental Results and Observations

The results for three types of disruption of varying frequency in Scenarios 1 through
4 are depicted in Fig. 12.6. As it can be seen in the figure, the post-tax profit rose
each time when the number of supplier locations increased from two to three and to
four.
Figure 12.7 shows an example of the transition in potential supply and unmet
demand in cases of a 1-in-25 disruption occurrence. It follows that disruptions occur

40,00,000

30,00,000 Scenario 4

20,00,000
Post-tax profit

10,00,000 Scenario 2

0 Scenario 3
-10,00,000

-20,00,000 Scenario 1
-30,00,000

Fig. 12.6 Post-tax profit by frequency of occurrence

Suppliable quant. of S1 Suppliable quant. of S 2 Unmet demand

800 3,000

700
2,500
Suppliable quantity

600
Unmet demand

2,000
500
400 1,500

300
1,000
200
500
100
0 0
1 16 31 46 61 76 91 106 121 136 151 166 181 196
Period

Fig. 12.7 Potential supply with a 1-in-25 disruption

12 Design and Evaluation of Global Supply Chain … 211

Suppliable quant. of S1 Suppliable quant. of S2 Unmet demand

Fig. 12.8 Potential supply with a 1-in-50 disruption

Suppliable quant. of S1 Suppliable quant. of S2 Unmet demand

Fig. 12.9 Potential supply with a 1-in-100 disruption

eight times for each of developed and developing countries suppliers. In this case,
when a disruption occurred at the supplier location, the effect would reach the
customer four periods later because we set the lead time between each location
(supplier-manufacturer, manufacturer-customer) to one period. Consequently, we
can verify from the experiment results that an unmet demand occurs belatedly.
Figure 12.8 shows a case with a 1-in-50 disruption occurrence, and Fig. 12.9 with a
1-in-100 disruption occurrence. As Figs. 12.7, 12.8 and 12.9 show, the unmet
demand from one disruption occurrence grows larger in Figs. 12.7, 12.8 and 12.9.
From the results obtained by the numerical experiments, we can confirm the
effectiveness of supplier decentralization in reducing penalties for unmet demand.
212 Y. Kainuma

Furthermore, the frequency of occurrence is low when large-scale, high-impact

disruptions in the supply chain are assumed leading to confirm that strategies to
decentralize suppliers are indispensable.

12.6 Conclusions

In this chapter, we designed a global supply chain model based on the current
conditions of advancing business globalization considering disruption risk. We
investigated three types of disruption of varying frequency and impact, and com-
pared post-tax profits depending on the occurrence of disruption. Through
numerical experiments, we showed that profits increase when suppliers are
decentralized, which supports the effectiveness of decentralization policy.
Moreover, we showed that supplier decentralization is even more effective when
disruption frequency is low and the impact is high.
We investigated only disruptions of the same frequency, in 200 periods, however
more studies are needed to assess supplier decentralization using a model that
combines disruptions with varying frequencies of occurrence.

References

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 Part III
Toward a Resilient Supply Chain
Chapter 13
Supply Chain Resiliency: A Review

Srinivasan Radhakrishnan, Benjamin Harris and Sagar Kamarthi

Abstract This chapter provides a broad overview of the field of supply chain
resiliency. First, we define the concept of resiliency from the perspective of a
supply chain. Next the terms risk and vulnerability are defined in the context of a
resilient supply chain. This connects previous studies in supply chain engineering to
the emerging field of resiliency. The second section of the chapter outlines com-
ponents that contribute to the resiliency of a supply chain. Supply chain flexibility,
velocity, visibility, and collaboration are defined and references to additional
sources are provided. The third section of the chapter outlines processes that are
used for building resilient supply chains. A number of relationships between supply
chain risk and profitability are explored, along with their impact on supply chain
resiliency. This section further provides a unifying exploration of the various
aspects and perspectives on supply chain engineering, including how they can be
utilized for developing and measuring the resiliency of a supply chain. The chapter
concludes with remarks ongoing research on supply resiliency and identifies
knowledge gaps and topics for future research.

13.1 Introduction

A recent movement in supply chain engineering is the development and incorpo-

ration of a concept called Supply Chain Resiliency (SCR). This chapter presents a
brief review of SCR. Section 13.2 of the chapter defines SCR as well as outlines the
components from each definition that contribute to supply chain engineering.
Section 13.3 reviews the literature to identify the components that constitute a
resilient supply chain. Section 13.4 examines recent attempts to design a supply

S. Radhakrishnan
B. Harris
S. Kamarthi (&)

Department of Mechanical and Industrial Engineering, Northeastern University,
Boston, MA 02115, USA
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 215

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_13
216 S. Radhakrishnan et al.

chain that incorporates one or more resiliency components discussed in this chapter.
Section 13.5 concludes with a summary of current resiliency definitions, and
identifies a number of research areas for future research.

13.2 Definition of Resiliency

In this section we discuss the multifaceted aspects of the term resiliency and funnel
a set of definitions that are used in the supply chain engineering literature.

13.2.1 Resiliency from a Supply Chain Perspective

The challenge in defining resiliency for a supply chain lies in the fact that the terms
uncertainty, risk, vulnerability and resilience are often used interchangeably to
define supply chain characteristics. This chapter discusses the boundaries and scope
of the aforementioned terms. Supply chain uncertainty is often used in place of
supply chain risk and vice versa. Some authors make a clear distinction between
uncertainty and risk (Simangunsong et al. 2012; Courtney et al. 1997; Juttner et al.
2003), while others do not give much importance to the distinction because of
blurring lines between those two terms (Juttner et al. 2003; Peck 2006; Li and Hong
2007; Ritchie and Brindley 2007). The distinction between uncertainty and risk
mainly emerges from the directionality of the outcomes, either positive or negative.
Risk is associated with negative outcomes whereas uncertainty can lead to negative
or positive outcomes (Wagner and Bode 2008). For example natural disaster based
disruptions to supply chain will have serious negative consequences however
demand based disruptions may either swing towards positive or negative side.
Knight (1965) gave a clear distinction between uncertainty and risk: “if you don’t
know the for sure what will happen, but you know the odds, that’s risk, and if you
don’t even know the odds, that’s uncertainty.” A suitable definition for supply chain
uncertainty according to Simangunsong et al. (2012) and van der Vorst and Beulens
(2002) given as follows:
Decision-making situations in the supply-chain in which the decision-maker does not know
definitely what to decide as he [or she] is indistinct about the objectives; lacks information
about (or understanding of) the supply-chain or its environment; lacks information pro-
cessing capacities; is unable to accurately predict the impact of possible control actions on
supply-chain behavior; or, lacks effective control actions (non-controllability)

Rosenhead et al. (1972) developed three classifications of decision processes,

delineated by supply chain information available; certainty, risk and uncertainty.
Under certainty all parameters are deterministic and known. The relationship
between input and output is unambiguous. Decision making under risk relies on
probability distributions, which govern the relation between input and output.
13 Supply Chain Resiliency: A Review 217

Decision making under uncertainty needs to be made despite the lack of infor-
mation about the likelihood of parameter changes.
Most authors adopt this categorization and refer to supply chain risk as how
much information is available about randomly changing supply chain parameters—
assuming probability specifications are at hand. Yet information processing needs
to respect the fact that supply chain scenarios are dynamic and the information
contained therein has varying degree of relevance and reliability. Supply chain
managers, however, still need to make decisions in the absence of pertinent
information about the risk of a supply chain. Supply chain risk therefore addresses
both decision-making under risk and decision-making under uncertainty
(Heckmann et al. 2015).
The type of process used to describe the development of uncertain parameters is
depicted by uncertainty models. The literature analysis follows the categorization of
Owen and Daskin (1998). They distinguished between probabilistic approaches and
scenario planning approaches. While the former explicitly considers probability
distributions, the latter evaluates generated sets of possible future values, which can
be, but are not required to be, weighted by discrete probability values (Heckmann
et al. 2015).
The international engineering standard ISO14971 defines and measures a risk
R as the product of probability and harm of an event e: R = Pe
Se, where Pe and Se
refer to the probability and severity of e, respectively (ISO 2015). In assessing
supply chain risk, triggering events are modeled as a function of their severity in
terms of impact on the supply chain goals and their frequency of occurrence.
Different terms are often used synonymously to refer to triggering events, e.g.
disturbance (Svensson 2000), disruption (Sheffi and Rice 2005), disaster, hazard or
crisis. Wagner and Bode (2008) stated that a disruption is characterized by its
probability, severity and effects. A disruption is further described as a combination
of the triggering event, which is characterized through frequency of occurrence and
magnitude, and a consequential situation, which threatens the normal course of
business operations. A disruption is regarded as more severe and often persists for a
longer period in time than a disturbance. Klibi and Martel (2012) combined the
availability of probability information and the extent of impact related to each
triggering event. The authors distinguish between random, which have a single
instance, hazardous events, which occur repeatedly, and uncertain events, about
which very little information exists.

13.2.2 Supply Chain Risk and Vulnerability

Often in academic literature the term vulnerability is used in conjunction with the
term risk. Svensson (2000) defined supply chain vulnerability (SCV) as “exposure
to serious disturbance, arising from risks within the supply chain as well as risks
external to the supply chain” and as “a condition that is caused by time and
relationship dependencies in a company’s activities in a supply chain.” In another
218 S. Radhakrishnan et al.

work Svensson (2002) incorporated supply chain disturbances (unexpected devia-

tions from the norm) and their negative consequences into vulnerability. Svensson’s
seminal work was followed by other works (Peck 2005, 2006) that treated SCV as a
multifaceted term rather than encompassing it in a single term definition. Peck
(2005, 2006) defined SCV in relation to risk as “at risk; vulnerable: likely to be lost
or damaged.” They suggested that supply chains link organizations, industries and
economies, and hence SCV should be addressed at multiple levels of analysis. What
is “at risk” could be the performance or survival of a process, vital assets or
infrastructure, an organization, an inter-organizational network, an economy, or
society (Peck 2005).
In general, SCV is the susceptibility of the supply chain to the likelihood and
consequences of disruptions (Svensson 2000, 2002; Blos et al. 2009; Christopher
and Peck, 2004) and hence often coupled with risk. In some papers SCV is defined
as the exposure of the supply chain to risks characteristic of any supply chain
system. SCV is a latent condition which only becomes manifest if a disruptive
event occurs (Juttner and Maklan 2011). Higher SCV is more likely to lead to a
disruptive event with severe consequences. As a latent condition, SCV can be
analyzed by measuring the exposure of the supply chain to environmental, supply
network and organizational risks (Briano et al. 2009). As a manifest condition, the
impact of a supply chain disruption indicates the degree of vulnerability (Juttner
and Maklan 2011).

13.2.3 Supply Chain Resilience

Supply chain resilience (SCR) addresses the supply chain’s ability to cope with the
consequences of unavoidable risk events in order to return to its original operational
state or to move to a new, more desirable state after being disturbed (Peck 2005;
Christopher and Peck 2004; Juttner and Maklan 2011). Ponomarov and Holcomb
(2009) defined supply chain resilience as “the adaptive capability of the supply
chain to prepare for unexpected events, respond to disruptions, and recover from
them by maintaining continuity of operations at the desired level of connectedness
and control over structure and function.” SCR focuses on the system’s adaptive
capability to deal with temporary disruptive events (Briano et al. 2009; Smith
2004). These disruptions imply a certain level of turbulence (Hamel and Valikangas
2003) and uncertainty in the supply chain (van der Vorst and Beulens 2002), which
together cause threats to the current operations (Sheffi 2005). Depending on the
magnitude of these threatening events, the terms disruption (Sheffi and Rice 2005),
crisis or even disaster are used (Natarajarathinam et al. 2009; Richey 2009). In
addition to how SCR is defined, we need to understand its relationship with SCV
and supply chain risk management (SCRM). Juttner and Makalan (2011) gave a
clear relationship map between the above mentioned three concepts (see Fig. 13.1).
Since lowering the impact of a supply chain disruption is also the key target of
SCR, it can be assumed that both concepts are related. More specifically, if SCR
13 Supply Chain Resiliency: A Review 219

Fig. 13.1 Relation between SCRM, SCR and SCV (Juttner and Maklan 2011)

decreases the negative consequences of supply chain risk events by ensuring a fast
return to its original or improved operation, it should, at the same time, decrease the
SCV in the case of a manifest risk event (Juttner and Maklan 2011). The main
objective of SCRM is to reduce SCV (Juttner and Maklan 2011) and increase SCR
(Sheffi and Rice 2005; Rao and Goldsby 2009). Juttner and Maklan (2011) noted
that this essentially puts emphasis on managing and mitigating risk and thereby
fostering resilience of the supply chain. However, the authors also note that a
supply chain risk measure does not necessarily reduce the vulnerability of the
supply chain and, at the same time, increase its resilience. Likewise, a supply chain
with high vulnerability could either have high or low resilience. If a SCRM ini-
tiative only lowers the probability of a disruptive event, the SCV, here defined as
the supply chain’s latent exposure to supply chain risks, is reduced but will not
necessarily have an effect on the SCR. In this sense, a supply chain risk strategy
which avoids certain geographical risk areas has lowered the likelihood of a dis-
ruption caused, e.g. by political instability in the region. It has, however, not
increased its capability to response to recover from a disruption if it still occurred.
However, if a supply chain risk initiative successfully addresses the risk effects, the
SCR increases as well (Juttner and Maklan 2011).

13.3 Components of a Resilient Supply Chain

In the case of ecological system resiliency, the components of resiliency are clearly
defined (see Table 13.1).
Similarly, components of SCR are also detailed in the literature. Alternative
terminologies for SCR include: capabilities of resilient supply chain, characteristics
of resilient supply chain, and formative resilient capabilities. Sheffi and Rice (2005)
divided supply chain disruptions into three phases: (1) readiness, (2) responsive-
ness, and (3) recovery. In order to secure these three disruption phases, four key
resilient capabilities are frequently discussed in the literature. They are (1) flexi-
bility, (2) velocity, (3) visibility, and (4) collaboration (Juttner and Maklan 2011).
220 S. Radhakrishnan et al.

Table 13.1 Components of ecological resilience (Ponomorov and Holcomb 2009)

Components of resilience
Elasticity Rapidity of restoration of a stable state following disturbance (Orians 1975;
Westman 1978)
Amplitude The zone of deformation from which the system will return to its initial state
(Orians 1975; Westman 1978)
Hysteresis The extent to which the path of degradation under chronic disturbance, and a
recovery when disturbance ceases, are not mirror-images of each other
(Westman1978, 1986)
Malleability Degree to which the steady state established after disturbance differs from the
original steady-state (Westman 1978)
Damping The degree and manner by which the path of restoration is altered by any forces
that change the normal restoring force (Clapham 1971)

13.3.1 Supply Chain Flexibility

Peck (2005) defined flexibility as “being able to bend easily without breaking.”
Flexibility ensures that changes caused by the risk event can be absorbed by the
supply chain through effective responses (Skipper and Hanna 2009). It is hence the
ability to encounter, resolve and, when appropriate, exploit unexpected emergencies
(Juttner and Maklan 2011). Flexibility can amount to an organic capability, which
also supports sensing disruptions and, as such, relates to the event readiness
dimension of supply chain resilience (Juttner and Maklan 2011; Sheffi and Rice
2005). Sheffi and Rice (2005) proposed “redundancy” as a separate formative
resilience capability. In agreement with Rice and Canioato (2003), Juttner and
Maklan (2011) proposed redundancy as “duplications of capacity so that operations
can continue following failure” as route to flexibility. Other authors included
“velocity” and speed into their flexibility definition and emphasized that flexibility
means doing things fast (Christopher 2005; Li et al. 2006). However, Juttner and
Maklan (2011) have maintained that both are distinct, yet mutually reinforcing
capabilities.

13.3.2 Supply Chain Velocity

Christopher and Peck (2004) defined velocity as “speed of motion, action, or

operation, rapidity and swiftness.” Velocity in a risk event determines the loss that
happens per unit of time. Compared to flexibility, velocity places a stronger
emphasis on the efficiency rather than effectiveness of the supply chain’s response
and recovery throughout and after a disruption (Smith 2004). In the context of
flexibility reconfiguration is the number of possible states a supply chain can take,
robustness is the number of changes it is able to cope with, and velocity is the pace
of flexible adaptations (Stevenson and Spring 2007). Lead-time is therefore seen as
13 Supply Chain Resiliency: A Review 221

a key indicator of supply chain velocity (Cranfield School of Management 2003).

From a global supply chain risk perspective, Manuj and Mentzer (2008) categorized
three forms of velocity: the rate at which a risk event happens, the rate at which
losses happen and how quickly the risk event is discovered. In a resilience context,
a fourth form was added by Juttner and Maklan (2011): the speed with which a
supply chain can recover from a risk event. Velocity thus supports the adaptive
capacity in all three phases of the risk event: before, throughout and after the supply
chain disruption.

13.3.3 Supply Chain Visibility

Francis (2008) defined supply chain visibility as “the identity, location and status of
entities transiting the supply chain, captured in timely messages about events, along
with the planned and actual dates/times of these events”. Supply chain visibility
addresses information about entities and events regarding end-to-end orders,
inventory, transportation and distribution as well as any events in the environment
(Sheffi and Rice 2005; Smith 2004; Wei and Wang 2010). Visibility ensures
confidence into the supply chain and prevents overreactions, unnecessary inter-
ventions and ineffective decisions in a risk event situation (Christopher and Lee
2004). As such, visibility is related to effective disruption response and recovery.
Furthermore, the ability to see from one end of the pipeline to the other is an
important element of event readiness because the right signals are picked up in a
timely manner (van der Vorst and Beulens 2002). Visibility, velocity and flexibility
together are sometimes captured under “agility” (Li et al. 2009; Chopra and Sodhi
2004; Faisal et al. 2006; Tang and Tomlin 2008; Christopher and Peck 2004).
However, in order to have a clear view on all dimensions of resilience we decide to
target all three formative capabilities separately.

13.3.4 Supply Chain Collaboration

Since supply chain resilience is a network-wide, inter-organizational concept, its

formative capabilities have to adopt the predisposed attitudes of the parties to align
forces in the case of a risk event. Collaboration is related to visibility in the sense
that it includes the parties’ willingness to share even sensitive risk and risk
event-related information (Faisal et al. 2006). As such, collaboration contributes to
reduced uncertainty and event readiness (Cranfield School of Management 2003).
Furthermore, collaboration has been suggested as the “glue that holds supply chain
organizations in a crisis together” (Richey 2009). It prevents opportunistic behavior
on behalf of individual parties which would adversely affect the whole system’s
response capability. Sheffi (2005) stressed that collaboration is equally important,
after a disruption was overcome, to share experiences among the parties. Such post
222 S. Radhakrishnan et al.

disruption collaboration is likely to have an effect on the system’s ability to deal

with future disruptions along all three phases: before, throughout and after the event
(Juttner and Maklan 2011). The four formative resilience capabilities echo rather
than contradict widely accepted principles of good supply chain management.
However, the literature suggests that disruptions are a strong moderator for the
positive effect of these formative capabilities on smooth supply chain operations
(Juttner and Maklan 2011).

13.4 Building Supply Chain Resiliency (SCR)

The field of operations research has contributed much to the study and development
of SCR. Pettit (2008) provided a framework by which contributions to SCR can be
categorized and analyzed, which we align within the review below. It is important
for organizations to have an SCR framework which forms the basis for evaluating
the health of supply chain when subjected to various disruptions. Pettit (2008)
proposed a comprehensive SCR framework that included two main dimensions,
shown in Table 13.2: (1) vulnerability and (2) capabilities.
The zone of balanced resilience as proposed by Pettit (Pettit 2008) is shown in
Fig. 13.2. This figure illustrates the importance of building resilience by balancing
profitability and risk. Low vulnerabilities and high capabilities lead to an erosion of
profits, indicating that the supply chain is over-equipped for a given amount of risk.
On the other hand, high vulnerability combined with low capability takes on more
supply chain risk than the system is capable of withstanding. With this relationship
in mind, it is important for an organization to have a clear vulnerability and
capability map.

Table 13.2 Vulnerabilities Vulnerability factors Capabilities

and capabilities according to
Pettit (2008) Turbulence Flexibility in sourcing
Deliberate threats Flexibility in order
External pressures fulfillment
Resource limits Capacity
Sensitivity Efficiency
Connectivity Visibility
Supplier/customer Adaptability
disruptions Anticipation
Recovery
Dispersion
Collaboration
Organization
Market position
Security
Financial strength
13 Supply Chain Resiliency: A Review 223

Fig. 13.2 Measurement of

Resilience and Resilience
Fitness Space (Pettit 2008)

A number of researchers have sought to bring the mathematical tools provided

by operations research to bear on the problem of designing resilient supply chains.
Following the capability framework outlined in by Pattit (2008), we provide a brief
survey of current results.

13.4.1 Flexibility in Sourcing

A number of operations research and econometric techniques have been brought to

bear on analyzing sourcing flexibility in supply chain management. The concept of
supply chain flexibility is theoretically and practically explained by Ka-Leung
Moon et al. (2012), who defined supply chain flexibility metrics and then used them
in an analysis of textile and clothing companies. Benaroch et al. (2012) utilized a
combination of econometrics and unconstrained nonlinear programming to solve
optimal sourcing problems while incorporating supply chain flexibility considera-
tions. Pen-Her Pei (2011) included methods found in computational game theory
and mechanism design to understand and evaluate sourcing flexibility conditions
under a variety of contact structures. Purvis et al. (2014) examined the concept of
supply chain flexibility from the perspective of lean and agile engineering. While
the previous work in supply chain flexibility concerns individual contracts and
transactions, the work of Chiang et al. (2012) sought to use a high-level strategic
view to examine the impact of sourcing and strategic flexibility. In doing so, they
fill a key gap in demonstrating supply chain flexibility as a discriminator, both from
the individual transaction basis to high-level strategic considerations.
224 S. Radhakrishnan et al.

13.4.2 Supply Chain Capacity

Iyer (2014) defined supply chain capacity as “the designed maximum flow through
a facility over a period of time.” Following the trend of this definition, a number of
authors have analyzed the impact of supply chain capacity on overall supply chain
performance. Using the concept of optimal control, Ivanov et al. (2015) described
and optimally solved a supply chain capacity model. Li et al. (2014) constructed a
simple supply chain and examine optimal capacity decisions under competitive
conditions. Their analysis differs from the traditional notion of supply chain
capacity due to their inclusion of game-theoretic concepts. Kamath and Roy (2007)
incorporated a system dynamics modeling methodology and utilize it to analyze the
information required to make optimal supply chain capacity decisions. In the lit-
erature for this survey, Mazzola and Neebe (2012) most closely linked operations
research techniques with supply chain capacity planning in a theoretical sense. The
model they developed incorporated nonlinear and network programming to solve
the Generalized Assignment Problem (GAP) over finite time with discrete time
steps. Due to the level of generality, their result finds applicability in many supply
chain capacity planning problems.

13.4.3 Supply Chain Efficiency

The concept of supply chain efficiency has existed in the literature for a few of
decades. A number of metrics have been developed through which engineers can
gauge the efficiency of a supply chain. More recently, the following authors have
contributed additionally to the concept. Martinez-de-Albeniz and Simchi-Levi
(2013) took the concept of supply chain efficiency and posed the problem in a
two-player stochastic game and pricing and demand. They then solved the problem
using stochastic dynamic programming. Qiu (2012) took an alternative approach to
measuring supply chain efficiency phenomenon, using a statistical instrument to
measure organizational support and how it correlates to cross-boundary (that is,
inter, intra, and extra-organizational) activities. The observed number of activities
was then correlated to the associated efficiency of the supply chain. Lo et al. (2008)
followed a method similar to that of Qiu to measure improvements in supply chain
efficiency following the implementation of the ISO 9000 manufacturing standards.
Feng and Zhang (2014) incorporated the proven concept of modular manufacturing
into a study on how a firm can improve its supply chain efficiency under a modular
manufacturing framework. Finally, Li and O’Brien (1999) examined supply chain
efficiency from a hierarchical perspective, seeking to optimize decisions at both the
supply chain and operational levels of an organization. In the context of SCR, the
above mentioned publications add to the computational toolkit available for ana-
lysts and engineers to quantify and improve resilience.
13 Supply Chain Resiliency: A Review 225

13.4.4 Supply Chain Visibility

While the exact definition differs across sources, one online source (Rouse 2015)
defines supply chain visibility as “the ability of parts, components, or products in
transit to be tracked from the manufacturer to their final destination.” While the
study of supply chain visibility is a field of research in its own right, Pettit (2008)
defined it as only one of a number of capabilities that characterize a resilient supply
chain. Zhang et al. (2011) further expanded the above definition using set notation
and operations. They defined atom, single, and compound visibility and use the
definitions to build a conceptual framework that can be used for building a system
to build and measure supply chain visibility in a large operation. The impact of
implementing improvements in supply chain visibility was explored by Caridi et al.
(2014), who correlated changes in supply chain visibility with changes in key
performance indicators (KPIs). The authors also provided a structured method to
estimate the level of visibility within a company’s supply chain. Many other
sources (Barratt and Oke 2007; Williams et al. 2013; Caridi et al. 2014; Yu and Goh
2014; Zhang et al. 2011; Caridi et al. 2010) contributed to the theoretical and
practical understanding of supply chain visibility.

13.4.5 Supply Chain Adaptability

Supply adaptability refers to the ability of a supply chain to augment and

re-organize itself in the face of possible disruptions. This ability is crucial to supply
chain analysis in a number of areas, highlighted by humanitarian and medical
systems. Dubey and Gunasekaran (2015) presented the differences between a
humanitarian supply chain and one commonly encountered in the commercial
world. Consequently, they pointed out characteristics of the supply chain that are
critical to operation, among them the ability of the supply chain to adapt to
stochastic events. Supplementing the previous work, Makris et al. (2011) utilized a
Bayesian network approach to enhance adaptability through improved decision
making under uncertainty. A common theme in these research programs is the
presence of uncertainty in the supply chain and mitigation of the impact of the
uncertainty. Along a different line of analysis, Fan et al. (2008) connected the
concept of self-organization in large systems to how supply chains incorporate
adaptability. While they also used the concept of information entropy to explain the
tendency of supply chains to adapt to external stimuli, they did not include an
empirical example. This indicates that the concept of self-organization in supply
chains, and adaptability in this context, still has room for research. Returning to an
empirical and statistical set of studies, Eckstein et al. (2014) analyzed a broad
cross-section of German industrial firms and demonstrated that firms displaying
higher levels of supply chain adaptability (and agility as well) perform better with
regard to cost and performance than firms that do not. While intuitive, their insights
226 S. Radhakrishnan et al.

into how product complexity affects the performance of each supply chain factor
(adaptability and agility) provided valuable information to supply chain managers
and practitioners.

13.4.6 Supply Chain Anticipation

Again returning to the common thread of stochastic behavior in a supply chain, a

number of researchers have developed methods by which a supply chain manager
can anticipate (and hopefully respond to) changes and disruptions in the enterprise.
Jansen et al. (2013) incorporated operations research techniques into supply chain
anticipation by developing a two-stage linear programming that captures demand
uncertainty to optimize subsequent production decisions. Chauhan et al. (2011) also
utilized linear programming techniques to optimize a decision process with appli-
cations in the forestry industry. The impact of supply chain anticipation is examined
by a more complicated example by Tanrisever et al. (2012), who used the ability to
anticipate changes in a supply chain to investigate the interplay between process
flexibility, defined as “the ability to produce multiple products on multiple pro-
duction lines,” and operational flexibility, which they defined it as “the ability to
dynamically change capacity allocations among different product families over
time.” The authors reached one interesting conclusion in particular, that most
analyses assume that firms will operate optimally after a supply chain decision has
been made. The validity of that assumption is shown to have a large impact on how
supply chain anticipation will impact key performance indicators. Another example
of innovative research involving supply chain anticipation was provided by
Boulaksil et al. (2011). They examined a contractual environment between a pro-
vider and a customer, and demonstrate a decision toolkit for dealing with customers
with heterogeneous demand levels. A number of interesting conclusions are drawn,
key among them (for this literature survey) being demand uncertainty and penalty
costs are directly proportional to the importance of integrating supply chain
anticipation techniques.

13.4.7 Supply Chain Recovery

The term recovery has come to have two different meanings in the supply chain
literature over the last decade. The first refers to the recycling and recovery of
products that are processed in the supply chain, while the second refers to the
rebuilding of the actual supply chain following a stochastic event. Within the
context of SCR, we shall focus on the second definition. The concept of supply
chain resilience implies the response to or recovery from an unforeseen event that
impacts the key performance indicators of the supply chain. The recovery of the
supply chain is a field of research in its own right, though the literature examining
13 Supply Chain Resiliency: A Review 227

disastrous events is not as widespread. Vahdani et al. (2011) considered the process
of supply chain recovery from the initial operation of the supply chain pre-collapse,
and develop a model to measure the probability that the supply chain can feasibly
recover in the time required to maintain a customer base. Macdonald and Corsi
(2013) performed a qualitative survey among supply chain managers to identify and
understand the factors that led up to a supply chain collapse, as well as a number of
best practices for managing the recovery of the supply chain to pre-collapse levels.

13.4.8 Supply Chain Dispersion

Under stochastic supply chain disruptions, one method for mitigating the impact on
supply chain performance is dispersing supply chain elements globally. This
question has attracted a lot of research in the last decade. Park et al. (2013) used the
Japanese economy and its recovery from a number of natural disasters as a case
study in the effectiveness of supply chain dispersion, among other methods. Their
conclusion that none of the Japanese firms have reached an appropriate respon-
siveness level indicates that the concept of supply chain dispersion is only recently
beginning to take hold commercially. Applying dispersion to supply chain man-
agement has also been explored in the theoretical arena. Mokashi and Kokossis
(2003) used directed graphs and dispersion algorithms to develop optimal planning
and distribution solution for supply chain management. Lorentz et al. (2012)
showed that geographic dispersion in a supply chain can have vastly different
effects, depending on the desired performance indicators. While supply chain dis-
persion can reduce a supply chain’s susceptibility to natural disasters, it also tends
to drive up holding and storage costs due to the increased need for transportation.
Seuring and Muller (2008) used the concept of supply chain dispersion as one
component of a sustainable supply chain architecture. While not explicitly called
out, the authors implied that global supply chains have a greater ability to be
architected in a sustainable fashion, implying an additional benefit from geographic
supply chain dispersion.

13.4.9 Supply Chain Collaboration

The concept of supply chain collaboration has been studied extensively as an

enabling factor for improving the key performance indicators of a supply chain.
Ramanathan (2013) provided a framework by which participants in a supply chain
can understand how information exchanged between them can be of mutual benefit
for improving supply chain anticipation and risk mitigation. Moving from a qual-
itative analysis and report to numerical simulation, Ramanathan (2014) used a
228 S. Radhakrishnan et al.

simulation environment as a heuristic tool to enable interested companies to

develop collaboration capabilities without having extensively invest. Ramanathan
also identified and provided metrics for how to measure different levels of col-
laboration, showing that companies can expect to gain different levels of supply
chain key performance indicator improvement as a function of their collaboration
level. On a practical level, Ramanathan (2012) collected empirical retail data to
examine and recommend how some factors, when shared between firms in col-
laboration, will result in increased forecast accuracy, while other factors may not.
Zacharia et al. (2011) envisioned supply chain collaboration using both
knowledge-based (meaning that knowledge is the most strategically important
resource of a firm) and relational (where links between firms are a strategic
resource) views of firms. They then utilized structural equation modeling to
understand which factors among firms prove to be the most impactful in terms of
supply chain collaboration and improvements in key performance indicators. In
their empirical study, Cao and Zhang (2011) arrived at a conclusion similar to that
of Ramanathan (2012), showing that supply chain collaboration has the potential to
provide competitive advantage to companies that intelligently utilize it. One dis-
tinction they noted, however, is that the size of firm affects the level to which supply
chain collaboration can impact firm performance.

13.4.10 Supply Chain Organization

The organization of a supply chain plays a major role in its performance, especially
in a competitive environment. Ketchen and Hult (2007) explored multiple indica-
tors of supply chain performance instead of analyzing based on a single supply
chain key performance indicator. Their goal is to understand how to create a “best
value” supply chain. The computational aspect of this is a subject of future, but the
authors identified a number of factors and theories that contribute to improved
supply chain organization. Miles and Snow (2007) also brought concepts from
organization theory to bear on supply chain management. They trace the evolution
of modern supply chains over the last three decades, concluding that supply chain
management will continue to become more collaborative in the future. From a
qualitative standpoint, Tangpong (2011) suggested content analysis to determine
improvement in a supply chain organization, while Whitten et al. (2012) defined the
presence of agility, adaptability, and alignment as components of a well-organized
supply chain (“Triple-A Supply Chain”). Along a different track, Singhal and
Singhal (2012) proposed using concept from supply chain management, including
organization theory, to build and pursue innovation in multiple industries and
commercial settings.
13 Supply Chain Resiliency: A Review 229

13.4.11 Supply Chain Market Position

Literature tying market position to supply chain management is not as widely

available as the literature on other aspects of supply chain resilience are.
Nevertheless, a number of papers give insight into the idea. Sharifi et al. (2013) tied
supply chain management and performance into a firm’s ability to enhance its
market position. This differs slightly from our viewpoint of a resilient supply chain
in that we are seeking to analyze a firm’s market position as an independent variable
with regard to supply chain resilience, not vice versa. The work of Lorentz, et al.
(2013) examined international food supply chains in emerging markets in order to
understand what supply chain management techniques must be brought to bear in
order to optimize the process as the marketplace evolves.

13.4.12 Supply Chain Security

The security of a supply chain can also be grouped in the broader area of risk
management. Yang (2011) examined a number of incidents in the Taiwanese
maritime supply chain and suggested risk mitigation strategies appropriate to the
impact and likelihood of the events. Similarly, Speier et al. (2011) identified
security factors in a general sense with the intent of developing a framework by
which risks to the supply chain can be efficiently and effectively mitigated. Tang
and Musa (2011) noted one factor lacking in other literature on the subject:
information flow risk. They then proceed to analyze the supply chain impact when
information is blocked in a global enterprise. Looking back at the literature
regarding supply chain collaboration, Lee et al. (2011) demonstrated how supply
chain collaboration can actually improve supply chain security.

13.4.13 Supply Chain Financial Strength

The financial strength of a supply chain is difficult to define, but it follows intu-
itively that a supply chain with financial reserves and liquidity will be able to
withstand disruption events. Randall and Farris II (2009) demonstrated how tech-
niques from financial analysis and financial management can benefit a supply chain
by reducing the costs associated with it. This will in turn increase the supply chain’s
ability to withstand something unforeseen.
Table 13.3 provides an overview of the previously discussed factors along with
citations to major works on the topic.
230 S. Radhakrishnan et al.

Table 13.3 An overview of supply chain resiliency attributes and corresponding references
Resiliency Analysis type
factor Conceptual proposal Survey instrument Other (specified)
w/quantitative
analysis
Supply chain Benaroch et al. (2012), Purvis et al. (2014),
flexibility Pen-Ehr Pei, et al. (2011) Ka-Leung Moon
et al. (2012), Chiang
et al. (2012)
Supply chain Ivanov et al. (2015), Li System dynamics
capacity et al. (2014), Mazzola and modeling—Kamath
Neebe (2012) and Roy (2007)
Supply chain Li and O’Brien (1999), Qiu (2012), Lo et al.
efficiency Feng and Zhang (2014), (2008)
Martinez-de-Albeniz and
Simchi-Levi (2013)
Supply chain Zhang et al. (2011), Yu and Williams et al. Case studies—Caridi
visibility Goh (2014) (2013), Barratt and et al. (2010)
Oke (2007), Caridi
et al. (2014)
Supply chain Fan et al. (2008), Makris Eckstein et al.
adaptability et al. (2011), Dubey and (2014)
Gunasekaran (2015)
Supply chain Boulaksil et al. (2011), Case study—
anticipation Tanrisever et al. (2012), Chauhan et al.
Jansen et al. (2013) (2011)
Supply chain Macdonald and
recovery Corsi (2013)
Supply chain Mokashi and Kokossis Lorentz et al. (2012) Case studies—Park
dispersion (2003) et al. (2013), Lit
review—Seuring
and Muller (2008)
Supply chain Ramanathan (2013, 2014) Case study—
collaboration Ramanathan (2012)
Supply chain Ketchen and Hult (2007), Whitten et al. (2012) Historical review—
organization Tangpong (2011), Singhal Miles and Snow
and Singhal (2012) (2007)
Supply chain Case studies—
market Lorentz et al. (2013),
position Sharifi et al. (2013)
Supply chain Speier et al. (2011), Lee Lit review—Tang
security et al. (2011) and Musa (2011),
Case study—Yang,
(2011)
Supply chain Randall and Farris II
financial (2009)
strength
13 Supply Chain Resiliency: A Review 231

13.5 Conclusions

This chapter provides a literature review of resiliency definitions from fields other
than supply chain engineering and demonstrates how these concepts from disparate
fields have influenced supply chain practitioners in defining resiliency in supply
chain engineering. Table 13.3 summarizes the SCR attributes and their analysis
types and the corresponding references. As shown in Sects. 13.1 and 13.2, resi-
liency definitions from fields as disparate as ecology and psychology provide
valuable insight into what constitutes supply chain resilience. Transitioning from
those definitions to applications in supply chain engineering has occurred in a
piecewise fashion under labels such as SCRM. Due to this fact, a unifying effort in
defining and developing SCR as a field of study is necessary.
Beyond the review of literature presented in this chapter, there are a number of
research gaps that must be covered before SCR can be integrated into SCM
operations on a large scale. For example, proactive SCM, competitive supply chain
interactions, and resiliency metrics, are some of the important areas in which
academic researchers can contribute to the growth of the supply chain resiliency
concept. Given the necessity of managing a supply chain in an increasingly com-
petitive and volatile market space, the impact of disruptive events must be under-
stood and mitigated effectively. The main goal of this chapter is to review concepts,
information, and benchmarks so that researchers can leverage this body of
knowledge to develop robust computational tools and to identify directions for
future research in supply chain resiliency.

Acknowledgements This work is supported by the research initiation grant for “Supply chain
engineering for neutralizing threats to resiliency (SENTRY)” project. We are very thankful to Dr.
Michael Silevitch, the Director of the DHS Center of Excellence for Awareness and Localization
of Explosives Related Threats, and Mr. John Beaty, the Director of Technology Programs, for
facilitating SENTRY project discussions and for their valuable intellectual inputs.

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Chapter 14
The Role of Resiliency in Managing
Supply Chains Disruptions

Anirban Ganguly, Debdeep Chatterjee and Harish Rao

Abstract Current day business organizations, symbolized by complex and global

supply chains, are often subjected to unforeseen threats that result in huge financial
losses. There are no sure ways of assessing these threats, especially the “black
swans” (high-impact, but low-probability events like natural disasters, terrorist
attacks, outbreaks, etc.), as the severe dearth of historical data excludes the use of
forecasting tools to evaluate those disruptions. However, it has been observed that
some organizations cope far better than others in addressing these unforeseen and
unquantifiable disruptions. This is not because they have a ‘secret formula’, but due
to them sharing a critical trait known as resilience. The notion of supply chain
resiliency, which is the ability of a supply chain to recover to the ‘pre-disruption’ or
a better state after suffering through a disruption process, has always been con-
sidered as a core element in the success of an organization. The primary objective of
this chapter is to familiarize the readers with the concept of supply chain resiliency
and its role in mitigating supply chain disruptions. The chapter will also reveal the
advantages of a resilient supply chain through insightful examples from a wide
range of industries.

A. Ganguly (&)
Jindal Global Business School, O. P. Jindal Global University,
Sonipat, Haryana 131001, India
e-mail: [email protected]
D. Chatterjee
Schneider Electric, 1st Main Rd, Electronic City, Bengaluru
Karnataka 560100, India
H. Rao
International Management Institute, B-10, Qutab Institutional Area,
Tara Crescent, New Delhi, Delhi 110016, India
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 237

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_14
238 A. Ganguly et al.

14.1 Introduction

In the current day global business environment marked by uncertainty and turbu-
lence, the vulnerability of supply chain has become a major cause of concern for
organizations. Increase in the size and complexity of supply chains, coupled with
globalization and unpredictable market trends, have greatly increased the risks
associated with an organization’s supply chain. These risks, which might include
natural disasters, terrorism, cyber-attacks and credit crunch among others, could
yield to a drastic loss in productivity, revenue, competitive advantage and prof-
itability if not managed appropriately (Mensah and Merkuryev 2014). In order to
combat these risks, supply chains are being designed to withstand disruptions,
provide an efficient and effective response, and be capable of recovering to their
original state or even better, post the disruptive event (Christopher and Peck 2004;
Ponomarov and Holcomb 2009). This is whole essence of supply chain resiliency,
which is concerned with improving the adaptability of global supply chains,
effective collaboration with the various components of the supply chain and
leveraging information technology to assure continuity in the face of catastrophic
disruptions (Fiskel et al. 2015). Resilience allows firms to manage supply chain
disruptions and continue to deliver their products and services to the customer
(Ambulkar et al. 2015). In the current day business scenario, supply chain resiliency
goes beyond just mitigating risks to being a major tool for competitive advantage
and financial gains, along with serving as an avenue to reduce customer perception
of assumed risks and moving companies from simple risk management to risk
resilient growth.
According to Ponomarov and Holcomb (2009), supply chain resilience aims at
developing the adaptive capability to prepare for unexpected events and to respond
and recover from disruptions. Supply chain resilience has gained momentum as a
competitive characteristic of supply chains due to increasing uncertainty in its
operations (Carvalho et al. 2012). It is based on the underlying assumption that not
all risk events can be prevented (Jüttner and Maklan 2011), and can be both
proactive and reactive in nature. While some researchers’ state that resilience
comprises of reactive capabilities for use after a disruption, others argue that
resilience is a more proactive effort toward being prepared for disruptions (Falasca
et al. 2008; Kamalahmadi and Parast 2016). However, whether reactive or proactive
in nature, resilience is often perceived as a highly desirable quality of supply chains,
as it increases a firm’s readiness in dealing with risks that can emerge from the
customers’ side, the suppliers’ side, the internal processes adopted or the integration
mechanisms employed or a combination of the above (Purvis et al. 2016).
Organizations that concentrate on building a resilient supply chain often end up
combating disruptions far better than their non-resilient counterparts. Two notable
examples of supply chain resiliency aiding an organization to bounce back from
disruption effectively and more efficiently that their competitors can be cited as
Toyota and DHL. In 1997, after a devastating fire roared through Aisin Seiki Co.
factory, which was then the largest manufacturer of brake fluid valves for Toyota
14 The Role of Resiliency in Managing Supply Chains Disruptions 239

Corporation, most of the people thought Toyota couldn’t recover for weeks
(Reitman 1997). However, due to the resiliency of their supply chain, five days after
the fire, its car factories started up again. Similarly, after the eruption of the
Eyjafjallajökull volcano in Iceland in 2010, DHL activated its emergency plan and
rescheduled one hundred flights from its hub in Leipzig, Germany, toward desti-
nations in southern Europe that did not experience airspace closures. Furthermore,
it quickly shifted transport to ground vehicles by deploying a fleet of trucks to
Leipzig to retrieve shipments, while providing continuous status updates to its
customers, thereby avoiding significant financial impacts due to the sheer resilience
of their supply chain (Fiskel 2015).
Other examples of resilient supply chain includes ON Semiconductor Corp, an
Arizona based chip maker, who kept their business moving after the devastating
earthquake and tsunami hit Japan in 2011 (Dipietro 2015) and Seagate, post the
Thailand floods of 2012, who managed not only to absorb the pressure that the
floods caused in their inventory and operations management, but also was able to
displace Western Digital, the then market leaders, as the global leader in hard drives
(Mearian 2012).
This chapter traces the concept of supply chain resiliency and its contribution
towards addressing disruption in organizations. This chapter aims to address two
key facets in supply chain resiliency: (1) an overview of supply chain resiliency and
(2) its role is mitigating supply chain disruption. Additionally, it also discusses the
critical phases and attributes of a resilient supply chain along with discussing
important supply chain resiliency strategies. Conclusions on the current state of
supply chain resiliency are provided based on the findings. The chapter is divided
into four sections. While the first section introduces the chapter to the readers along
with laying down the organization of the chapter, Sect. 14.2 discusses the defini-
tions and characteristics of supply chain resiliency. Section 14.3 provides the role
of resiliency in addressing supply chain disruption along with stating the critical
strategies for designing a resilient supply chain. Section 14.4 is devoted toward
discussing the findings and drawing conclusions and recommendations from it.

14.2 Definition and Characteristics of a Resilient

Supply Chain

Resilience, which traces its origin to the Latin word resilīre meaning ‘to spring back or
rebound’, can be stated as the ability of a substance or object to spring back into shape.
The concept of resilience has its origins in development theory of social psychology
and is directly related to important issues such as ecological and social vulnerability,
the politics and psychology of disaster recovery, and risk management under
increasing threats (Ponomarov and Holcomb 2009). One of the early conceptualiza-
tion of resilience stated it as a degree, manner, and pace of restoration of initial
structure and function in an ecosystem after disturbance (Clapham 1971). The concept
240 A. Ganguly et al.

of resilience, over the years, has gradually evolved and diffused into a variety of
domains, with supply chain being one of the newest members to adapt the concept.
The concept of resilience in supply chains combines previous tenets with studies
of supply chain vulnerability, defined by Svensson (2002) as “unexpected devia-
tions from the norm and their negative consequences”. Therefore, it can be con-
cluded that resiliency addresses the supply chain’s ability to cope with the
consequences of unavoidable risk events in order to return to its original operations
or move to a new, more desirable state after being disturbed (Christopher and Peck
2004; Peck 2005). A resilient supply chain must therefore develop capabilities to
react to the negative consequences of unexpected events and to return quickly to its
original state, the one before disruption, or to move to a new best state after being
affected by the disruption, and continue business operations as efficiently as pos-
sible (Barroso et al. 2015). A resilient supply chain may not be the lowest cost
supply chain, but one that is more capable of coping with the uncertainties in the
business environment (Carvalho et al. 2012). According to Melnyk et al. (2014),
resilience can either consist of a system’s ability to minimize the impact of a
disruption by evading it entirely (avoidance) or by minimizing the time between the
onset of disruption and the start of recovery from that disruption (containment) and
the ability of a system to find a return path (recovery) to a steady state of func-
tionality (stabilization) once a disruption has occurred. Therefore, resilience is not
only about responding to a one time disruption, but is concerned with continuously
anticipating and adjusting to severe disruptions that can permanently impair the
earning power of an organization (Hamel and Valikangas 2003). Table 14.1 pro-
vides the readers with some of the key definitions of supply chin resiliency.
As seen from the set of definitions provided in Table 14.1, there exists a sig-
nificant overlap as most of the definitions agree in the adaptive and adjustable
nature of resilience. Furthermore, it has been observed that the developmental
nature of resilience should guide supply chains not only to recover from a disruptive
event or crisis but moreover to find stability in a better state than before (Ponis and
Koronis 2012). In essence, supply chain resiliency can be addressed on four aspects
—preparation for a disruptive event; response to an event; recovery from the event;
and, growth/competitive advantage after the event (Tukamuhabwa et al. 2015). The
definitions provided in Table 14.1 also exhibit certain characteristics of a resilient
supply chain. According to most of the definitions, a resilient supply chain needs to
be ready to adapt and adjust to unforeseen changes in business environment
(Bhamra et al. 2011). Additionally, being proactively ready for an unforeseen event
and responding to them in an efficient manner, not to forget about recovering from
disruptions, are also considered as important characteristics of resilient supply
chains (Ponomarov and Holcomb 2009). Furthermore, flexibility of the supply
chain can also serve as an important weapon for combating supply chain disrup-
tions. Finally, it can be also stated that capability of sustained response to sudden
and significant shift in input is another major characteristics of resilient supply
chains (Christopher and Rutherford 2004). Therefore, the essential characteristics of
a resilient supply chain, based on extant literature, are as follows.
14 The Role of Resiliency in Managing Supply Chains Disruptions 241

Table 14.1 Some key definitions of supply chain resilience

Author(s) (Year) Definition
Ates and Bititci (2011) The ability of a firm’s supply chain network to absorb disruptions
and subsequently return to its initial state condition
Barroso et al. (2011) Ability to react to the negative effects caused by disturbances that
occur at a given moment in order to maintain the supply chain’s
objectives
Brandon‐Jones et al. Ability of a system to return to its original state, within an
(2014) acceptable period of time, after being disturbed
Christopher and Peck The ability of a system to return to its original state or move to a
(2004) new, more desirable state after being disturbed
Datta et al. (2007) The ability of the production–distribution system to meet each
customer demand for each product on time and to quantity
Falasca et al. (2008) Ability of a supply chain system to reduce the probabilities of a
disruption, to reduce the consequences of those disruptions once
they occur, and to reduce the time to recover normal performance
Fiksel et al. (2015) The capacity for an enterprise or set of business entities to survive,
adapt, and grow in the face of turbulent change
Kamalahmadi and The adaptive capability of a supply chain to reduce the probability
Parast (2016) of facing sudden disturbances, resist the spread of disturbances by
maintaining control over structures and functions, and recover and
respond by immediate and effective reactive plans to transcend the
disturbance and restore the supply chain to a robust state of
operations
Kim et al. (2015) A network-level attribute to withstand disruptions that may be
triggered at the node or arc level
Ponomarov and The adaptive capability of the supply chain to prepare for
Holcomb (2009) unexpected events, respond to disruptions, and recover from them
by maintaining continuity of operations at the desired level of
connectedness and control over structure and function
Ponis and Koronis The ability to proactively plan and design a supply chain network
(2012) for anticipating unexpected disruptive (negative) events, respond
adaptively to disruptions while maintaining control over structure
and function and transcending to a post event robust state of
operations, if possible, more favorable than the one prior to the
event, thus gaining competitive advantage
Rice and Caniato Ability of the supply chain to react to a disruption or disturbance
(2003) and restore normal operations
Xiao et al. (2012) supply chain’s ability to return to the original or ideal status after
external disruption and includes both the abilities of adaptability to
the environment and recovery from the disruption
242 A. Ganguly et al.

• Adjustability
• Adaptability
• Responsiveness
• Sustainability
• Flexibility/Agility
Next section will discuss the strategies required to build a resilient supply chain.

14.3 Building a Resilient Supply Chain to Combat

Disruptions

Supply chain disruption can be stated as unplanned and unanticipated events that
negatively affect the normal flow of goods and materials within a supply chain
(Craighead et al. 2007; Kleindorfer and Saad 2005). Therefore, disruption is a
fundamental pre-requisite of supply chain resiliency (with vulnerability being the
other). Sheffi and Rice (2005), in their seminal work concerning resiliency, illus-
trated a disruption profile as exhibited in Fig. 14.1.
According to Sheffi and Rice (2005), a serious disruption in an organization (and its
supply chain) can be dissected into eight components—starting from the event itself to
the stage of full recovery and long term impact. Figure 14.1 also illustrates that a
disruptive event can render a supply chain vulnerable and it generally takes a while for
the supply chain to bounce back to its ‘pre-disruption’ state after the disturbance.
Therefore, it can be stated that a proper understanding of the supply chain disruptions,
coupled with a clear assessment of the accompanying risks, can serve as a key building
block of a resilient supply chain. Supply chain risks identification lies at the foun-
dation of building a resilient supply chain and risks can be categorized into different
types and also from different perspectives. Understanding the risks associated with
supply chain and developing mitigation strategies accordingly can aid an organization
to understand and design their resiliency strategies.
One of the key initiatives for addressing these risks is fostering a risk management
culture in organizations (Christopher and Peck 2004). Owing to the multi-level
complications and multi-faceted interactions along the length of a supply chain, it
becomes extremely difficult for the risk managers (or the risk management team) to
monitor and identify all risks. As a result, nurturing the culture of risk management is
an integral component in the success of an organization and risk assessment forms an
important part of the decision making process. Therefore, organizations often create a
cross-functional supply chain risk management team to report to the top management
on a periodic basis through the supply chain managers.1

1
It should be worthwhile to mention here that the risk exposure index, developed by David
Simchi-Levi at Massachusetts Institute of Technology (MIT) enables companies for the first time
to fully quantify their maximum risk exposure under any unpredictable supply chain disruptions.
Ford has already implemented this in collaboration with the MIT team, by developing their
14 The Role of Resiliency in Managing Supply Chains Disruptions 243

Performance

8. Long term
impact

4. IniƟal
impact
6. PreparaƟon for
1. PreparaƟon
recovery
3.First
response 7. Recovery

Time
2. DisrupƟve 5. Time of
event full impact

Fig. 14.1 The disruption profile. Source Sheffi and Rice (2005)

In recent years, supply chain disruption management has become one of the
major concerns of many organizations and supply chain managers that direct its
efforts to improve the resilience of their organization’s supply chains (Barroso et al.
2010). Because complex global supply networks are characterized by limited vis-
ibility, the potential risks are hidden and their potential cascading effects may not be
understood (Fiskel 2015). An often-cited example is Nokia’s cell phone business,
which discovered in 2000 that one of its key suppliers in New Mexico was con-
cealing the fact that its facility had been destroyed by fire. However, early recog-
nition of the crisis enabled Nokia to secure alternative supplies, and it modified the
product design to broaden its sourcing options, ultimately gaining significant
market share while Ericsson, which relied on the same supplier, lost about $400
million in sales due to slowness in crisis recognition and response, and eventually
exited the cell phone business (Fiskel 2015; Fiskel et al. 2015). Therefore, one of
the main objectives of building a resilient supply chain is to recover from any
disruption caused due to known or unknown/unforeseen events, and organizations,
over the years, have developed a set of strategies to make their supply chain more
resilient and thus, more adaptable to unforeseen disruptions. Hamel and
Vailikangas (2003), Christopher and Peck (2004) and Sheffi and Rice (2005), in
their seminal articles concerning enterprise and supply chain resiliency, were one of

(Footnote 1 continued)
Decision Support System (DSS) for risk management, which is used daily. The system is used by
procurement managers and directs in three ways—(1) strategically, to identify exposure to risk
associated with parts and suppliers, prioritize and allocate resources effectively, segment suppliers,
and develop risk mitigation plans, (2) tactically, to track daily changes in risk exposure in order to
alert procurement executives to changes in their risk position; and (3) operationally, to respond to a
disruptions by identifying an effective way to allocate resources after a disruption (Simchi-Levi
et al. 2014; Simchi-Levi 2015).
244 A. Ganguly et al.

the earliest proponents of resiliency strategies in organizations and supply chains.

While Hamel and Vailikangas (2003) and Sheffi and Rice (2005) focused their
attention on enterprise resiliency, Christopher and Peck (2004) did so more towards
the resiliency of supply chains. Other notable works on supply chain resiliency
strategies includes the research conducted by Barroso et al. (2010), Johnson et al.
(2013), McKinnon (2014), Mensah and Merkuryev (2014), Ole-Hohenstein et al.
(2015), Ponomarov and Holcomb (2009), Scholten et al. (2014) and Purvis et al.
(2016), to name a few. However, with the blurring boundary between the resiliency
of an enterprise and its supply chain, the strategies are being held true both in the
case of an enterprise as well as its supply chain. The remainder of this section will
be devoted towards enlisting and discussing the strategies that form essential
building blocks of a resilient supply chain.

14.3.1 Making the Supply Chain Flexible/Agile in Nature

Resilience implies agility, or the flexibility (which can be stated as “being able to
bend easily without breaking”) and ability to adapt speedily (also referred to as
“velocity”) to both positive and negative environmental influences (Peck 2005;
Ponomarov and Holcomb 2009). It is the ability of a supply chain to encounter,
resolve, and when appropriate, exploit unexpected emergencies (Jüttner and
Maklan 2011). Furthermore, it has been suggested that flexibility can amount to an
organic capability, which also supports sensing disruptions and, as such, relates to
the event readiness dimension of supply chain resilience (Sheffi and Rice 2005).
According to Sheffi (2005), flexibility, coupled with redundancy, can be considered
as the two important approaches for building resilience. Similarly, agility, defined
as the ability of an organization’s supply chain to respond rapidly to unpredictable
changes in demand or supply (Christopher and Peck 2004), is another important
strategy for building a resilient supply chain and involves continuous search for the
most appropriate response to change, uncertainty and unpredictability within the
business environment. The essence of flexibility and agility lies in a supply chains
capability of reallocating resources when needed and developing good relationship
with suppliers (Mensah and Merkuryev 2014). These characteristics along with
velocity, which is considered as an important antecedent of agility, are essential in a
resilient supply chain (Christopher and Peck 2004; Scholten et al. 2014).
Fashion giant, Zara, thrives on supply chain agility. Zara is renowned for replenishing
stocks to each of its store twice a week in small batches thus producing close to 450 million
items a year. However in order to reach on the rapid change in consumer demand, Zara has
developed an efficient agile supply chain, with all designers, buyer experts and management
in one place and production facility close to them, assuring full flexibility and agility
(Zhelyazkov 2011).
14 The Role of Resiliency in Managing Supply Chains Disruptions 245

14.3.2 Increasing the Redundancy of the Supply Chain

Some researches argue that redundancy, which can be stated as having excess
capacity and back-up systems to maintain the core functionality of a system in the
event of disturbances, ensures that an enterprise will be less likely to experience a
collapse in the wake of unforeseen stresses. According to some researchers on
supply chain resiliency, increasing the redundancy of an organization’s supply
chain can be a useful strategy in building a resilient supply chain. For example,
Christopher and Peck (2004) argues that strategic disposition of additional capacity
and/or inventory at potential ‘pinch points’ can be extremely beneficial in the
creation of resilience within the supply chain (Christopher and Peck 2004). Purvis
et al. (2016), in their research on supply chain resiliency strategy, established the
fact that redundancy is a function of supply chain resiliency. Redundancy could be
achieved through holding additional inventory (thereby preventing stockouts),
ensuring excess supplier capacity, having multiple supply source and/or geo-
graphically dispersing the business (Christopher and Peck 2004; Ole-Hohenstein
et al. 2015; Rice and Caniato 2003; Tomlin 2006), all with the intention of
increasing a firm’s ability to deal with disruptions. However, an overreliance on
redundancy and its buffers to achieve resilience is also perceived as an expensive
strategy, which should only be used temporarily in situations in which the dis-
ruption is predictable or more likely to occur in the near future (Sheffi 2005).
An example of using supply chain redundancy to its advantage can be cited of Intel, one of
the world’s largest semiconductor chip makers. Intel builds semiconductor fabrication
factories with identical layouts for machinery and production processes. Because of its
standard fabrication design, Intel can switch production among facilities if the need arises
(Sheffi 2005).

14.3.3 Increasing the Visibility of the Supply Chain

A clear understanding of upstream and downstream demand and customer expec-

tation helps the supply chain to respond better to market changes more quickly.
According to Christopher and Peck (2004), visibility implies a clear view of
upstream and downstream inventories, demand and supply conditions, and pro-
duction and purchasing schedules. Information sharing and collaboration between
different entities in the supply chain is a pre-requisite to achieve visibility. An
example of supply chain opaqueness caused due to each entity making their
decision to respond to market flux without having proper information of the cus-
tomer demand is bullwhip effect. A significant barrier to supply chain visibility is
often encountered within the focal firm’s internal organization structure. The
presence of ‘functional silos’ inhibit the free flow of information leading to ‘second
guessing’ and a general lack of communication (Christopher and Peck 2004).
246 A. Ganguly et al.

For example, Cisco revamped its supply chain post hurricane Katrina in 2005, which paid
major dividends in the aftermath of 2011 Japanese earthquake and tsunami. Within
40 minutes after the tsunami hit the shores, Cisco supply chain managers were aware of it
and started forming their continuity plan. This catastrophe resulted in one of the largest
supply chain disruptions in modern history, with economic losses crossing $200 billion.
Yet, CISCO suffered almost no revenue loss. Within 12 hours, CISCO’s managers could
identify all their suppliers in the affected region, assess the impact of the disaster on more
than 300 suppliers, list more than 7000 affected parts, assign a risk rating to each part and
create a mitigation response. By the time the day drew to a close, CISCO had setup a solid
supply chain resiliency program that addressed not only the impact of the tsunami but also
the aftereffects the tsunami would cause on its worldwide value chain (Manners-Bell 2014).

14.3.4 Effective Knowledge Management and Collaboration

Among the Supply Chain Entities

Researchers on supply chain resiliency have repeatedly stressed on the importance

of effective knowledge management and information sharing as one of the key
strategies in building a resilient supply chain. Information sharing, which can be
stated as exchange of ideas between various organizations, people and technologies,
can reduce uncertainty in supply chains and in turn, vulnerability to disruptions.
Thus a key priority for supply chain risk reduction is the creation of a supply chain
community to enable the exchange of information between members of that
community (Christopher and Peck 2004). Additionally, sharing knowledge about
supply chain disruptions has a positive impact on its resiliency as it can improve the
event readiness through increasing the visibility and reducing the time for detection
of the events (Jüttner and Maklan 2011; Manuj and Mentzer 2008). Furthermore,
collaboration to share crucial information and valuable knowledge and establish
joint efforts can also be considered as an important resiliency strategy (Johnson
et al. 2013; Jüttner and Maklan 2011; Ole-Hohenstein et al. 2015; Pettit et al. 2010,
2013; Sheffi 2005). However, since supply chain resilience can’t be achieved in
silos, so the exchange of information has to be timely and accurate. Traditionally,
different entities in a supply chain have different objectives which are often opposite
in nature and therefore infuse a kind of adversarial relationship between them.
Positive collaborative relations positively impacts smooth supply chain perfor-
mance at times of disruption.

14.3.5 Inventory Management and Control

The use of inventory redundancy in situations of supply uncertainty is, in most

cases, recognized as a possible risk mitigation strategy (Barroso et al. 2010) and
aids in building up the resiliency of a supply chain. Although it might lead to an
increase in the cost, building redundant inventory in the supply chain might
14 The Role of Resiliency in Managing Supply Chains Disruptions 247

function as a buffer to maintain continuous operations (Barroso et al. 2010).

Therefore, researches on supply chain resiliency has enlisted stocking surplus
inventory as one of the important strategies in ensuring supply chain resiliency
(McKinnon 2014; Ole-Hohenstein et al. 2015).
For example, Walmart’s vendor managed inventory model has been a major contributor
towards the success of its supply chain. This benefit is achieved because suppliers can
directly access data about the inventory of their goods at Walmart stores. As a result,
multiple supplier can intervene in case of a supply chain disruption and ensure that the
inventory reaches the stores on time, thereby eliminating the possibility of any breakdown
of the supply chain. Furthermore, Walmart’s policy of stockpiling to combat possible
anticipated disasters had also been a key to their success, which they did in October 2002
prior to the West Coast port lockout, and in the process prevented any disruptions that could
have affected their holiday sales (Sheffi 2005).

14.3.6 Changing the Corporate Culture

According to Christopher and Peck (2004), every organization should instill a

culture of ‘supply chain continuity management’ in order to make sure that the
supply chain disruptions are well understood and addressed. They further stated that
a cross-functional supply chain risk management team should be created within the
organization, whose primary responsibility will be to audit risks using a set of
framework and tools and provided feedback on their analysis. Furthermore, Mensah
and Merkuryev (2014) also stressed the importance of a strong corporate culture in
building a resilient supply chain. According to them, developing a strong corporate
culture will lead to empowering employees to make quick decisions, which might
lead to quick recovery after disruptions. The role of developing a corporate culture
to facilitate resiliency has also been discussed in the works of Sheffi (2005), Sheffi
and Rice (2005) and Scholten et al. (2014). Table 14.2 provides the readers with the
key supply chain resiliency strategies.

Table 14.2 Supply chain resiliency strategies

Resiliency strategies
1 Making the supply chain flexible/agile in nature
2 Increasing the redundancy of the supply chain
3 Increasing the visibility of the supply chain
4 Effective knowledge management & collaboration among the supply chain entities
5 Inventory management and control
6 Changing the corporate culture
248 A. Ganguly et al.

14.4 Conclusions

This chapter set out to familiarize the readers with the concept of supply chain
resiliency and various strategies to achieve the same. In the present day business
scenario marred by constant uncertainty and elephantine complexity, supply chain
disruptions are increasing in frequency, thereby affecting their normal operation and
stability and hence the ability of the business to fulfill commitments. This has been
further complicated by the fact that the competition among business entities has
gradually transitioned into competitions among their supply chains, thereby com-
pelling organizations towards the daunting task of designing resilient supply chain
strategies, which has fast become an essential component of business continuity. As
a result, supply chains are being designed to be resilient to disruptions and react
effectively to its negative effects (Barroso et al. 2015).
As discussed in this chapter, one of the key elements of being resilient is to
anticipate, prepare, adapt and recover from disruptions. There have also been
instances where organizations were able to treat potential disruptions as opportu-
nities for gaining competitive advantage in the market. However, the key elements
of supply chain resiliency and the strategies for managing these key issues are still
not clearly understood. Additionally, in order to justify the need for resilient supply
chains, one needs to have an understanding and clear definition of the phenomenon
of resilience. This chapter tries to shed some light on these issues and is expected to
serve as a starting block for students and researchers who wish to embark on the
journey of exploring supply chain resiliency. The definitions, characteristics,
strategies and the importance of resiliency in combating disruption as discussed in
this chapter will serve as a valuable weapon in the hands of researchers who can
subsequently use this as a roadmap for further research activities in supply chain
resiliency. This chapter also has a twofold implication for managers as well. Firstly,
practicing managers and executives can use the information provided in this chapter
to respond to disruptive events more effectively and with increased confidence.
Secondly, managers are encouraged to examine the strategies of designing a resi-
lient supply chain as provided in this chapter as an avenue to ensure more effective
structure and more efficient response to supply chain disruption.
Finally, it can be stated that just as the market is constantly changing, threats to
our supply chains are evolving, adapting, and changing as well (Petit et al. 2010).
Therefore, resilience has not only become a mandatory characteristic of a supply
chain in order to survive in the short-term, but also provides the ability to adapt to
change and thrive in the long-term (Petit et al. 2010) and is expected to prove to be
the ultimate competitive advantage in an age of turbulence (Hamel and Valikangas
2003). The authors’ expect that the theoretical foundation of the concept of supply
chain resiliency as laid down in this chapter will help in building up future research
activities that will open up new windows for research, in the process leading to the
development of new theories and empirical studies on supply chain resiliency.
14 The Role of Resiliency in Managing Supply Chains Disruptions 249

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Chapter 15
Designing Resilience into Service Supply
Chains: A Conceptual Methodology

Sigurd S. Pettersen, Bjørn E. Asbjørnslett and Stein O. Erikstad

Abstract This chapter presents a methodology for designing resilient service

supply chains. The approach combines system design methods with methods from
risk assessment. Service supply chains consist of multiple assets, cooperating to
fulfill an operation. Each asset has functionality to perform a set of tasks in the
operation, and the combined functionalities of the fleet of assets must cover the
activities the service supply chain are to perform. When a module in one asset in the
fleet experiences loss of functionality, it constitutes a disruption in the service
supply chain, a failure mode. The objective of the proposed methodology is to give
decision support reducing the vulnerabilities of the service supply chain through
design actions that can increase overall service supply chain resilience. The
methodology consists of four steps. The first step includes breakdown of operation
and service supply chain, mapping of modules to tasks, and selection of service
supply chain configuration based on costs and utility. In the second step, failure
modes are identified and their criticality assessed. In the third step, we propose
design changes to reduce the impact of disruptions. These are evaluated in Step 4,
where decisions regarding redesign are made. The recommendations from this
methodology can be used to plan for how to redesign in the case of contingencies,
or be used as part of an iterative process where the new information is incorporated
in the evaluation of initial service supply chain design.

15.1 Introduction

Resilience is an increasingly important system property to stakeholders in complex

systems, as for instance in an extended supply chain context. Consider the propa-
gation of delays throughout a logistics chain due to a disruption in one leg of the

S.S. Pettersen (&)
B.E. Asbjørnslett
S.O. Erikstad

Department of Marine Technology, Norwegian University of Science and Technology,
Trondheim, Norway
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2018 253

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_15
254 S.S. Pettersen et al.

transport mission. Like this, it is reasonable to expect that a disruption in a part of a

complex operation, due to a failure of some specialized equipment, will have
similar repercussions. Both in the case of failure in the logistics chain and the
complex operation, the consequences may be far greater than the costs indicated by
the initial disruption.
In this context, we define service supply chains as fleets of assets, which
cooperate to fulfill an operation. The assets within the service supply chains contain
different modules, units of equipment fulfilling specific functions. There may exist
functional overlap between different modules and assets. In case of cost opti-
mization, this functional overlap may be regarded as slack, driving costs. If this
were the case, a designer would be tempted to down-size the service supply chain
system to avoid such overlap, hence reducing initial costs. A result may be an
increase in vulnerability as functional redundancy is lost.
The design methodology presented in this chapter outlines how designers can
take advantage of functional couplings and increase service supply chain resilience,
by addressing opportunities to use objects for tasks for which they were not orig-
inally intended. This can be accomplished either by actively redesigning the system,
or by redeploying existing system components to new tasks.
The objective of the design methodology for resilient service supply chains is to
give decision support for reducing supply chain vulnerabilities, by proposal of
design actions based on redundancy and flexibility (Sheffi and Rice 2005; Rice and
Caniato 2003) to enhance overall supply chain resilience. In the context of building
the resilient service supply chain, the following design-related questions should be
answered:
1. What functionality does an operation require?
2. What is the functional scope and number of assets required for covering the
functional requirements of the operation?
3. To what extent does functional overlap exist among the assets?
4. What opportunities exist for using assets for activities, other than the activities
for which the asset was originally assigned?
Further, the reader should note that the focus are the risks related to the func-
tionality of the system components. A failure mode approach is used to assess the
disruption risk that enables an understanding of which functionalities should be
restored to ensure continuation of operations (Berle et al. 2011a).

15.2 Theoretical Foundations for the Methodology

The theoretical foundations for the design methodology is a synthesis of supply

chain risk management, reliability theory and systems design. By combining these
subjects, new insight is achieved about how we can design for resilience in service
supply chains. The approach represents an example of risk-based design thinking in
15 Designing Resilience into Service Supply Chains … 255

a supply chain context, as we build mitigation measures into the service supply
chain design (Papanikolaou 2009).
Supply chain risk management has been developed in part as a response to the
focus on efficiency and cost-reduction in logistics and production. Increased
complexity in supply chains has forced us to consider concepts such as resilience.
Frameworks for building resilience into supply chains were presented by Peck
(2005), Peck et al. (2003) and Christopher and Peck (2004). Craighead et al. (2007)
outlined the roots of disruption risks in supply chain design characteristics. Rice
and Caniato (2003) suggested that flexibility and redundancy are key strategies for
achieving resilience.
Drawing inspiration from reliability theory, specifically failure mode, effects,
and criticality analysis (FMECA) (Rausand 2011), Berle et al. (2011a) used failure
modes to address the criticality of lost functionality in a supply chain system.
Vulnerability analyses (Asbjørnslett 2009; Asbjørnslett and Rausand 1999) pro-
vided another link between the understanding of supply chain disruption risks, and
the mitigating measures that can help restore the system after an unwanted event.
Vulnerability analysis is used in a methodology for reducing logistical disruption
risks, and was combined with failure mode thinking in Berle et al. (2011b).
Asbjørnslett et al. (2012) bridged the gap between vulnerability analyses and design
by developing a simulation model combined with an optimization algorithm that
re-optimizes fleet configuration after failure modes mature.
A generic framework for decision making under uncertainty was presented in
McManus and Hastings (2006), focusing on enabling lifecycle properties like
flexibility and reliability. To achieve new insights and generate knowledge about
how the supply chain can be designed for resilience, we utilize methods based on
this framework. We combine the tradespace paradigm for early stage system design
(Wasson 2005; Ross and Hastings 2005) with usage of design structure matrices
(Steward 1981; Eppinger and Browning 2012). The tradespace approach facilitates
a broad search of the design space for better solutions in terms of the cost and utility
balance. Design structure matrices are useful for delimiting the supply chain design
space with respect to physical limitations and functional relationships. In the tra-
despace context, the ability to quantify changeability to identify and execute
options for future design changes becomes important (Ross et al. 2008). When a
failure mode matures and alters the utility or functional performance of a given
supply chain, flexibility can be used to enhance the resilience of the supply chain.

15.3 Concepts and Definitions

The concept of resilience refers to the ability of a system, such as a supply chain, to
recover from a disruption (Rice and Caniato 2003). Implicitly, we can assume that
designing for resilience is about building capabilities into the design to ease the
recovery process. Designers acknowledge that the number of failure scenarios is so
large, that some disruption to the operation eventually will occur (Berle et al. 2011a).
256 S.S. Pettersen et al.

It is thus necessary to design systems that can be restored after the occurrence of the
disruption, hence minimizing the consequences of the undesired event.
The approach is mission oriented, and fulfilling the mission of the service supply
chain is the objective. Figure 15.1 shows how the performance of a system dete-
riorates after a disruption, and how it can be restored, regaining a new stable
performance level. Performance should be regarded as a function representing a
mission-supporting or mission-enabling capability. Designing for resilience is in
essence about designing into the system the capability to achieve a new level of
operational performance, within a mission-feasible timeframe (short enough dis-
ruption time). That is the service supply chain’s ability to fulfill its mission even if
the initial attempt fails to succeed.
Some key concepts and definitions for supply chain vulnerability, risk and
resilience from Asbjørnslett (2009) are shortly re-stated here. Vulnerability is a
concept that may be used to characterize a supply chain system’s lack of robustness
or resilience with respect to various threats that originate both within and outside its
system boundaries. The focus in this method is how the vulnerability of the service
operation, based upon failures in functionality of the service supply chain, can be
reduced through functional flexibility on the asset level, or even on the module level
by redesigning the assets.
Opposite to vulnerability, we have robustness or resilience. A service supply
chain can be said to be robust or resilient, with respect to a hazard or threat, if the
hazard or threat is not able to produce any ‘lethal’ effect on the system. In our case,
this means that the hazard or threat, or the resulting failure mode, does not reduce
the functional performance level of the service supply chain below a level so that
the service supply chain is no longer able to perform its mission. We define
robustness as a system’s ability to resist an accidental event, returning to do its
intended mission and retaining the same stable situation as it had before the acci-
dental event. Resilience may be defined as a system’s ability to return to a new
stable situation after an accidental event. As such, robust systems have the ability to
Performance

DisrupƟon System restored

Normal operaƟons
Performance
New normal operaƟons change

Minimum required
performance

DisrupƟon Ɵme
Time

Fig. 15.1 Performance levels during normal operations and disruptions, based on Asbjørnslett
and Rausand (1999)
15 Designing Resilience into Service Supply Chains … 257

resist, while resilient systems have the ability to adapt. In this approach, we seek to
design service supply chains, consisting of assets that have the ability to adapt,
given failure modes leading to loss of functionality.
For developing the methodology, we define the central building blocks of the
service supply chain. Hierarchically, we can look at the service supply chain as built
up by assets that cooperate to complete the mission. The assets are further built up
by modules, which represent units of equipment performing the required functions.
Function can in this respect be defined as “the actions for which a thing is fitted or
used” (de Weck et al. 2011). Thus, each module has functionality, letting them
perform specific tasks. In principle, every module can have several functions, so
that it is possible for redundancies to exist without the initial intention of the
designer.

15.4 A Methodology for Resilient Service

Supply Chain Design

15.4.1 Overview of the Conceptual Methodology

The design methodology for resilient service supply chains is an iterative process.
Starting from an initial supply chain design, it goes through a process in which
failure modes are assessed, and design actions to increase resilience are proposed,
and evaluated. The insights from the analysis enables the designer to establish a
more resilient basis for design. Improved insight into the resilient properties of the

1. OperaƟon and system definiƟon 2. Failure mode invesƟgaƟon

(a) Define system boundaries and For the chosen supply chain configuraƟon:
operaƟonal profile. (a) Define failure modes as relaƟng to the
(b) Map modules to acƟviƟes in the key funcƟonaliƟes.
operaƟon. (b) Assess the risk related to the failure
(c) Explore the tradespace of possible modes.
supply chain configuraƟons. (c) QuanƟfy impact on tradespace of
(d) Select a supply chain configuraƟon. potenƟal failure modes.

4. Design acƟon evaluaƟon 3. Design acƟon proposal

For each (criƟcal) failure mode:
(a) Assess the performance of the
reconfigured supply chain uƟlizing the (a) Propose design acƟons for transiƟoning
design acƟons, by exploring the from the iniƟal supply chain
tradespace. configuraƟon.
(b) Recommend a reconfiguraƟon of supply (b) Determine feasibility of proposed design
chain. acƟons.

Fig. 15.2 Flowchart for the resilient service supply chain design methodology
258 S.S. Pettersen et al.

service supply chain design can also support formulation of contingency plans for
the supply chain. A flowchart for the design methodology is shown in Fig. 15.2.
To make the methodology easier to follow, we present it as applied on a case.
The case we present comes from marine operations. More specifically, we consider
a group of vessels as a service supply chain cooperating to perform an offshore
construction mission. The case is illustrative, and serves as an explanatory parallel
for the methodology.

15.4.2 Step 1: Operation and System Definition

In Step 1, we need to select a service supply chain configuration that fulfills the
scope of operation. This step is an example of solving a fleet size and mix problem
using tradespace exploration and design structure matrices by simultaneously
exploring alternative service supply chains.
The tradespace of service supply chains to be explored is defined in terms of
assets included in the service supply chain. These assets are heterogeneous, each
being defined by the modules included in their design. In this case, assets are
possible vessel designs, and modules represent equipment that serve a purpose
towards fulfillment of the operational profile. Alternative vessel designs are defined
based on what cranes and winches are included in the design. Based on this we
completely enumerate the design space of alternative vessel configurations. Finally,
we specify the architecture of possible service supply chains by combining vessels
that together cover the functional requirements for all tasks in the operation. The
system boundaries are thus set around the vessels that constitute the service supply
chain.
The offshore construction operation is decomposed into individual tasks, so an
operational profile for the service supply chain can be established. This allows us to
select a service supply chain configuration according to the current operation
context. In this case, the tasks to be performed are a small lift, a large lift, and a
towing task.
As the structure of the operation and the system structure of the service supply
chain now have been established, we can now map the modules in each asset to
each task in the operation using design structure matrices. This mapping between
modules and tasks is shown in Fig. 15.3. The numbering in the mapping matrix
refers to the goodness of fit between module and task, where 2 indicates better
performance than 1.
The service supply chain needs to be able to perform all tasks that are part of the
marine operation. From Fig. 15.3 we can see that modules included in the proposed
service supply chain offer functional redundancy. Several modules can perform the
same task. For example, the large winch can perform small lifts in addition to
towing, albeit at a lower capability level.
By establishing a cost-utility tradespace, we explore alternative service supply
chain configurations. In this case, we estimate the cost for the service supply chain
15 Designing Resilience into Service Supply Chains … 259

Vessel 7

Vessel 12 Large winch

Generic mapping Mapping for a specific
between acƟviƟes service supply chain
and modules configuraƟon Service
supply chain

Large crane
Small crane
Large winch
Small winch

Large crane
Small winch
Small liŌ 2 2 1 0 Small liŌ 2 0 1
Marine Marine
Large liŌ 2 0 1 0 Large liŌ 2 0 1
operaƟon operaƟon
Towing 0 0 2 2 Towing 0 2 2

Fig. 15.3 Design structure matrix mapping between tasks in the operation and the modules in
service supply chains

configuration from the number of vessels and the modules installed on each vessel.
A multi-attribute utility function is established from several value attributes com-
bined into a single, normalized metric (Ross and Hastings 2005). The value attri-
butes measure objectives that to some extent are in conflict, and must be weighed
against each other (Keeney and Raiffa 1993). In the case presented, the following
value attributes are important:
• The number of vessels in the service supply chain.
• The overall service supply chain capability level.
• The amount of functional redundancy in the service supply chain.
The objectives that correspond to the attributes are to minimize the number of
vessels in the service supply chain, and to maximize the capability level and the
amount of functional redundancy. We assume a linear relationship between
single-objective utilities and corresponding attributes. For simplicity, each of the
value attributes are seen as equally important, and are assigned equal weights in the
multi-attribute utility function.
Figure 15.4 shows the resulting tradespace representation of alternative service
supply chains, after calculating costs and utility. All points in the plot refer to
alternative service supply chain configurations. Three of these configurations are
highlighted. The most interesting architectures to explore further are those close to
the Pareto front, which are the designs that maximize the utility, for each possible
budgetary constraint. Pareto optimal service supply chain give the most value
(utility) for money spent.
The outcome of Step 1 of the methodology is the selection of one specific
service supply chain configuration. In Fig. 15.4, we see that Service Supply Chain
no. 146 is Pareto efficient. Hence, we select this as the initial configuration.
260 S.S. Pettersen et al.

Fig. 15.4 Tradespace of alternative service supply chain configurations

Fig. 15.5 Failure modes

defined as loss of Module FuncƟon AcƟvity
functionality, severing the
link between a system module Module AcƟvity
and a task
Failure mode

15.4.3 Step 2: Failure Mode Investigation

After selecting the initial service supply chain configuration, we need to account for
possible failures in the marine assets included. Many failure modes can disrupt the
offshore construction operation, and their effect on the operational performance
must therefore be understood. Starting from the lowest level of indenture in the
system decomposition in Step 1, the module level, we now must identify the failure
modes from the related modules. We see how the functionality of a module allows
it to complete a task in Fig. 15.5. The failure mode makes the module unfit for
completing the task. The failure modes are thus related to the set of functionalities
for each module in an asset, and loss of functional performance required in a task.
Through decomposition of the service supply chain to the module level, we thus
become able to identify failure modes easily.
To assess the importance of alternative disruption scenarios, we quantify the risk
of each identified failure mode. Risk is defined as the product of likelihood and
15 Designing Resilience into Service Supply Chains … 261

Fig. 15.6 Changes in tradespace due to the failure of the large crane module

consequence for failure. Likelihood estimates for functional failures in components

can be found from existing handbooks of failure rate data, from experiments or
simulation models. The consequence is found from the change in overall utility for
the service supply chain due to the failure. At this stage, failure mode, effects, and
criticality analyses can be used for assessing the risks of each failure mode
(Rausand 2011). Risk priority numbers can then represent the risk. These risk
priority numbers are tied to the negative impact on the utility of the service supply
chain. Ideally, one should perform an extensive FMECA for the service supply
chain in Step 2.
For illustrating the methodology, we show the effect of one crane failure aboard
Vessel 7 on overall performance of the service supply chain. Note that this is only
one of numerous scenarios that must be considered in Step 2. Figure 15.6 shows the
tradespaces before and after the crane failure. We see that the chosen service supply
chain configuration drops from the Pareto front, and becomes unable to fulfill its
mission. Thus, utility is set to 0.

15.4.4 Step 3: Design Action Proposal

When the effects of alternative failure modes on the tradespace have been assessed,
we can start looking for solutions that may restore normal operation of the service
supply chain, for every failure mode. If possible, one would prefer to restore the
service supply chain system to Pareto optimality. By taking advantage of current
functional redundancy or exercising flexibility in the supply chain system, we seek
to restore its performance. Using redundancy, we could take advantage of func-
tional overlaps in the service supply chain. The modules included in assets in the
service supply chain may not be at full utilization, and these modules can be
reassigned to perform disrupted tasks. In the case of redundant functionality
262 S.S. Pettersen et al.

available, the service supply chain would drop from the Pareto front, while the
configuration would remain feasible. For the failure shown in Fig. 15.6, this is not
possible, as the large lift is a task that no existing module installed on either asset,
Vessel 7 and Vessel 12, can perform. This renders the service supply chain
infeasible. This means that a design action based on flexibility in the service supply
chain design must be sought.
Exercising flexibility to mitigate the consequences of the failure mode thus
implies some redesign of the service supply chain. Changing the configuration of
the supply chain means that a transition occurs in the tradespace where all supply
chain designs are plotted (Ross et al. 2008). The redesigned service supply chain
will no longer be the initial point design we selected in Step 1 that was negatively
affected by the failure mode introduced in Step 2. We separate between exercise of
flexibility through adding modules to existing assets in the service supply chain,
and exercise of flexibility through adding new assets to the service supply chain. In
Fig. 15.7 we show how flexibility is exercised in the offshore construction case. All
feasible transitions away from the supply chain experiencing functional failure are
shown with circles. Two possible transitions are highlighted in Fig. 15.7, from
Service Supply Chain no. 146 to Service Supply Chain no. 1725 and Service
Supply Chain no. 3485, as these are Pareto optimal transition. These highlighted
alternative transitions will add either Vessel 7 or Vessel 15 to the service supply
chain, while keeping the other existing assets. In this case, all transitions to new
service supply chain configurations indicate addition of assets, rather than
redesigning assets by adding new modules.

Fig. 15.7 Tradespace showing transition alternatives for the service supply chain after failure
mode
15 Designing Resilience into Service Supply Chains … 263

To define whether a specific transition path representing a potential design action

is feasible, we need to implement some rules. First, it is reasonable to consider only
transitions that involve changing the assets by adding modules, or adding assets to
the service supply chain. These transitions should ensure that the affected activities
get a new functional module assigned to them. This corresponds to identifying
possible transition paths.
Second, during an operation that is being disrupted due to a system failure, time
will be a critical factor. Hence, the response must be agile, meaning that recon-
figuring or adding new modules to the assets in the service supply chain should be
simple and time-effective. Thus, depending on the time-horizon of the operation,
larger retrofits of the assets involved in the operation may not be considered feasible
transitions. As we saw from the explanatory case, adding wholly new assets to the
service supply chain may be a better alternative. The highlighted transition paths in
Fig. 15.7 are both based on addition of assets to cover the lost functionality.
To conclude Step 3, we point to the need for an appropriate cost threshold for the
expense associated with implementation of a design action proposition (Ross et al.
2008). The cost threshold should represent the upper bound for expenditures, time
and other resources that can be spent for restoring the service supply chain, through
a design action proposal represented by a tradespace transition. This way we ensure
that the measures taken through redesign of the service supply chain will serve their
purpose and help restore the performance of the system without excessive cost slips.
Ross et al. (2008) uses the term filtered outdegree to specify the number of tran-
sition paths falling within the cost threshold.

15.4.5 Step 4: Design Action Evaluation

In Step 4, the redesign opportunities found in Step 3 are evaluated. These redesign
opportunities are the possible transitions in the tradespace. The cost of adding new
assets or installing new modules on assets in the service supply chain, and the
corresponding utility of the new service supply chain configuration, is information
that can be obtained from the cost and utility calculations in Step 1.
While unacceptable transitions were filtered out in Step 3, there are still several
tradeoffs to account for, before selecting a final transition path to a new service
supply chain configuration. A possible tradeoff that the decision-makers face at this
stage, are the expenditure associated with a transition, versus the timeliness of the
transition. At the same time, one would prefer to transition back to the Pareto front,
if possible. For further discussion of redesign using tradespace exploration, see
Ross et al. (2008) and Fitzgerald and Ross (2012a, b).
Figure 15.7 highlighted a set of possible transitions away from Service Supply
Chain no. 146, to amongst others Service Supply Chain no. 1725 and Service
Supply Chain no. 3485. Observing all the service supply chains that are highlighted
as possibilities for redesign, we see that only Service Supply Chain no. 1725 is
264 S.S. Pettersen et al.

Pareto efficient. This alternative is perhaps the most reasonable choice for redesign
based on the existing information.

15.5 Summary

The logic of the design methodology is summarized in Fig. 15.8. The original
situation upon which we select the initial service supply chain design is shown as
normal operations to the far left in the figure. This represents Step 1. In Step 2, as a
failure mode occurs, the performance and hence value of each configuration in the
tradespace will decrease. This is illustrated in the second illustration from the left.
The third tradespace from the left represents Step 3, and shows some possible
transition paths, in which the initial service supply chain will be redesigned by
adding an asset, or by adding a new module to one of the assets. Finally, when we
select among the alternative transitions in Step 4, we restore the service supply
chain to a new stable level of normal operations. In the tradespaces, the selected
service supply chain is highlighted by a triangle.
The link between Step 1 and Step 2 are summarized on a more detailed level in
the design structure matrices in Fig. 15.9, showing the effect of two possible failure
modes on three possible service supply chain architectures, where Service Supply
Chain 1 has been selected as an initial configuration. Failure Mode 1 is defined as
loss of functionality of Module 2 in Asset 1, while Failure Mode 2 is defined as loss
of functionality of Module 4 in Asset 2. To the left, we show the original situation,
while the effects of two alternative failure modes are shown to the right.
Figure 15.10 illustrates the tradespace representations corresponding to the
design structure matrices shown in Fig. 15.9. As we see, the utility of all possible
configurations declines due to the failure modes that may occur.

Fig. 15.8 Tradespace exploration connected to the resilience concept

15 Designing Resilience into Service Supply Chains … 265

Before failure AŌer failure

Failure Mode 1

su e

su e

su e
1

3
ch l y

ch l y

ch l y
vic

vic

vic
Asset 2 ain

n
pp

pp

pp
ai

ai
r

er

er
Se

Asset 1 S

Asset 1 S
Asset 1

Asset 3

Asset 4

Asset 2

Asset 5
Module 1
Module 2
Module 4
Module 5
Module 1
Module 2
Module 3
Module 4
Module 5
Module 6
Module 1
Module 2
Module 4
Module 5
Module 4
Module 6
Normal operaƟon
su e

su e

su e
1

3
ch l y

ch l y

ch l y
vic

vic

vic
Asset 2 ain

n
pp

pp

pp
ai

ai
Task 1 1 0 1 0 1 0
r

er

er
Se

Asset 1 S

Asset 1 S

OperaƟon
Task 2 0 1 0 1 0 1
Asset 1

Asset 3

Asset 4

Asset 2

Asset 5
Task 3 1 2 1 1
Failure Task 4 2 1 2 1 2 1 2
modes Task 5 1 1 2 1 2
Module 1
Module 2
Module 4
Module 5
Module 1
Module 2
Module 3
Module 4
Module 5
Module 6
Module 1
Module 2
Module 4
Module 5
Module 4
Module 6
cause
disrupƟon Failure Mode 2
from normal

su e

su e

su e
1

3
ch l y

ch l y

ch l y
Task 1 1 2 1 2 1 2 operaƟon

vic

vic

vic
Asset 2 ain

n
pp

pp

pp
ai

ai
OperaƟon

er

er
Se
Task 2 1 1 1 1 1 1

Asset 1 S

Asset 1 S
Task 3 1 2 1 1

Asset 1

Asset 3

Asset 4

Asset 2

Asset 5
Task 4 2 1 2 1 2 1 2
Task 5 1 1 2 1 2

Module 1
Module 2
Module 4
Module 5
Module 1
Module 2
Module 3
Module 4
Module 5
Module 6
Module 1
Module 2
Module 4
Module 5
Module 4
Module 6
Task 1 1 2 1 2 1 2
OperaƟon Task 2 1 1 1 1 1 1
Task 3 1 2 1 1
Task 4 0 1 0 1 0 1 2
Task 5 1 1 2 1 2

Fig. 15.9 Design structure matrices mapping modules to tasks during normal operation and two
alternative failure modes

Before failure AŌer failure

Failure Mode 1

Service
UƟlity

Service Service
Supply Supply Supply
Chain 2 Chain 3
Chain 1
Normal operaƟon
Service Service Service
Supply Supply Supply
Chain 2 Chain 3
Chain 1
UƟlity

Failure modes Costs

cause disrupƟon Failure Mode 2
from normal
operaƟon Service Service Service
UƟlity

Supply Supply Supply

Chain 2 Chain 3
Chain 1

Costs

Costs

Fig. 15.10 Tradespace illustrating performance during normal operation and two alternative
failure modes
266 S.S. Pettersen et al.

Possible transiƟon paths for Service Normal operaƟon restored due to

Supply Chain 1 during Failure Mode 1 redesign to Service Supply Chain 4

Service Service
UƟlity

UƟlity
Supply Supply
Chain 1 Chain 4

Costs Costs
1

4
Su c e

Su c e
Ch ly

Ch ly
Asset 2 ain

n
pp

p
i

i
rv

rv

ai
p
Se

Se
Asset 1

Module 2 Asset 1

Asset 2
SelecƟng redesign
alternaƟve to restore
Module 1
Module 2
Module 4
Module 5

Module 1

Module 7
Module 4
Module 5
normal operaƟon

Task 1 1 0 Task 1 1 0 1
OperaƟon

OperaƟon

Task 2 0 1 Task 2 0 2 1
Task 3 1 Task 3 1
Task 4 2 1 Task 4 2 1
Task 5 1 Task 5 1

Fig. 15.11 Design structure matrix and tradespace illustrating the redesign of the service supply
chain

Figure 15.11 illustrates the design structure matrix for the disrupted Service
Supply Chain 1, and corresponding tradespace with two possible transition paths, to
the left. When we identify transition paths for the redesign of the service supply
chain, we go through Step 3 of the methodology. To the right, Fig. 15.11 shows the
design structure matrix for Service Supply Chain 4, which is the resulting config-
uration after redesign by selecting one transition path. The location of Service
Supply Chain 4 in the tradespace is also shown. The selection of this transition path
corresponds to adding Module 7 to Asset 1. This redesign process fulfills Step 4 of
the methodology.
Overall, the methodology offers a novel approach to designing more resilient
supply chains for service operations. By combining proven concepts from engi-
neering design and reliability theory, supply chain managers, designers and
decision-makers get a new tool for increasing resilience in supply chains.
15 Designing Resilience into Service Supply Chains … 267

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Chapter 16
Resiliency in Supply Chain Systems:
A Triadic Framework Using Family
Resilience Model

Arash Azadegan and Jayanth Jayaram

Abstract Although the significance of supply chain resilience has been well
explored, there is much to be explained about its formation and composition. Using
systems theory and the Family Resilience model, this chapter offers a series of
organizational characteristics that combine to form supply chain resilience. These
subsets of supply chain resilience are categorized into three. The first, inherent
resilience, comes from the strength of resources that are already possessed, are
permanent and inseparable from the supply chain itself. The second, anticipative
resilience, are ones developed purposefully to face crises and disruptions. These are
preparatory resources that come in the form of excess resources, business continuity
plans, or insurance policies. The third type is adaptive resilience, which can come
in the form of collaborative capabilities, collective decision-making, and leadership
that combines care and concern with the ability to make on the spot decisions. The
chapter explains how supply chains, as organizational systems, leverage these three
sub-sets to face disruptions.

16.1 Introduction

In today’s global, dynamic and highly competitive business environment, success

requires a sound approach to preparation and response to supply chain risks and
disruptions. As of late, the frequency and extent of potential threats to supply chains
for many companies have sharpened. Potentially as a result of the global reach of
supply chains, and increased inter-dependence among supply chain members,

A. Azadegan (&)
Rutgers Business School, New Brunswick, Newark, NJ, USA
e-mail: [email protected]
J. Jayaram
University of South Carolina, Columbia, SC, USA

© Springer Nature Singapore Pte Ltd. 2018 269

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_16
270 A. Azadegan and J. Jayaram

companies have become ever more concerned about their ability to manage risks
and respond to disruptions (Blackhurst et al. 2011).
Supply chain resilience is a company’s ability to rebound from adverse events,
possibly more resourcefully and with more strength. Since resilience can help
improve response and recovery in the face of disruptions better than one’s com-
petitors, a resilient supply chain can be a source of competitive advantage. It is not a
surprise to see continually rising interest in better defining and explaining the
concept during the recent past (Chopra and Sodhi 2014; Bode et al. 2011). While
the significance of supply chain resilience has been well-explored, much remains to
be explained about its composition and formation. Researchers have often relied on
a tabulation of factors that could strengthen mitigation and response efforts in their
explanations of supply chain resilience (Pettit et al. 2010). For instance, some
suggest for flexibility, redundancy and innovativeness to be indicative of resilience
in supply chains (Tang 2006; Sheffi 2015). Others suggest that collaborative efforts
and human capital help with resilience (Blackhurst et al. 2011).
As research on supply chain resilience matures, it is becoming apparent that
registering a handful of interesting variables may not adequately explain the con-
cept of supply chain resilience. To date, minimal emphasis has been placed on a
rigorous and theory-based explanation of supply chain resilience. Indeed, assuming
that firms can fuse these elements together, how to combine and apply them so as to
best manage disruptions is not explained. The interplay between factors that build
supply chain resilience is rarely the topic of discussion. Moreover, many of the
common factors considered in supply chain resilience are multifaceted. Flexibility,
for instance, can come in the form of capacity flexibility, scheduling flexibility,
material flexibility, sourcing flexibility and several others (Skipper and Hanna
2009). Similarly, innovativeness can be in the form of innovative ability in products
or processes or even organizational structure (Azadegan and Dooley 2010). Missing
from the literature is a theoretically sound explanation of the “how” and “why” of
the effects of supply chain resilience.
In this chapter, we combine two theoretical explanations to help detail the
nuances associated with supply chain resilience. We combine how systems theory
characterizes resilient systems (Holling 1973; Ashby 1962) with how sociologists
and psychologists studying military families characterize resilient families
(Mccubbin and Patterson 1982). When faced with adversity and crises caused by
deployment, injury or death of the service-person, some military families show
much stronger response and recovery capabilities. The Family Resiliency
(FR) model offers categories of resilience characteristics and explains the interac-
tion among these categories (McCubbin and McCubbin 1996). In line with systems
theory and the FR model, we define supply chains as interacting and interdependent
group of companies making an effort to survive and succeed in their immediate
environment.
According to systems theory, resiliency in living systems is enhanced when
particular characteristics are present. The first characteristic is the ability of the
16 Resiliency in Supply Chain Systems: A Triadic Framework … 271

system to maintain “fit” with its environment. Systems that can sense, respond,
adjust and adapt faster than changes in their environment are more fit. Maintaining
“fit” becomes harder as systems become more complex. In complex systems, not
only is there a need for fit between internal operations and the external environment,
but also a fit between operations of members with one another. Balancing the
internal needs while addressing changes initiated outside the company can become
difficult as the system grows larger and more complex. Because of the larger
number of organizational members, complex supply chains carry more connections
between companies, more layers of connections and more connections between
individual agents. Naturally, these require careful orchestration of how the fit with
the environment is implemented.
Another characteristic of resilient systems is the notion of requisite variety
(Ashby 1962). To maintain stability, the number of conditions that a system can
adjust to and accommodate needs to be greater than or equal to the number of
conditions that the environment can throw at the system. As Ashby (1962) noted,
“only variety can destroy variety”. For example, a winning chess player might be
said to have more variety of moves than his losing opponent. For supply chains,
requisite variety implies that the combination of capabilities that a company pro-
vides should be prepared for handling more than what is emergent in the
environment.
The third characteristic of resilient systems is the notion of multi-stability (Ashby
1960). Living systems have a preference toward a particular equilibrium point
between them and the external environment (Cariani 2009). For instance, the
human body operates best at 98.6 °F. Reverting to this preferred equilibrium point
implies that our bodies return to an optimal pattern of operation. However, resilient
systems are ones that can operate well under a multitude of alternative equilibria.
These are called metastable systems (Holling 1973; Ashby 1956). While the human
body best operates at 98.6 °F, humans are able to operate in temperatures fluctu-
ating lower and above any place on earth, simply because of their ability to adjust
and adapt through clothing, coolers/ACs, and other climate technologies.
How systems theory explains resilience has been applied extensively in families.
Psychologists and sociologists have offered overwhelming support in how members
of resilient families can face adversity and crisis more successfully than others
(Walsh 1996; Patterson 2002). A popular model is the Resiliency Model of Family
Stress, Adjustment, and Adaptation (RM Model hereafter) (McCubbin and
McCubbin 1996).
According to the RM model, certain categories of family functioning are critical
to family recovery in the face of a crisis (McCubbin and McCubbin 1996). These
include the family’s (1) Family resources, (2) Patterns of functioning, and stressor
appraisal, and (3) Problem-solving and coping (Fig. 16.1). Families with weak
finances, or health issues are more vulnerable to potential crises. Those with
established patterns of bonding and cohesiveness are shown to be more successful
in facing unfortunate events (McCubbin and McCubbin 1996). The FR model offers
272 A. Azadegan and J. Jayaram

PaƩerns of
funcƟoning &
stressor
apprisal

Problem
Family
Family Stressor Solving &
Adjustment
Coping

Family
Resources

Inherent
Supply Chain
Resilience

Supply Chain AdapƟve MiƟgaƟon, Response

DisrupƟon Supply Chain and Recovery
Resilience

AnƟcipatory
Supply Chain
Resilience

Fig. 16.1 Family resilience model and applicability to supply chains (adapted from McCubbin
and McCubbin 1996)

two key insights to the study of resilience in supply chains. First, it offers a cate-
gorization of factors that lead to resilience based on how living systems operate.
Second, it explains how these categories interact so as to mutually reinforce the
system’s abilities.
In this chapter, we relate explanations provided by systems theorists and the FR
model to develop a conceptual model for resilience in supply chains. To start, using
theoretical explanations and based on the OM/SCM literature, we categorize
organizational characteristics that lead to resilience into three: (1) inherent resi-
lience, (2) anticipatory resilience and (3) adaptive resilience (Fig. 16.1). We then
go on to provide further specifics about the model to offer more explicit proposi-
tions. The result is a new conceptual model on the building blocks of supply chain
resilience and how, when combined, they can enhance response and recovery in the
face of supply chain disruptions (Fig. 16.2).
16 Resiliency in Supply Chain Systems: A Triadic Framework … 273

Environmental Uncertainty & Contextual Factors

Inherent
Resilience

DisrupƟon
AdapƟve Response &
Resilience Recovery

AnƟcipatory
Resilience

Latent Resilience Manifest Resilience

Fig. 16.2 Supply chain resilience model

16.2 Resilience, Systems Theory

and Family Resilience Model

Resiliency in an everyday dialogue refers to the ability to “recover from or adjust

easily to change.” The source of this definition is from engineering science; derived
primarily from how simple mechanical/industrial devices function. For instance, a
resilient screwdriver is one that can maintain a relatively tight engagement of its
blade with the slot of the screw, which makes it versatile when working in relatively
inaccessible places, or “tight spots”. This engineering definition for resilience may
not adequately explain resilience in complex social systems (Holling 1973).
Organizational resilience also requires positive adjustment during challenging
conditions. Preserving the functioning within the system despite the presence of
adversity (e.g. internal adversity, rapid change, or lousy leadership) is also
important. As Weick noted, “What happens during the recovery can be crucial for
the subsequent fate of the system” (Weick 1993).
Family resilience emerged as scholars combined ideas from general systems
theory on families (Danielson et al. 1993). Particularly important to family resi-
liency researchers was the effect of stress on military families. The stress associated
with having a career in the military, including deployment, spousal absence,
health-related matters and potential combat injuries, all can make family lives
challenging. Grounding their efforts with earlier work on family coping in wartime
stress, McCubbin and McCubbin (1988) carried exhaustive studies on vulnerability
and regenerative power of military families facing crises to develop the Family
Resiliency (FR) model. To develop the FR model, they used observations from a
longitudinal investigation of families facing prolonged war-induced stressor events
274 A. Azadegan and J. Jayaram

(for instance, having a husband/father held captive or unaccounted for in the

Vietnam War).
The basic premise of the FR model is that serious crises can derail the func-
tioning of a family system, with ripple effects for all members and their relation-
ships. The model highlights several major interacting groups of components that
shape the family process and outcomes critical to family recovery in the face of a
crisis (McCubbin and McCubbin 1988). It is the combination and interaction of
these that enable the family system to rally in times of crisis, to buffer stress, reduce
the risk of dysfunction, and support eventual adaptation (Walsh 2003). Moving
beyond listing the elements of a resilient system, the FR model offers explanation
on how groups of elements interact with one another, to enhance, redirect and align
the family’s efforts.
In the next section, we explore the parallels between families and supply chains,
in order to set the stage on how a resilience model for supply chain management
can be developed.

16.2.1 Parallels Between Families and Supply Chains?

There are notable similarities in the dynamics of family systems and supply chains.
First, both systems are composed of members and a whole, with patterns of con-
nections among members and between each member and the whole. Each member
may be in a stronger or weaker relationship with others, but everyone is inter-
connected and interdependent. In families, it can be difficult to predict the behavior
of individuals by merely considering them in isolation; one needs to know about the
context of the individuals in the family (Cowan and Cowan 2006). The same can be
said about supply chains. For instance, it is nearly impossible to understand why an
exhaust manifold parts manufacturer adjusts the tolerance on a particular part,
unless a broader view of the supplier’s role in the automotive supply chain is
considered. With regards to change and disruption, changes in one family member
(e.g., job loss), a subsystem (e.g., the couple relationship), or the overall system
(e.g., home destroyed by a tornado) reverberate across the family system
(Whitchurch and Constantine 1993). Similarly, changes in one supply chain
member (e.g., financial loss), a subsystem (e.g., buyer-supplier relationship), or the
overall system (e.g., the entire supply chain over run by new technology) rever-
berate across the system.
A second parallel is the notion of boundaries. Systems theorists consider each
member to have an invisible enclosure that separates it from the outside (Wagner
and Reiss 1995). An important property of a system is the extent to which member
boundaries are permeable. Non-permeable (or rigid) member boundaries denote
disengaged members. For instance, rigid boundaries may cause the father to have
difficulty in becoming included in the mother-son relationship. The same can be
said about supply chains; a retailer may be excluded from a new product devel-
opment strategy that is arranged between an original equipment manufacturer
16 Resiliency in Supply Chain Systems: A Triadic Framework … 275

(OEM) and supplier. At the other end of the permeability continuum, member
boundaries can be so diffuse that they become overly enmeshed. For example, in
some families children occupy the attention of their parents so constantly that there
is no separation between the life of the couple and the life of the children (Cowan
and Cowan 2006). Extending the examples to supply chains; retailers can be so
involved in production planning of an OEM, such that there is no opportunity to
develop strategies for other products or customers.
A third parallel is related with the notion of homeostasis and multi-stability.
Homeostasis requires coordination between actions internal to the organization with
activities in the external environment. Crises change the “fit” with the external
environment and are thus likely to change the nature of internal relationship
between members of the system as well. Multi-stable families and supply chains
manage to ward off a diverse and wide-ranging type of disruptions because their
members are able to accommodate and adjust to a multitude of operating optimality.

16.2.2 Supply Chain Resilience—A Review

Literature on supply chain resilience is at its nascence stages. To the best of our
knowledge, the term “supply chain resilience” has only been referred to in the
academic arena since 2004 (Christopher and Peck 2004). In this short period of
time, copious articles have explored the concept to offer further explanations. While
commonly mentioned characteristics of supply chain resilience are flexibility,
redundancy and organizational culture, there are other factors identified as well. For
instance, Christopher and Peck (2004) highlighted a culture focused on risk man-
agement awareness and comprehension of the supply chain risks (bottlenecks and
critical paths) and collaboration as other important factors.
To date, beyond the aggregate level, literature has come short in explaining the
effects of these factors on building supply chain resilience. For instance, factors that
are often related to resilience (e.g. flexibility, redundancy and culture) can take
various forms. Whether each of these forms is helpful in facing risk and disruptions
has not been investigated. Tang and Tomlin (2008b) offered a detailed assessment
of how different forms of flexibility relate to risk and disruption management.
Whereas demand flexibility shifts production quantities across different products,
production flexibility shifts production quantities across internal resources (plants
or machines). Supply flexibility may imply the ability to shift order quantities
across suppliers, shift order quantities across time, use multiple suppliers or use
flexible supply contracts. Each of these variations may be effective or ineffective in
the facing certain risks and disruptions.
Moving beyond flexibility and redundancy, Ponomarov and Holcomb (2009)
note the importance of connectedness and risk sharing among supply chain mem-
bers as traits that enhance resilience. Pettit et al. (2010) note financial strength and
visibility among capabilities that enhance resilience. Blackhurst et al. (2011)
highlight the importance of human capital (education and training) and
276 A. Azadegan and J. Jayaram

organizational capital resources (contingency planning and risk management

teams). However, missing from much of the findings so far is how different aspects
of resilience relate and potentially enhance one another. In the next section, we
detail how systems and family resilience theory offer explanations to help in this
regard.

16.3 Family Resilience Model and Supply Chains

16.3.1 Inherent Resilience (System Strengths)

Every living system carries a certain degree of resilience inherently built into it.
This allows the system to naturally flex, bend, and mold around its ever-changing
environmental conditions. These built-in properties are a central building block
around which organizational resilience can be structured around (Horne and Orr
1998). In military families, inherent resilience manifests in members’ natural coping
skills, spouse’s self-reliance, or the father and mother’s self-confidence in managing
young children alone. At the family level, emotional and esteem support for each
family member, and level of cohesion among members are part of the family’s
inherent strengths. Families that are open to change, can better reorganize and adapt
to fit new challenges tend to be more resilient.
Inherent resilience for supply chains comes from the strength of resources that
are already possessed. These capabilities are often permanent and inseparable
qualities of the supply chain. For instance, agile (rapidly flexible) supply chain
networks are advocated because they can be a competitive advantage (Lee 2004).
However, agile supply chains are also capable of responding quickly to changing
conditions can be a competitive advantage even when there are no immediate crisis
in the horizon (Juttner and Maklan 2011). Flexibility, when built into the system
rather than for purposes of risk and crisis management can be another form of
inherent resilience. For instance, companies often leverage sourcing flexibility to
quickly change inputs. However, the purpose is often far from what is needed for
crisis response. Flexible sourcing may be for price reasons, or for strategic purposes
or because the ability to change sources simply make good business sense. This
type of flexibility is often inseparable from the fundamental structure of the supply
chain.
Another form of flexibility that can be categorized as inherent resilience is that of
design flexibility. During the product design process at SeaMicro, the microchip
manufacturer, engineers take their design modifications to contract manufacturers
and have them tested immediately. Deign flexibility saves weeks or even months
when compared to more formal arrangements in design testing and validation. Yet
another inherent resilience is that of product configuration. In a recent year, Deere
built almost 8,000 variations of its popular 8R tractor line. The company’s
16 Resiliency in Supply Chain Systems: A Triadic Framework … 277

flexibility in product configuration allows Deere to serve the needs of diverse farm
markets using a single product platform (Schlegel and Trent 2014). Finally, we note
that flexibility-based inherent resilience takes several other forms; such as logistics,
material, and lead time flexibility.
Inherent resilience can come in other forms. Families with a nest egg, inheritance
or other forms of financial resources often handle crises better since economic
resources help buffer the bitter experience of up-rootedness (Dyk and Schvaneveldt
1987). Similarly, supply chains operating in high-margin industries or those asso-
ciated with an OEM or supplier that is financially strong tend to leverage these
resources to mitigate disasters more easily. The extent of financial resources can be
useful, although it was not developed for specific purpose of handling crises.
Information sharing is another form of inherent resilience worth noting. In
supply chains, information comes in many forms. Information sharing regarding
demand, supply, inventory, production schedules, and purchasing schedules
enables firms to generate higher levels of supply intelligence and greater visibility
of risk profiles (Christopher and Peck 2004).

16.3.2 Anticipative Resilience (Preparatory Capabilities)

Resilient systems develop resources dedicated to warding off and managing dis-
ruptions. For families, this type of resource helps resist and better appraise the
effects of disruptions. For instance, those that have mapped and planned potential
mishaps have a better chance of success. Similarly, families with better interpretive
and forecasting abilities are considered to be more resilient. We categorize these
capabilities under the term anticipative resilience. Anticipative resilience includes
uniquely developed competencies that are designed to protect the system from
unexpected or non-normative stressors and strains.
The most common form of anticipative resilience in supply chains is that of
excess resources. Organizational reserves, such as redundancies in inventory, safety
stock, operational capacity and suppliers are commonly used in anticipation of
unfortunate events. Unlike inherent resilience, anticipative resilience entails
resources that are specifically maintained for addressing disruptions. The strength of
anticipative resilience comes from its dedicated form. For instance, safety stocks are
essentially kept to handle demand fluctuations. Instead, substitutable parts can be
used for multiple purposes, which means that they may not be available when a dire
situation arises. Similarly, redundant processes are readily available. Similarly,
adjustable processes may be preoccupied with other production priorities. Here
again, further distinction in the type of flexibility is necessary. Flexibility in order
fulfillment allows for the firm to quickly change outputs when there are raw
materials shortages. Flexibility in modes of delivery using alternate distribution
channels may be designed into supply chains to proactively mitigate logistical
issues. If these capabilities are developed and incorporated for the primary reason of
278 A. Azadegan and J. Jayaram

mitigating and responding to risks of disruption, then they can be categorized as

anticipative resilience.
Carrying anticipative resilience can prove to be contentious. For instance,
because redundancy involves the duplication of capabilities, some consider it as an
unnecessary cost burden. Barring potential crises, redundant resources may lead to
unutilized capacity, idle inventory, increased costs and potentially lower quality.
For those less concerned with supply chain disruptions, there is a minimal need for
redundancies. Nevertheless, with a rise in concerns over disruptions, the need for
redundancies in the form of anticipative resilience does rise. Empirical research
advocates for this. Hendricks and Singhal (2005) report how operational slack in
the supply chain, lowers the likelihood that a negative stock market reaction will
occur. Azadegan et al. (2012) note how operational slack, the form related to the
firm’s production processes operational slack lowers the likelihood of venture
failure with an increase in environmental uncertainty.
Beyond redundancies, anticipative resilience can take several other forms.
Insurance policies are among common ones (Alcantara 2015). Supply chain visi-
bility for risk minimization efforts is yet another form (Christopher and Peck 2004).
Many researchers have recommended sharing information as a preferred way to
diminish supply chain risk. As compared to information sharing in operations, this
type of information sharing is primarily meant to minimize large-scale risks. An
example of these initiatives is the use of control towers, which can help in effec-
tively responding to disruptions through, for example, identifying vulnerable sup-
pliers, thereby allowing enough time to develop countermeasures against potential
failures. Another means to enhance anticipative resilience is through Business
Continuity Management (BCM) programs. BCM programs encompass the collec-
tion of risk mitigation, risk management, continuity planning and emergency
response activities (Cerullo and Cerullo 2004).

16.3.3 Adaptive Resilience (Adaptation and Coping)

The third type of resilience highlighted by McCubbin and McCubbin (1996) is that
of the family’s problem-solving and coping strategies. The process by which
families restore balance once faced with a stressor is often referred to as regener-
ative power (Patterson 2002). Problem solving is a regenerative power because it
helps organize stressors and hardships into manageable components, to identify
alternative courses of action, and to initiate steps to resolve interpersonal issues.
Coping helps maintain the emotional stability and well-being of the family
members.
We label these as “Adaptive resilience.” Adapting is the process of recalibrating
one’s expectations on the spot, with the surprise at hand, and acting exactly and
speedily to mitigate, improvise, or innovate out of a failure. Several traits charac-
terize adaptive resilience. To start, adaptive resilience relies upon the quality of
decisions made in the face of disruptions. Supply chain disruptions are often
16 Resiliency in Supply Chain Systems: A Triadic Framework … 279

fast-moving, high-stakes events that can be unforgiving to mistakes (Lee 2004).

Decisions that are made collaboratively among informed and participative mem-
bers, often evade glaring omissions. Collaboration helps unite supply chain mem-
bers during disruptions. A focal firm is often unable to detect the root cause of
disruptions, mitigate the effect of actual problems, or resume business operations by
reconfiguring supply chain resources alone. To that note, adaptive resilience implies
collective decision making to important solutions. Solutions created quickly and
collectively in response to disruptions. Specific to leadership, adaptive resilience
combines care and concern through situational awareness, with the agility to make
expeditious and on-the-spot decisions. Indeed, how effectively the decisions made
are executed is also important. Adaptive resilience carries the ability to maintain
function on the basis of ingenuity or extra effort in crisis situations. This is also
related to the leadership’s ability to handle “tough choices” in the field quickly and
responsibly as part of an adaptively resilient organization (Patterson 2002).
Proposition 16.1 Resiliency can be accomplished through a combination of three
components: (a) Inherent, (b) Anticipative, (c) Adaptive.

16.4 Differentiating the Three Forms of Resilience

and Significance of Adaptive Resilience

Inherent, adaptive and anticipative resilience are unique in many regards. Because
inherent resilience is developed for purposes beyond risk management and more
related to competitive and business advantage, inherent resilience rarely creates a
cost burden that is directly accounted to risk management. Anticipatory resilience is
likely to be accompanied with added operating costs. Maintaining slack inventory
of raw materials, redundancy capacity in production or labor force all are bound to
raise costs. As we noted above, anticipative resilience comes in the form of dedi-
cated, idiosyncratic investments that are ready-to-use when a disruption occurs. In
essence, anticipatory resilience comes with a more reliable assurance on its use-
fulness. For instance, emergency stock piles are bound to be there when needed.
Both inherent and anticipatory resilience can be considered as latent forms of
resilience. Yet the issue with latent forms of resilience is in their “liquidity.” These
are reserve capabilities that are held to be used when disruptions occur. There rarely
is an immediate payoff in developing or enhancing them; nor a complete guarantee
on whether they will be useful when the disaster strikes. Nevertheless, time is on
one’s side in developing and refining them. In contrast, adaptive resilience offers
the ability to develop response solutions that are customized to the disruption at
hand. A summary of the three forms is given in Table 16.1.
We noted the works of Tukamuhabwa et al. (2015) and McCubbin and
McCubbin (1988) identify both protective and recovery factors that work syner-
gistically and interchangeably to respond successfully to crises and challenges.
Protective factors facilitate adjustment, or the ability to maintain integrity and
Table 16.1 The three forms of supply chain resilience
280

Definition and explanation Examples Sources (selective)

Inherent resilience
SC flexibility
− Sourcing flexibility Ability to adjust the source and amount of raw material Part commonality, modular product Christopher and Peck
or parts design (2004), Pettit et al.
− Order fulfillment Ability to adjust production to time and volume based Alternate distribution channels (2010), Rice and
flexibility changes to orders Caniato (2003),
Sheffi and Rice
− Capacity flexibility Ability to adjust production to changes in volume increase Alternative suppliers and
(2005)
and decrease manufacturing sites
SC integration Order/inventory/distribution integration to improve ERP systems, business intelligence
operations performance
SC efficiency Production of output without waste Labor productivity, asset utilization
Postponement Delayed differentiation; delay investment in product until Time, place and form postponement
last possible moment
Financial strength Capacity to absorb damage to cash and financial Profitability, Margins and product
profitability portfolio
Market strength Capacity to absorb injury to reputational and customer Customer loyalty, relationship and
impressions brand equity
Anticipatory resilience
SC redundancy
– Safety stock Surplus material primarily kept for risk management Raw material and finished goods Azadegan (2014),
inventory Chopra and Sodhi
– Slack capacity Alternative manufacturing, service and equipment Reserve capacity, reserve workforce (2014), Kildow
maintained for risk management (2011), Kleindorfer
and Saad (2005),
– Supply redundancy Reserve and redundant suppliers available for purposes of Multiple sourcing
Pettit et al. (2010),
disruption management
Tomlin (2006),
SC flexibility Ability to adjust sourcing, order and capacity with risk Supplier contract flexibility Zsidisin et al. (2005)
management as prime purpose
A. Azadegan and J. Jayaram

(continued)
Table 16.1 (continued)
16

Definition and explanation Examples Sources (selective)

SC visibility Physical and informational transparency to improve Control towers
operations for risk management
Business continuity plans
– Risk reduction activities Activities meant to eliminate or reduce the chances of Insurance policies, outsourcing
potential disruptions
– Risk mitigation activities Activities meant to reduce the impact of potential Business impact analysis, monitoring
disruptions systems
– Contingency planning Activities developed in advance for various situations that Playbooks, policy manuals and
might impact business protocols
– BCP in supplier selection Activities meant to minimize risk and continuity issues in Listing and auditing critical suppliers
suppliers during selection
Financial reserves Liquid assets available to sustain an organization in the Insurance, emergency reserves,
face of disruptions marketable securities
Security Procedures, and technology to protect supply chain assets Layered defenses. access restrictions
measures/Compliance from attack
Awareness Ability to discern potential future events or situations Near-miss analysis, early warning
monitoring
Adaptive resilience
Resiliency in Supply Chain Systems: A Triadic Framework …

Situational awareness Detailed situational understanding in the face of a Clear mental model, recognizing Craighead et al.
disruption changes to situation (2007), Pettit et al.
Decisiveness Ability to make decisions on operational adjustment in the Quickly deciding among choices, not (2010)
face of challenges delaying decisions
Responsiveness Ability to modify operations in the face of challenges Fast re-routing and response to
customer demands
Recovery execution Ability to focus on returning to normalcy Resource mobilization, consequence
mitigation
281
282 A. Azadegan and J. Jayaram

functioning. But when the family (or supply chain) is challenged, recovery factors
are called upon to promote the ability to adapt, or rebound to the crisis.
The significance of adaptive resilience at the “moment of truth” (or when dis-
ruptions actually happen) cannot be overestimated. Arguably, much of the invest-
ment and effort placed in developing resources in anticipatory resilience can prove
ineffective if adaptive resilience is not there to correctly apply them. In many cases,
years of preparation and planning can go to waste, simply because the leader did not
make the right decision, or the systems in place did not respond the way they were
intended to. This is particularly important when facing many of today’s larger-scale
supply chain disruptions that show unique characteristics that companies may not
be familiar with. The Tsunami-nuclear disaster in Japan and Super-storm Sandy are
examples of large-scale disruptions that were difficult to fully anticipate and prepare
for. Facing these types of disruptions is particularly dependent on how adaptive
resilience. Adaptive resilience helps counteract the restrictive tendencies through
situational awareness. Awareness improves organizational confidence, which
reinforces the capability for broad information processing. Jointly believing that an
organization has capacity and that this capacity helps with accepting the confusion
and ambiguity of the crisis at hand and to handle the matter more effectively.
Several considerations highlight the significance of anticipatory resilience. First,
when faced with crises, systems are challenged to their extreme performance levels.
To recover, systems often need an extensive, broad and immediate array of
resources. To make matters worse, the array of needs can quickly change as the
disruption unfolds. Adaptive resilience helps the system reconfigure and adjust
itself quickly in the environment.
Second, it is natural for systems to behave overly rigid in threatening situations.
Threatening situations lead to restriction of information processing and narrowing
of one’s field of attention (Staw et al. 1981). In the face of overpowering threat,
organizations often respond by constricting control, such that power and influence
become concentrated in the hand of a few executives, leading to a “command and
control” model of crisis management. Therefore, we posit:
Proposition 16.2 Adaptive resilience positively mediates the effects of inherent
resilience and anticipatory resilience in facing supply chain disruptions.

16.5 System Balance and Trade-off Among

Forms of Resilience

Earlier, in Sect. 16.2.1, we noted the importance of maintaining balance (fit) be-
tween the system and its operating environment. At the same time, systems (fam-
ilies or supply chains) need to maintain a functional fit between their challenges and
resources and in the interaction among various members. A disruption that unsettles
the fit with external environment is likely to unsettle the internal balance of the
system as well.
16 Resiliency in Supply Chain Systems: A Triadic Framework … 283

Systems theory suggests that multi-stability at the system level relies on

multi-stability at the member level. For instance, multi-stable families that can
modify their responsibilities to permit the transitioning parent to invest in
work-for-pay, can better handle the change of a stay-at-home mother take on a new
job. Similarly, supply chain members that can adjust in order to accommodate one
another’s production, delivery and scheduling plans, can better address a disruption.
Here is one example: A pair of suppliers that are prepared to make parts usually
produced by the other, while staying profitable helps the entire supply chain
maintain its balance despite variations and disruptions. Similarly, a logistics pro-
vider that can ramp up its delivery capacity or ramp it down quickly can help the
entire system maintain its balance despite weather and other natural disasters.
The above details suggest that improved resiliency in one system member may
compensate for weaker resilience in others. In essence, as it relates to the supply
chain, resilience may be transferrable among members. By extension, specific
forms of resilience forms can also be compensatory. When a supplier comes short in
anticipatory resilience (finished goods), manufacturer’s anticipatory resilience (raw
material from the supplier) can work to compensate (Fig. 16.3). Similarly, when a
manufacturer had limited inherent resilience (weak profit margins), a distributor’s
inherent resilience (strong margins) can work to compensate.

Form 1
Balanced at the organizational
and inter-organizational level.

Form 2
Balanced at the organizational
and inter-organizational level

Stronger overall resilience in one

member compensates for
weakness in the other.

Form 3
Balanced at the organizational
and inter-organizational level.

Strength in one form of resilience

in one member compensates for
weakness in the same form of
resilience in others.

Fig. 16.3 Balanced resiliency across the supply chain

284 A. Azadegan and J. Jayaram

Proposition 16.3 Increases in resilience among supply chain members helps

compensate for weaknesses by others.

16.6 Operating Context and System Boundaries

Earlier, in Sect. 16.2.1, we noted the significance of permeability in member and

system boundaries as a key distinction. More perturbations means that there are
more varieties of unexpected situations thrown at the organization. With a rise in
uncertainty, be it in the form of dynamism, complexity or munificence, we antic-
ipate higher permeability in the system. Faced with increased hazard, a system will
need to place further emphasis on its resiliency capabilities. Building on explana-
tions from the law of requisite variety, we suggest that more perturbations in the
environment will require the system to carry a more robust arsenal of capabilities
handle these variations. In short, the need for enhancing firm resilience becomes
more necessary with a rise in uncertainty.
Proposition 16.4 Uncertainty in the operating environment carries a detrimental
effect on how supply chain resilience improves firm ability in facing supply chain
disruptions.

16.7 Discussion

This chapter dives deeper into the important topic of supply chain resilience to
provide a theoretically grounded explanation of supply chain resilience. It groups
various forms by which supply chain resilience can be developed into three forms
and explains how they can complement one another. The chapter offers explana-
tions based on how resilient systems (such as families or supply chains) are ones
that are resourceful, robust, and adaptive in such a way that they fight through crises
rather than succumb to them. Using well established research on systems theory and
family resilience. The results is a model that shows the inter-relationship among the
building blocks of organizational resilience.
Often, the simplest and most widespread strategy for mitigating the impact of
supply chain disruptions is through redundancies, particularly in the form of
inventory buffers. But for many, this strategy is synonymous with accepting system
inefficiencies; a direct antithesis to what is advocated for a supply chain opti-
mization (Tang and Tomlin 2008a). Despite its downside, resilience in an antici-
patory form is popular because it can be easy to use and carry a high guarantee of
usefulness in the face of disruption.
We highlight the nuances associated with flexibility as a form of resilience. To
start, depending on its form and intended reason for developing flexibility can be
categorized as either inherent or anticipatory resilience. Second, since flexibility has
16 Resiliency in Supply Chain Systems: A Triadic Framework … 285

multiple uses, it may require more effort to develop and implement takes more time
and requires the coordinated effort of the entire organization along with its partners.
For instance, setting up technologies and systems for information sharing, adopting
the build-to-order method, and observing international security compliance and
procedures may require more time.
Another important matter worth noting is that related to inter-dependence of
agents in a system. We often blame system interdependence as the cause for rising
risks in the supply chain. It is no surprise to see supply chain disruptions in one
corner of the world affect supply chain members operation at the other corner.
Process improvements, such as Just-in-time manufacturing, and technological
enhancements that help reduce delivery times, have reduced physical inventory and
time buffers between supply chain members. These and other factors have helped
raise the dependence and inter-dependence of members of the supply chains on one
another.
In this chapter, we suggest that although inter-dependence may be an outcome of
today’s efficient supply chains, it may not necessarily have to be a deterrence. In
fact, most people would consider inter-dependence in their family group as a
positive enhancement to managing personal disruptions. Family inter-dependence
can be the source of comfort, protection, assistance, and recognition; all when a
member deems it necessary. The same can be noted about supply chains. When
inter-dependence leads to increased concern and willingness to compensate for
others’ shortcomings, interdependence can be a positive attribute.

16.8 Future Research

There are several means by which the conceptual development offered here can be
empirically tested and extended. To start, large-scale cross-section surveys that
combine archival firm performance can be a viable means to test the validity of the
proposed model here. Similarly, multiple case studies of how various firms have
faced small and large-scale disruptions can be help determine the effectiveness of
various forms of resilience.
Literature suggests that supply chain disruptions can take many forms: severity,
unfamiliarity, and complicatedness to name a few. With the rise of any of these
characteristics, the disruption becomes more challenging. For instance, disruption
severity can determine the level of involvement of individuals at different levels of
the organization and the extent of resources necessary as countermeasures (Hannah
et al. 2009). Our work did not distinguish types of supply chain disruption nor the
potential effects of inherent, anticipative and adaptive resilience in the face of
disruptions. Future conceptual and empirical studies can address the nuances
associated with the type of disruption.
Family resilience labels disruptions as a “stressor.” An important factor along-
side the perceived severity of stressors, a “pile-up” of stressors can tax the ability to
286 A. Azadegan and J. Jayaram

recover. This is of particular significance in supply chain research, since the level of
“stress” and pressure that a firm’s operating environment causes can hinder the
firm’s ability to best recognize and respond to unexpected events.

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Chapter 17
Cultivating Supply Chain Agility:
Managerial Actions Derived
from Established Antecedents

Michael J. Braunscheidel and Nallan C. Suresh

Abstract Today’s marketplace is characterized by intense competitive pressures as

well as high levels of turbulence and uncertainty. Organizations require agility in
their supply chains to provide superior value and also manage disruption risks and
ensure uninterrupted service to customers. The cultivation of agility can be
approached as a risk management initiative that enables a firm to anticipate as well
as respond rapidly to marketplace changes and disruptions in the supply chain.
Agility is thus of value for both risk mitigation and response. This chapter provides
an updated perspective of an emerging body of literature devoted to supply chain
agility. Next, based on our own research stream on this topic, we propose a set of
supply chain initiatives as antecedents for cultivation of agility. These include
internal integration measures, external integration with suppliers and customers,
cultivation of external flexibility, and lean practices. We also provide more fun-
damental, cultural drivers for cultivating agility, which include market orientation,
learning orientation and organizational culture types that are conducive for agility.
These antecedents were established through empirical research, and we translate
them into a set of managerial practices to address the cultivation of agility for both
mitigation and response.

17.1 Introduction

In order to cope with the challenges of more competitive market places, a signif-
icant amount of research has been conducted on supply chain practices to improve
the performance of supply chains. In addition to increasing competitive pressures,
in recent years global markets have also been characterized by growing levels of

M.J. Braunscheidel (&)

Department of Management, Canisius College, Buffalo, NY, USA
e-mail: [email protected]
N.C. Suresh
Department of Operations Management and Strategy, School of Management,
State University of New York, Buffalo, NY, USA

© Springer Nature Singapore Pte Ltd. 2018 289

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_17
290 M.J. Braunscheidel and N.C. Suresh

turbulence and unpredictability. Thus it has been stressed that organizations must
consciously develop agility to provide value as well as manage disruption risk and
ensure uninterrupted service to customers (Christopher 2000; Christopher and
Towill 2001; Swafford et al. 2006).
The management of supply chain disruption risk is subject to increasing atten-
tion among both researchers and practitioners. Chopra and Sodhi (2004) classified
supply chain risks into different categories, along with the drivers of these risks.
Kleindorfer and Saad (2005) categorized supply chain risks into two types: (1) risks
related to supply and demand coordination and uncertainty, and, (2) disruption risks
that are caused by such events as natural disasters, terrorism and labor strikes. They
outlined a list of 10 principles developed from the industrial risk management and
supply chain literatures. Along these lines, there have been many prescriptive
articles that have identified different types of risks and different types of actions to
both anticipate such risks (mitigation) and different ways by which firms can
recover quickly to such disruptions if and when they do occur (responsiveness).
In this chapter, we make the following contributions:
1. We provide an updated, parsimonious perspective of this emerging body of
literature.
2. Based on our prior empirical research stream on this topic, we discuss a set of
supply chain initiatives as antecedents for cultivation of agility. We also provide
more fundamental, cultural antecedents towards cultivation of agility.
3. Since both construct and predictive validity of these models have been estab-
lished, we translate the findings into a set of managerial practices that serve to
address the cultivation of agility for mitigation and response.
Unlike the prescriptive literature of the past, the managerial actions advanced in
this chapter are derived from actually established empirical relationships. This
chapter is organized as follows. In Sect. 17.2, we provide an updated perspective,
based on a representative set of studies on supply chain agility. In Sect. 17.3 we
discuss the direct and indirect antecedents for supply chain agility based on our own
research stream on this topic. In Sect. 17.4, we provide direction and guidance as to
what managers can do to enhance supply chain agility, both to mitigate and respond
to disruptions. Section 17.5 presents the conclusions from this set of studies.

17.2 Literature Review and Updated Perspectives

In today’s complex, and turbulent market places, organizations and the supply
chains in which they operate need to be responsive to the volatilities of demand,
supplies and numerous other factors. While this basic notion of agility continues to
dominate, the definitions of agility has also been evolving in recent years.
Table 17.1 provides a summary of evolving definitions of agility amongst repre-
sentative research studies, covering the breadth and range of concepts that have
been included so far as part of supply chain agility.
17 Cultivating Supply Chain Agility: Managerial Actions … 291

Table 17.1 Evolving definitions of agility amongst representative studies

Study Definition of agility and variables studies
Fliedner and E Ability to offer low-cost, high quality products with short lead
Vokurka (1997) times and varying volumes. IVs: Internal initiatives e.g.
process re-engineering and external initiatives like inter-firm
cooperation
Naylor et al. (1999) C Using market knowledge and a virtual corporation to exploit
profitable opportunities in a volatile market place. Placement
of decoupling point
Christopher (2000) CN Ability to respond rapidly to changes in demand, both in terms
of volume and variety
Mason-Jones et al. E Using market knowledge and virtual corporation to exploit in
(2000) a volatile market place. Comparison of lean and agile
paradigms; appropriate use of the decoupling point
Prater et al. (2001) E Agility requires speed and flexibility. IVs: Sourcing flexibility
and speed; Manufacturing flexibility and speed; Delivery
flexibility and speed; External vulnerability
Christopher and CN Ability of the supply chain to react quickly to changes in
Towill (2002) market demand: in volume, variety or mix
Agarwal et al. (2006, E Ability to respond rapidly to changes in demand volume and
2007) variety
IVs: Customer satisfaction, quality, cost, delivery speed, new
product introduction, and lead-time
Narasimhan et al. Ability to efficiently change operating states in response to
(2006) uncertain and changing market conditions
Swafford et al. E Capability to adapt or respond speedily to changing
(2006) marketplace. IVs: Procurement/sourcing flexibility,
manufacturing flexibility, distribution/logistics flexibility
Li et al. (2008, 2009) C, Agility is integrating an alertness to changes
E (opportunities/challenges), internal and environmental—using
resources to respond to changes in timely and flexible manner.
Strategic alertness and response capability, Operational
alertness and response capability, Episodic alertness and
response capability
Swafford et al. E Supply chain agility represents speed of firm’s internal supply
(2008) chain functions to adapt to changes
IVs: Information technology integration, supply chain
flexibility
Braunscheidel and E Capability of firm, in conjunction with key suppliers and
Suresh (2009) customers, to respond in speedy manner to changing
marketplace. IVs: Market orientation, learning orientation,
internal integration, external integration, external flexibility
Vickery et al. (2010) E Responsiveness to needs and wants of customers. IVs: SC IT,
and SC organizational initiatives
Chiang et al. (2012) E Capability of the firm and in conjunction with its key suppliers
and customers, to respond in speedy manner to a changing
marketplace. IVs: Strategic sourcing; Firm’s strategic
flexibility
(continued)
292 M.J. Braunscheidel and N.C. Suresh

Table 17.1 (continued)

Study Definition of agility and variables studies
Gligor and Holcomb E SC coordination, cooperation, communication on SC agility,
(2012) operational and relational performance
Gligor et al. (2013) E Alertness, Accessibility, Decisiveness; Swiftness, Flexibility
on firm’s SC agility
Shao (2013) E Geographic dispersion; SC agility; SC integration; SC
visibility on Disruption warning capability and disruption
recovery capability
E Empirical study, CN Conceptual; C Case study

In the early work of Fliedner and Vokurka (1997), the authors contended that
firms can no longer gain competitive advantage by positioning themselves at a
particular point on the product-process matrix. Instead, due to the presence of
dynamic markets, shorter product life cycles, faster pace of innovation, firms will
need to become agile and simultaneously deliver on the basis of cost, quality,
dependability and flexibility. Naylor et al. (1999) contended that a merging of lean
and agile paradigms need to take place in supply chains, separated by a decoupling
point. Mason-Jones et al. (2000) found that organizations first need to identify and
understand the requirements of the market place before embarking on
re-engineering programs. Christopher (2000) presented conceptual arguments to
define agility as a business-wide capability that embraces organizational structures,
information systems and mind sets, along with four characteristics that are vital to
an agile supply chain: market sensitivity, information-based (vs. inventory based)
posture, becoming a fully linked network, and collaboration among partners. Prater
et al. (2001), using five case studies, maintained that the term agility inherently
contains two concepts: speed and flexibility.
Agarwal et al. (2006) attempted to show that supply chain performance is
improved if it is able to respond quickly to changing customer demand, while
reducing costs. In a later work, Agarwal et al. (2007) found that supply chain agility
also depends on customer satisfaction, quality and cost improvements, delivery
speed, new product introduction, and service level improvement.
Given overlapping operating elements between agility and lean paradigms,
Narasimhan et al. (2006) attempted to disentangle the elements between lean and
agility. Swafford et al. (2006) made theoretical arguments that agility is an exter-
nally facing capability, drawing from many elements of flexibility that constitute
internal competences. They found that an organization’s supply chain agility is
directly influenced by the degree of flexibility in manufacturing and
procurement/sourcing and is indirectly influenced by distribution/logistics.
Li et al. (2008) presented a conceptual model consisting of strategic, operational
and episodic design agility. Each of these consists of alertness and response
capabilities, for six dimensions of supply chain agility. In a survey of North
American firms, Gligor and Holcomb (2012) found that supply chain coordination,
cooperation and communication had a strong influence on supply chain agility.
17 Cultivating Supply Chain Agility: Managerial Actions … 293

In turn, supply chain agility was found to significantly affect operational and
relational performances. Gligor et al. (2013) identified five dimensions of agility:
alertness, accessibility of relevant data, decisiveness, swiftness and flexibility. In an
empirical study of Chinese manufacturers, Shao (2013) studied the relationship of
supply chain characteristics and disruption mitigation capabilities.
As seen from this updated, but parsimonious summary of the literature, a wide
range of concepts are being encompassed within agility, and much work remains to be
done on supply chain agility. There is also a critical need at this juncture for sum-
marizing the substantive body of research that has been done to date, and translate
them into managerial actions, which forms the principal objective of this chapter.

17.3 Direct and Indirect Antecedents

of Supply Chain Agility

In this section, we summarize the findings from an empirical research stream

pertaining to supply chain agility among manufacturing firms in USA
(Braunscheidel and Suresh 2009; Braunscheidel et al. 2010). The studies covered a
wide range of firms spanning SIC codes 20–39, and the respondents were high-level
supply chain management professionals. Details of the survey and demographic
data of the respondents are provided in Braunscheidel and Suresh (2009). The
constructs investigated in these studies are synthesized in Fig. 17.1. There were two
sets of antecedents to supply chain agility: direct antecedents involving supply
chain initiatives, and indirect, cultural antecedents. The direct antecedents are
covered first in this section, followed by the cultural drivers.

17.3.1 Direct Antecedents

Much research has been done in the past on the impact of these constructs on
operational and business performance of supply chains, but the focus of interest
here is the impact of these factors on supply chain agility. It was shown that, in
addition to performance, supply chain agility is impacted by four set of practices:
(1) internal integration, (2) external integration with key suppliers and key cus-
tomers, (3) external flexibility and (4) lean practices.
Internal integration, the first of these four direct antecedents, represents activi-
ties and practices that allow functions within an organization to coordinate and
cooperate with one another (Braunscheidel et al. 2010). Internal integration
involves use of cross-functional teams, internal communication regarding goals and
priorities, openness and teamwork, routine formal meetings and informal,
face-to-face meetings. Internal integration has been studied extensively in past
research on supply chain management (e.g., Flynn et al. 2010; Droge et al. 2004).
Several studies have suggested that internal integration is also a necessary first step
294 M.J. Braunscheidel and N.C. Suresh

Org. Culture Internal

Type IntegraƟon

Market External
OrientaƟon IntegraƟon
Supply Chain
Agility
Learning External
OrientaƟon Flexibility

Lean IniƟaƟves

Indirect Direct Antecedents:

Antecedents: Supply Chain
Cultural Drivers IniƟaƟves

Fig. 17.1 Indirect and direct antecedents of supply chain agility

before integrating with both key suppliers and customers (e.g. Koufteros et al.
2005; Pagell 2004; Vickery et al. 2003). However, there has been a dearth of
research on the impact of internal integration on supply chain agility.
The second important supply chain initiative, external integration, represents
activities and practices that coordinate the flow of information and goods with
upstream and downstream members of the supply chain (Braunscheidel et al. 2010).
Again, there has been a significant amount of research on integration with cus-
tomers and suppliers, and its impact on supply chain performance, but not enough
on agility. Paulraj and Chen (2007) found the impact of external logistics inte-
gration with suppliers has a significant impact on agility. A study of German
multi-national firms by Blome et al. (2013) concluded that there is a direct rela-
tionship between supply-side competence and demand-side competence with sup-
ply chain agility. Gligor and Holcomb (2012) found that the behavioral/relational
elements of supply chain coordination and supply chain communication have a
direct effect on a firm’s supply chain agility. Braunscheidel and Suresh (2009),
employing a second-order construct of external integration, found a highly signif-
icant pathway from this construct to supply chain agility.
Thirdly, many types of flexibility have been studied in the literature (D’Souza
and Williams 2000; Koste and Malhotra 1999; Upton 1995; Zhang et al. 2003).
17 Cultivating Supply Chain Agility: Managerial Actions … 295

However, the two outward facing flexible manufacturing capabilities of mix and
volume flexibility were shown to have a direct impact on agility in Braunscheidel
and Suresh (2009). Mix flexibility is the ability of the organization to produce
different combinations of products economically and effectively given certain
capacity (Zhang et al. 2003). Mix flexibility is measured on the ability to produce a
wide variety of products, different product types without major changeovers, dif-
ferent products in the same plant at the same time and quick changeovers. Volume
flexibility is defined as the ability of an organization to operate at a variety of
different output levels without compromising the performance of the system with
regards to cost, quality or service (Zhang et al. 2003). It enables the firm to operate
profitably at different levels of production, and to change production quantities
easily, swiftly and cost effectively.
A fourth initiative, widely adopted in practice is lean manufacturing (Womack
et al. 1990). Lean is associated with the elimination of waste from all processes
within a firm and in the extended supply chain. Lean supply chains often operate
with tightly coupled systems with very little slack. This comes at the expense of
agility, rendering them vulnerable to disruptions in the supply chain. Despite this, it
should also be noted that many elements of lean, such as reduction in setup times,
quick changeovers, cross-trained workforce, dynamic scheduling, etc. also serve to
contribute to agility in other ways.
The pathways shown in Fig. 17.1 are the antecedents that have been empirically
established (Braunscheidel and Suresh 2009; Braunscheidel et al. 2010). It is seen
that all four of the above direct antecedents were shown to contribute to agility. We
next consider the indirect, cultural antecedents.

17.3.2 Indirect Antecedents: The Cultural Drivers

In this section, the impact of organizational culture and two cultural characteristics,
market and learning orientation on agility are summarized. It is well known that
supply chain efforts involve major cultural changes such as establishment of trust, a
shift from adversarial relationships to collaboration and partnership among buyers
and sellers in the supply chain, etc. These aspects are being researched extensively.
The first major cultural driver considered is the organizational culture type.
Organizational culture refers to widely shared and strongly held values (O’Reilly
1989; Chatman and Jehn 1994). This definition of culture was adopted for three
reasons. First, values are the defining elements of a culture (Enz 1988). Second, our
definition is at the organizational level and we wish to study agility at the orga-
nizational level and employ values that are held by the members of the organiza-
tion. Third, the values must be strongly held. That is, people in the organization
must truly believe in the values of the organization.
To operationalize organizational culture, the competing values framework
(CVF) of Quinn and Rohrbaugh (1983) was utilized. This scheme enables a sys-
tematic comparison across levels, organizations and national cultures and countries
296 M.J. Braunscheidel and N.C. Suresh

(Howard 1998), and it has been widely applied in a variety of settings (e.g. Gregory
et al. 2009). This framework involves two dimensions. The first dimension is
related to an internal versus an external focus. The second is a continuum with one
end being flexibility and the other end stability and control. This results in four
distinct quadrants that identify four organizational culture types: adhocracy, clan,
hierarchy and market.
The adhocracy culture is flexible in its approach but has an external focus. This
culture type aims to grow and acquire resources through flexibility and readiness.
The second, clan culture has an internal focus and is also flexible in its approach.
This cultural type is characterized by cohesion and morale as the means, and human
resource development as its end. The third, hierarchy culture, is typified by an
internal focus and a structure of stability and control. Through effective information
management and communication, firms with this culture type seek to establish
stability and control. The fourth, market culture, also has an external focus, but its
structural focus is on stability and control. Through planning and goal setting, this
culture type aims to achieve productivity and efficiency (Quinn and Rohrbaugh
1983). The CVF permits the study of the dominant organizational culture while
acknowledging the possibility that subcultures may exist within an organization
(Deshpande et al. 1993).
One might expect that Clan and Hierarchy cultures will have a strong influence
on internal integration due to their internal focus. On the other hand, Adhocracy and
Market cultures may have an effect on external integration. But the results were
found to be intriguing. It was found that a firm’s Clan cultural score had no effect on
any of the integration practices. A firm’s Adhocracy score strongly affected its
external integration practices while the firm’s Market characteristic had a mild
influence on these same practices. Interestingly, the firm’s Hierarchy score strongly
influenced both internal and external integration practices but in a negative way.
That is, the more a firm exhibited a Hierarchical culture, the less it would integrate
with key customers and key suppliers and internally integrate. None of these other
three cultural scores had an impact on internal integration (Braunscheidel et al.
2010). We now turn to the other two cultural antecedents, market orientation and
learning orientation.
Following organization culture type, the cultural characteristic of market ori-
entation is considered. It has been defined as the organizational culture that creates
the behaviors necessary for creation of superior value for customers. It entails
having a sufficient understanding of one’s target buyers to create superior value for
them continuously, an understanding of short-term strengths and weaknesses as
well as long-term strategies of current and potential competitors and coordinated
utilization of company resources in creating superior value for target customers
through the collective efforts of design, production, distribution and promotion
(Narver and Slater 1990). Firms that possess high market orientation may be more
knowledgeable about competitors’ actions, and what customers demand and desire.
In order to be better aligned with customer needs, better inter-departmental align-
ment and coordination could be effected within the firm. Likewise, externally, a
firm can be better integrated with its supply-side and demand-side partners. It was
17 Cultivating Supply Chain Agility: Managerial Actions … 297

found that market orientation was found to have a significant influence on both
internal integration and external integration with key customers and key suppliers.
In addition, market orientation exhibited a moderate influence on external flexibility
(Braunscheidel and Suresh 2009).
Learning orientation is the third important cultural driver considered. In order to
survive in dynamic and turbulent markets, firms must continue to seek the processes
of learning, behavior change and performance improvements (Slater and Narver
1995). Sinkula et al. (1997) conceptualized learning orientation as an organizational
value that influences the tendency of an organization to create and use knowledge,
and hence, to learn and adapt. A learning organization is skilled at challenging the
underlying assumptions that its business is based upon (Baker and Sinkula 1999).
An organization with a learning orientation is committed to learning which refers to
the relative value that a firm places on learning. It is open-minded, which relates to
the concept of unlearning and to the emphasis that firms place on questioning the
assumptions that govern. Cohen and Levinthal (1990) argued that a critical ingre-
dient to a firm’s innovative capabilities is the ability to recognize, assimilate and
apply new, external information. Such studies, emphasizing the importance of being
able to learn and adapt in dynamic markets, suggest learning orientation as a major
cultural driver for agility.
The results with learning orientation have been somewhat counterintuitive.
Learning orientation had a significant impact on internal integration only. There
was no influence on either external integration or external flexibility, suggesting
that the results of learning orientation of firms have so far been predominantly
within the firm, and insufficiently at the supply chain level. However, learning
orientation was seen to strongly influence internal integration, which in turn was
seen to affect supply chain agility significantly.

17.4 Managerial Actions Required for Enhancing Agility

Based on the above empirically established research relationships, we next sum-

marize the managerial implications as a comprehensive set of actions needed to
ensure supply chain agility. We categorize them under the heads of: (1) supply
chain initiatives, and, (2) more fundamental, cultural changes needed to enhance
agility. The latter, cultural changes needed are generally accomplished over a longer
time frame than the more tangible supply chain actions. Hence the supply chain
initiatives can be viewed as short- and medium-term actions, and the cultural
dimension as a more medium- and long-term transformation of the organization and
its supply chain partners. We also characterize the numerous actions steps as either
contributing to mitigation and/or response. To facilitate discussion, these man-
agerial actions are summarized in Table 17.2a, b.
298 M.J. Braunscheidel and N.C. Suresh

Table 17.2 (a) Supply chain initiatives to augment agility and flexibility, (b) Cultural transfor-
mation initiatives to augment agility
Mitigation Response
(a) Initiatives
Supply chain configuration initiatives for agility
Creation of the supply chain map X X
Examination of the supply chain map for vulnerable elements X
Creation of a SC vulnerability map to identify risks X X
Active information sharing with supply chain partners X X
Selective creation of capacity buffers to cope with potential X X
disruptions
Selective creation of inventory buffers to cope with supply X X
disruptions, demand surges, and to ensure fast response
Contingency plans for supply-side uncertainties and disruptions X X
Contingency plans for operational and demand-side uncertainties X X
and disruptions
Ensuring flexibility in supply network, operations and distribution X X
networks through alternate routing capabilities
Utilization of delayed differentiation (form postponement) and X X
logistics postponement to enable customization and responsiveness
Use of rapid response initiatives like continuous replenishment X X
(CR), vendor managed inventory (VMI), collaborative planning,
forecasting and replenishment (CPFR), etc.
Inventory levels are visible throughout the supply chain X X
Demand levels are visible throughout the supply chain X X
Internal integration
Formal meetings are routinely scheduled among various X X
departments
Extensive use of cross functional teams to solve problems X X
Frequent internal communication across departments of goals and X X
priorities by management
Encouragement of openness and teamwork X X
When problems or opportunities arise there is a preference for X X
informal, face-to-face meetings across departments
External integration with suppliers and upstream partners
Sharing of inventory levels with suppliers X X
Feedback on quality and delivery performance for suppliers X X
Striving to establish long term relationships with suppliers X X
Key suppliers deliver to plants on a JIT basis X X
High corporate level of communication on issues with suppliers X X
Sharing of information via Internet X X
Working with suppliers to seamlessly integrate inter-firm processes X X
Joint development of new products/services with suppliers X X
X X
(continued)
17 Cultivating Supply Chain Agility: Managerial Actions … 299

Table 17.2 (continued)

Mitigation Response
Joint planning with suppliers as an important element of
purchasing
Information integration with suppliers is given importance X X
Joint planning with suppliers is given importance in production X X
External integration with customers and downstream partners
Feedback elicited from customers on quality and delivery X X
performance
Customers actively involved in new product development process X X
Frequent sharing of demand information from customers X X
Sharing of production plans with customers X X
Sharing of inventory levels with customers X X
Joint planning with customers as an important element in logistics X X
Information integration with customers is given importance X X
Information integration with logistics service providers given X X
importance
Cultivation of mix and volume flexibility
Being able to operate efficiently at different levels of output X
Being able to operate profitably at different production volumes X
Ability to quickly change the quantities for our products produced X
Ability to easily change the production volume of a process X
Ability to produce a wide variety of products in our plant(s) X
Ability to produce different product types without major X
changeover
Ability to build different products in the same plants at the same X
time
Ability to changeover quickly from one product to another X
Implementation of lean manufacturing principles
Production is ‘pulled’ by the shipment of finished goods X
Use of a ‘pull’ production systems X
Use of Kanbans, squares or containers of signals for production X
Classification of products based on similar processing requirements X
Equipment grouped to produce continuous flow of families of X
products
Factory layout based on families of products (cells) X
Pace of production directly linked with rate of customer demand X
Working systematically to lower setup time in the plant X
Ensuring low set up times of equipment in the plant X
Bringing equipment/processes under statistical process control X
Extensive use of statistical techniques to reduce process variability X
Charts showing defect rates used as tools on the shop floor X
Use of fishbone diagrams to identify causes of quality problems X
Use of process capability studies before product launch X
(continued)
300 M.J. Braunscheidel and N.C. Suresh

Table 17.2 (continued)

Mitigation Response
(b) Cultural orientations
Cultivation of market orientation
The business objectives are driven by customer satisfaction X X
Monitoring commitment and orientation to serving customers’ X X
needs
Strategy for competitive advantage is based on understanding of X X
customer needs
Business strategies driven by beliefs on how to create greater value X X
for customers
Customer satisfaction systematically and frequently measured X X
Close attention is paid to after-sales service X X
Salespeople share information within business concerning X X
competitors’ strategies
We respond actively to competitive actions that threaten the firm X
Top management team regularly discusses competitors’ strengths X X
and strategies
Senior managers from every function visit current and prospective X
customers
Information on successful and unsuccessful customer experiences X X
shared across all business functions
All functions are integrated in serving needs of target markets X X
All managers understand how everyone in the firm contributes to X X
value creation for customers
Cultivation of learning orientation
Managerial view that firm’s ability to learn is key to competitive X X
advantage
Employee learning viewed as an investment, not an expense X X
The collective wisdom that once we quit learning, we endanger our X X
future
All employees committed to the goals of this organization X X
A well-defined vision for the organization X X
Not afraid to reflect critically on assumptions on the way to X X
conduct business
Managers encourage employees to “think outside of the box” X X
Managers accept that their “view of the world” can be questioned X X
Cultivation of organizational culture: positive attributes
Organization a dynamic and entrepreneurial place where people are X X
willing to take risks
Leadership in the organization generally exemplifies X X
entrepreneurship, innovation and risk-taking?
Commitment to innovation and development is the glue that holds X X
the organization together, along with an emphasis on being on the
cutting edge
(continued)
17 Cultivating Supply Chain Agility: Managerial Actions … 301

Table 17.2 (continued)

Mitigation Response
The organization emphasizes acquisition of new resources and the X X
creation of new challenges; Trying new things and prospecting for
opportunities valued
Cultivation of organizational culture: negative attributes
The organization is very controlled and structured place where −X −X
established procedures generally govern what people do
The leadership generally exemplifies coordination, organization or −X −X
smooth-running, efficiency
Formal rules and policies are the glue that holds the organization −X −X
together. Maintaining a smooth running institution is important.
The organization emphasizes permanence and stability, with −X −X
efficiency, control and smooth operations deemed important
Note−X indicates that this works counter to augmenting agility in an organization

17.4.1 Supply Chain Initiatives for Agility

Supply chain initiatives aimed at enhancing agility can be further grouped under the
categories of: (a) reconfiguring the overall supply chain for greater agility; (b) in-
ternal integration; (c) integration with suppliers; (d) integration with customers and
downstream partners; (e) the cultivation of various types of flexibility which con-
tribute to supply chain agility; and (f) the implementation of lean manufacturing
practices. These are elaborated in the following sections.

17.4.1.1 Supply Chain Configuration Initiatives for Agility

Consistent with supply chain management principles developed over the last two
decades, firms are expected to actively share information with upstream and down-
stream partners, maintain visibility of demand forecasts, inventory information,
production plans, etc. with suppliers and distributors. The supply chain map is
examined critically to identify “pain points” i.e. points of vulnerability in terms of
supply and distribution. Overdependence on one supplier, distributor or any other
partner may prove economical but may also increase risks of disruption. After the
creation of the supply chain map, it is examined carefully and redundancies in capacity
and inventory buffers are established at critical positions to prevent possible disrup-
tions. The sources of uncertainty must be examined systematically in all segments of
the supply chain and their root causes must be addressed for mitigation, prior to
developing contingency plans to react after disruptions occur at such positions.
A useful tool to identify potential risks, estimate the probability of occurrence
and their consequences is a supply chain vulnerability map or a subjective risk
map. Typically risk probabilities (low to high) are plotted on one axis and conse-
quences (low to high) are plotted on the other. By employing inter-functional
302 M.J. Braunscheidel and N.C. Suresh

(internal integration) and inter-organizational (integration with customers and

suppliers) teams, a comprehensive vulnerability map can be constructed. This
enables the supply chain to not only identify potential risks but also enables the
preparation of contingency plans that can be implemented in advance of a dis-
ruption. The identification of potential risks enables the prioritization of risks, the
identification of controllable and non-controllable risks and the ability to assess the
cost of mitigating risk exposure with the benefits of reduced risk exposure
(Kouvelis et al. 2012; Van Mieghem 2012). That is, top management can make
conscious decisions with respect to potential risks.
Supply chain initiatives such as form postponement (delayed differentiation) and
logistics postponement are also aimed at ensuring agility and fast response to
changing customer demands. Postponement strategies, by virtue of delaying pro-
duct differentiation as close to the customer as possible, help to reduce the
supply-demand mismatch that many global supply chains struggle with. Under
normal circumstances postponement improves the capability to manage supply
while during a disruption event, it enables a firm to change the configuration of
different products quickly (Tang 2006). Systematic sharing of information, as part
of initiatives such as vendor managed inventory (VMI), collaborative planning,
forecasting and replenishment (CPFR) systems, etc. also involve sharing of demand
forecasts and operating plans with other supply chain partners and they contribute
to mitigation as well as coordinated response on the part of the supply chain
members. In many situations the integration and synchronization of planning and
execution of production plans via VMI, CPFR or similar initiatives can minimize
and/or eliminate disruptions caused by demand-supply mismatches. In the same
way the uses of such initiatives can also lead to increased forecast accuracy,
reduced forecast variability and reduced lead times and lead time variability. Such
supply chain configuration actions are listed in the first part of Table 17.2a.

17.4.1.2 Internal Integration

A next set of managerial actions pertains to internal integration, i.e. inter-functional

and interdepartmental integration, which lead to a connected and more coordinated
response to marketplaces changes and disruptions. In addition to economic per-
formance of a supply chain, the above research stream has established that the
agility of the supply chain is also improved by higher levels of supply chain
integration. Essentially, internal integration results in a more coordinated and
connected response on the part of firms in a supply chain. Internal integration has
often been mentioned as a necessary first step in supply chain integration process
(Stevens 1989; Rosenzweig et al. 2003; Vickery et al. 2003). Stevens (1989)
identified four stages that a firm must go through to achieve supply chain inte-
gration. The first stage is characterized by functional silos with little synchroniza-
tion while the second stage emphasizes the inbound flow of goods. Stage-three
integration is called internal integration where an organization recognizes that it
17 Cultivating Supply Chain Agility: Managerial Actions … 303

must effectively and efficiently manage the flow of goods into and out of the
organization. The fourth stage is external integration with suppliers and customers.
Vickery et al. (2003), in a study of the automotive supply industry, found that
there is a positive, causal relationship between integrative information technologies
and supply chain integration, which comprised both horizontal integration (within a
firm) and vertical integration (with suppliers and customers). It has also been shown
that the joint application of external and internal integration practices has a syn-
ergistic effect on firm performance (Droge et al. 2004). Rosenzweig et al. (2003)
employed the use of an integration intensity measure (consisting of both internal
and external measures of integration) to demonstrate its impact on competitive
capabilities and business performance.
In addition to its relationship with agility, internal integration is also one of the
keys for the identification and assessment of potential risks. Firms with high levels
of internal integration have cross-functional teams that include members of oper-
ations, marketing, procurement and logistics, to name a few. These functions are
aware of real and potential risks in the supply chain (Hendricks and Singhal 2012).
In addition to being knowledgeable of real and potential risks, these functions must
coordinate with one another to ensure a smooth flow of product to their customers
in normal times as well as when disruptions occur. Thus internal integration is
beneficial during normal operations as well as when disruptive events occur.
Table 17.2a lists some of the key action steps required on the part of management
to foster internal integration.

17.4.1.3 External Integration with Suppliers and Upstream Partners

In order to ensure connected response on the part of suppliers, to potential and actual
supply chain disruption, many supply-side integration measures are undertaken.
These are normally the same set of measures needed to ensure better supply network
performance: frequent sharing of information with suppliers, greater transparency,
sharing of inventory information, providing frequent, constructive feedback on
quality and delivery performance, striving to establish long term relationships with
suppliers, working with suppliers to seamlessly integrate inter-firm processes, joint
development of new products/services, joint operational planning, etc. One of the
potential benefits of providing quality improvement feedback and integration of
inter-firm processes is the identification and elimination of problems before they arise.
Elimination of potential problems through process improvement is better than miti-
gating the impact of these problems (Van Mieghem 2012).

17.4.1.4 External Integration for Customers

and Downstream Partners

As for integration with upstream partners, integration with downstream partners

also involve information sharing, and frequent inputs on demand trends and
304 M.J. Braunscheidel and N.C. Suresh

marketplace changes from downstream partners. A well-developed sensing mech-

anisms geared towards elicit early market signals serve to prepare upstream partners
to anticipate changes and be prepared for changes. These measures also include the
conventional demand-side integration tactics such as feedbacks elicited from cus-
tomers on quality and delivery performance, frequent elicitation on market signals,
downstream partners actively involved in new product development process, fre-
quent sharing of demand information from customers, sharing of production plans
and inventory levels with downstream partners, joint production planning with
downstream partners as an important element in logistics planning, information
integration with downstream organizations, etc.

17.4.1.5 Cultivation of Mix, Volume and Other Types of Flexibility

Having established empirically that agility may also be affected by the extent of
externally focused, mix and volume flexibilities, the constituent elements of these
need to be systematically cultivated. These involve the ability to operate efficiently
at different levels of output, being able to operate profitably at different production
volumes, the ability to quickly change the quantities for our products produced, to
easily change the production volume of a process, the ability to produce a wide
variety of products in our plant(s), the ability to produce different product types
without major changeover, etc. These flexibilities are customarily created through
several constituent elements of lean production systems such as reduction of setup
times, single minute exchange of dies (SMED) principles, cross-training of work-
force, designing versatile tools which facilitate their applicability to a wider range
of parts and machine operations, etc.
In addition to supporting agility, flexibility offers a two pronged approach and
investment in flexibility reaps benefits during normal operations as well as in a
disruption situation (Sheffi and Rice 2005; Rice and Caniato 2003). Firms do not
need to justify investment in flexibility solely as a means to mitigate or respond to a
disruption. Investment in flexibility enables a supply chain to better serve its cus-
tomers during normal conditions as well as when disruptions strike.

17.4.1.6 Implementation of Lean Manufacturing

Even though lean manufacturing is generally identified with steady-state manu-

facturing systems, the underlying tools and techniques involved in lean are aimed at
flexible manufacturing practices that are oriented towards coping with demand
fluctuations and demand-side uncertainties. One of the hallmark characteristics of
lean production systems is the adoption of statistical process control (SPC).
Through the use of SPC, problems in the production system are continuously
corrected and eliminated. As previously mentioned, eliminating problems is
preferable to mitigating them. Another characteristic of lean systems is the use of a
‘pull’ system. That is, production rates are determined by customer demand as
17 Cultivating Supply Chain Agility: Managerial Actions … 305

materials are pulled through the manufacturing system. Thus as customer demand
changes, as will often happen in a disruption event, the pace of production can
change as well. It is also worth reiterating that the journey to become agile is
predicated on their ability to become lean (Van Hoek 2000; Womack and Jones
1996; Yusuf et al. 2004). As mentioned previously, lean entails the process of
continuous improvement. This involves the elimination of waste in a process. By
eliminating waste, the stage is set for a process to become agile. These lean
practices are well known, and widely implemented.

17.4.2 Cultural Initiatives for Agility

Finally, the cultural orientations of market orientation, learning orientation and

culture type of adhocracy are desirable firm characteristics to adopt in terms of
agility. Cultural transformations, in general, do not happen overnight, and may thus
be seen as long term initiatives. In some studies, organizational culture has been
mentioned as key to establishing the ability to respond to disruptions in the supply
chain (Sheffi and Rice 2005; Christopher and Peck 2004; Rice and Caniato 2003).
However, definitive recommendations have not been made. We submit that in order
to become and remain agile, firms must consciously examine the cultural orienta-
tions of their supply chain organizations.
In addition to having a direct relationship on internal integration, external
integration and flexibility (Braunscheidel and Suresh 2009), market orientation also
impacts visibility in the supply chain by virtue of its emphasis on customers and
competitors. Firms with a high market orientation pay close attention to the needs of
their customers so that superior value can be delivered. In a similar manner, close
attention is also paid to the competitive landscape in terms of the strengths and
weaknesses of current and potential competitors.
A firm’s learning orientation has a direct effect on internal integration. That is,
firms must learn to work in a cross-functional manner. As previously discussed,
internal integration is a necessary step in becoming integrated with your customers
and suppliers in addition to having a direct effect on agility. Another advantage of
possessing a learning orientation is the ability for an organization and supply chain
to learn from disruption events. When a disruption occurs, after it has been dealt
with, an analysis should be conducted to determine what went right, what could be
improved and what went wrong. That is, organizations with a learning orientation
will incorporate this new information into how they contend with future disruption
events.
When a disruption occurs in a supply chain, it is often the case that a specific
contingency plan either was not put into place or despite the best planning efforts,
the specific scenario at hand was not considered. It is suggested, therefore, that
firms that have the listed positive attributes of organizational culture (Adhocracy)
are better suited to handle the situation than those with the negative attributes
(Hierarchy). When highly uncertain, low probability events occur employees may
306 M.J. Braunscheidel and N.C. Suresh

need to ‘operate on the fly’ with real time, updated information of the particulars of
the event (Kouvelis et al. 2012). Situations such as these, demand that employees
take risks as they try to respond to the disruption in real time. If an organization is
highly structured with many formal rules and policies, employees who are first
responders to the disruption will defer to higher levels for guidance as to how to
handle the disruption. Valuable time may be lost in the implementation of a
response. This may enable the disruption to become worse and have a greater
impact on the firm and supply chain.
Additionally, research has empirically demonstrated that an adhocracy organi-
zational culture has a positive effect on both internal and external integration
practices. Those organizations with high levels of a Hierarchical culture have a
negative impact on internal and external integration. Given that these integration
practices are critical to the development of agility, it is evident that paying attention
to a firm’s organizational culture has an impact on its ability to respond to dis-
ruptive events in the supply chain.
The cultural drivers of market orientation and learning orientation represent
somewhat actionable elements, whose elements are summarized in Table 17.2b.
The positive (adhocracy) and negative (hierarchy) attributes of culture, based on the
competing values framework, can also be seen in Table 17.2b. Admittedly, these
elements are the most long-term in nature but they may hold the key to the
development and sustainability of agility, and hence, the ability to mitigate and/or
respond to supply chain disruptions.

17.5 Conclusions

In this chapter, the cultivation of supply chain agility was approached as a risk
management initiative that enables a firm to anticipate as well as respond rapidly to
marketplace changes and disruptions in the supply chain. Disruptions may have
numerous impacts on supply chain performance. The scope and magnitude of the
consequences of these disruptions requires intra- and inter-functional, as well as
inter-organizational coordination and communication. This chapter has provided an
updated perspective of an emerging body of literature devoted to supply chain
agility. Based on our own research stream on this topic, a set of supply chain
initiatives were discussed as antecedents for the cultivation of agility. These
included internal and external integration measures, cultivation of external flexi-
bility, and lean practices. Following this, more fundamental, cultural antecedents
towards cultivation of agility were discussed, which included the constructs of
organizational culture type, market orientation and learning orientation. Since the
validity of these models has been established through empirical research, we have
translated these findings into a set of managerial practices for the cultivation of
agility for both mitigation and response.
Unlike the purely prescriptive literature of the past, the prescriptive summary of
managerial actions provided in this chapter has been based on actually established
17 Cultivating Supply Chain Agility: Managerial Actions … 307

empirical research results. Thus this chapter has attempted to develop an enhanced
framework and provide guidance for managers and practitioners for agility in
supply chains. Much work still remains to be done on supply chain agility, and it is
hoped that this chapter has served to enhance our understanding of some of the
major antecedents of agility.

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Chapter 18
Assessing Supply Chain Resilience
upon Critical Infrastructure Disruptions:
A Multilevel Simulation Modelling
Approach

Paolo Trucco, Boris Petrenj and Seyoum Eshetu Birkie

Abstract Supply chain risk management (SCRM) approaches suggest that actors
in a supply chain network should consider different risk scenarios to address and
mitigate supply chain risks in a better way. Overall performance of a supply chain
could be severely affected by disruptions that are triggered by failures or service
disruptions in the critical infrastructure (CI) systems that the supply chain relies on.
Interdependencies among the CI systems and supply chains, particularly the
so-called Key Resources Supply Chains (KRSC) such as food, worsen the effects as
disruption and consequences propagate in the network. In order to understand such
interdependencies and enhance SCRM approaches with a more holistic view, this
chapter introduces a multilevel modelling approach. The economic loss impact of
disruptions in CI systems and the potential effectiveness of different strategies to
improve resilience in KRSC are modelled and assessed. A combination of Discrete
Event Simulation and System Dynamics is used at the different levels of the sim-
ulation model. The proposed approach is demonstrated with an application case
addressing the vulnerability and resilience analysis of a fast moving consumer
goods supply chain against disruptions in underlying CI systems. Results of the
multilevel simulation offered relevant insights toward a better understanding of the
strength and dynamics of the interdependence between KRSC and CI, and conse-
quently on resilience improvement efforts. Results help supply chain managers to
prioritise resilience strategies, according to their expected benefits, when making
decisions on the amount and location of resilience capabilities within a supply
chain. The results strongly support the implementation of collaborative and coor-
dinated resilience strategies among supply chain actors to direct efforts where they
can be most effective.

P. Trucco
B. Petrenj
S.E. Birkie (&)

School of Management, Politecnico di Milano, Milan, Italy
e-mail: [email protected]
S.E. Birkie
EiT-M, Mekelle University, Mekelle, Ethiopia

© Springer Nature Singapore Pte Ltd. 2018 311

Y. Khojasteh (ed.), Supply Chain Risk Management,
DOI 10.1007/978-981-10-4106-8_18
312 P. Trucco et al.

18.1 Introduction

Chile is the number one copper producer in the world. Supply of copper from Chile
was disrupted in April 2014 after the earthquake and ensuing tsunami at an epicentre
far from the major copper mines (e.g. Clarke and MacDonald 2014). The disruption
was, however, mainly due to the ruined roads, power outages, and closed ports, rather
than direct damage to production facilities or capacity. This real-life example
demonstrates that in any supply chain the flows of materials, information and money
can easily be disrupted due not only to supply or demand problems but also due to
affected critical infrastructure systems that the supply chains depend on. Similarly, a
recent news on Wall Street Journal also indicated that the future prices of copper was
threatened by water shortage in a small town due to drought (Patterson 2015).
Managing supply chain risks involves decision making under uncertainty on
multiple parameters. Actors in a supply chain network are often required to consider
multiple levels of decision to better address and mitigate supply chain risks as much
proactively as possible. Such a detailed and multilevel consideration of disruption
risk interactions is important because it is not sure where the sources of disruption
affecting a supply chain might emanate from. As indicated in the aforementioned
example, a supply chain could be severely affected by disruption in the critical
infrastructure (CI) used by the supply chain. These effects are magnified due to the
(inter)dependencies between CI systems and disruption propagation to Key
Resources Supply Chains (KRSC), i.e. supply chains of some industries marked as
critical (such as food or pharmaceuticals) which are heavily dependent on other CI.
Supply chain risk and disruption of CI are complex phenomena that are difficult
to understand in real life circumstances. To evaluate resilience strategies, conse-
quences (losses) of CI disruptions need to be quantified; this requires an adequate
understanding of all the possible cascading effects within the CI and to the supply
chain network level as well. Simulation modelling approaches provide a relatively
simple and cheap way of representing, experimenting and designing for such
phenomena. However, simulation approaches to supply chain risk management
(SCRM) or critical infrastructure protection and resilience (CIP-R) which focus on
just one level provide limited support for such understanding; the complex inter-
dependences of disruptions in CI systems and on supply chains is not given enough
attention in literature.
This chapter focuses on assessing the impact of CI disruptions on KRSC, the
economic losses caused and the potential effectiveness of different strategies to
improve resilience in KRSC. A few recent disruption incidents are used as cases for
a qualitative discussion to demonstrate the relevance of the issue. After having
briefly discussed the state-of-the-art on simulation modelling approaches in SCRM
and CIP-R, a multilevel simulation modelling approach is then introduced. The
proposed approach is finally demonstrated with a practical application case
addressing the vulnerability and resilience analysis of a fast moving consumer
goods (FMCG) supply chain under different disruption scenarios of interdependent
CI systems.
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 313

18.2 Mutual Dependencies Between SC and CI Systems

18.2.1 Critical Infrastructure Disruption

and Supply Chain Risk

Critical Infrastructure can be defined as those assets and systems that, if disrupted,
would threaten national security, economy, public health and safety, and way of life
(McNally et al. 2007). Contemporary societies are increasingly dependent on
availability, reliability, correctness, safety and security of CI (The Council of the
European Union 2008). The vital functions and services of CIs are supplied through
networks and assets including electricity grids, roads and communication networks.
CI systems have interdependence among each other; that is, a bidirectional or
unidirectional relationship exists between the states of any given pair of CI systems
(Rinaldi et al. 2001). These interdependencies can be described in terms of physical,
cyber, logical, and geographic types. Physical interdependency exists when an input
of one CI is dependent on material/energy output of another (e.g. a rail network
depends on power supply). Cyber interdependency describes the dependence of CI
on information infrastructure. When elements of multiple infrastructure are in close
spatial proximity, geographical interdependence occurs (e.g. joint exposure to the
same natural phenomena). When an interdependence between CIs exists and is not
any one of the aforementioned three classes, it is classified as logical (e.g. increased
highway usage by commuters due to railway strikes and service interruptions).
A disruption of CI or SC can be described as an unplanned and unanticipated
event which prevents or limits flow of material, information or money in a system
(Craighead et al. 2007). Kim et al. (2015) argued that disruptions may occur at node
(i.e. facility), arc (e.g. transportation), or network (both node and arcs) level of a
supply chain. Disruptions that occur at network level are much more important than
the other two as they may cause severe consequences on supply chains. By focusing
on disruptions at CI, this chapter discusses how resilience strategies minimise the
effect of disruptions that can affect multiple actors, i.e. nodes and arcs, in a supply
chain–KRSC in our case. Disruptions in a CI include information and communi-
cation disruptions, transportation, power, and other infrastructure failures, which is
the main concern in this chapter. Disruptions of these CI have a significant impact
not only on other interdependent CI but also on supply chains that utilise the CI
(Ouyang 2014; Rinaldi et al. 2001). In fact, the consequences can ripple along
different CI systems and multiple supply chain levels. Societal life can be severely
affected by disruptions in CI directly or indirectly as supply chains that provide
inputs for human day-to-day activities depend on them. For example, in the
aftermath of Hurricane Katrina, oil pipes and telecommunications systems failed
due to power outages (Santella et al. 2009). Folgers coffee plants (back then owned
by Procter and Gamble) in the area were hit hard by the hurricane, affecting coffee
supply. Even worse was the lack of access for the recovery effort in the area due to
damaged roads, which forced them to use helicopters.
314 P. Trucco et al.

18.2.2 Supply Chain Resilience

Tang (2006) describes different robust SC strategies that aim to improve a firm’s
capability to manage supply and/or demand better under normal circumstances and
to enhance the firm’s capability to sustain its operations when a major disruption
hits. The majority of these strategies rely on the availability of infrastructure sys-
tems that serve the supply chain, either as primary subject of intervention or as
subsequent objective associated to other categories of risks. We can say that dis-
ruptions of such infrastructure represent one of the most important risk category and
their improvements enable to protect SC from either CI disruptions or all the other
risk categories closely linked to them.
In general, resilience can be understood as the ability of a global supply chain to
anticipate, reorganise and deliver its core function continually, despite the impact of
external and internal shocks to the system (Birkie et al. 2014; Ponomarov and
Holcomb 2009; Tang 2006). Sheffi (2007) describes resilience as the capacity to be
better positioned than competitors to deal with and to gain advantage from dis-
ruptions. These definitions essentially focus on capabilities that a supply chain has
in mitigating disruptions happening somewhere in the network (Kamalahmadi and
Parast 2016) and possibly turn them into an opportunity to gain competitive
advantage. At supply chain network level, resilience can be seen as an attribute to
withstand such disruptions triggered at a node (facility) or an arc (transportation)
(Kim et al. 2015) as the consequences of a disruption at one point can ripple along
the supply chain (Ivanov et al. 2014).
Rice and Caniato (2003) identified flexibility and redundancy as two broad
strategies for SC resilience. Flexibility entails creating capabilities within the
organization to redeploy some existing and previously committed capacities from
one area to another (to make up for lost or delayed capacity). Redundancy, by
contrast, is the additional capacity that would be used to replace the capacity loss
caused by a disruption (Rice and Caniato 2003). Both approaches require invest-
ments in infrastructure and resources prior to the point of need.
When evaluating effectiveness of resilience strategies applied to specific parts of
the SC, we also consider different levels of resilience capacity, achievable through
either flexibility or redundancy, or most typically a mix of the two.

18.2.3 Review of Relevant SC Risk and CI Disruption Cases

The Chile copper supply disruption situation mentioned earlier is one demonstra-
tion of how supply chain disruptions are caused or worsened by failure in the CI
systems that the supply chain depends on. Similar cases that reveal how supply
chains are vulnerable to disruptions in CI systems and cascading effects are reported
in Table 18.1.
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 315

Table 18.1 A few supply chain disruptions and their dependence on CI failures
Supply chain disruption Related/underlying CI Disrupted Consequences of the
interdependences CI disruption
1. Copper supply Supplies could not be Road Copper prices showed
shortage in Chile (2014) transported due to transport increases up to as high as
damages to roads and Power 1% on London Metal
power interruptions supply Exchange and New York
because of earthquake; Rail Mercantile Exchange in
employees of mines went transport speculation of shortages
to families Manpower (Clarke and MacDonald
Ports 2014)
2. Delay of essential Border closures and Road Great Britain alone lost
goods including medical tighter controls to deal transport an estimate of at least 1
supplies in the EU due to with chaos due to Rail billion USD a year due to
migration crisis (2015) stowaways meant that the transport the crisis (BSI 2015)
supplies were severely
disrupted, especially
those urgently needed
3. Auto and electronics The damaged power and Airfreight The direct economic
parts shortage following transportation Power impact of the disruption
the triple disaster in infrastructures had supply is estimated to be more
Japan (2011) greatly influenced Water than 22 billion USD
recovery from the supply excluding damages to
disruption Road damaged buildings and
transport infrastructure (e.g. World
Ports Economic Forum 2012)
Manpower
Gas and
fuel
supply
4. Import items to US Workers’ strike caused Ports Retrospective analysis
stranded at ports (2002) the blockage; airfreights Airfreight estimated more than 1
(as alternative routes) Manpower billion USD per day for
became more expensive economic loss to US
than they usually are as economy for each day of
few fast companies strike that went for
already leased the 11 days (Hall 2004)
capacity

To start by reciting the Chile earthquake situation, the main cause of copper
supply shortage was not damage at the copper mines. The epic centre of the
earthquake was not very close to copper mines, which are mainly located in
Northern Chile. In fact, the major mining companies have announced shortly after
the quake that the mines and smelting plants were intact. It was, however, difficult
to transport the produced copper due to the damaged roads and power interruption.
Some of the mines have also stopped production for a while because employees
316 P. Trucco et al.

were sent to join and support families affected by the earthquake and the subsequent
tsunami.
Large amount of mostly perishable items have been stranded at the US West
Coast ports during the 2002 dock workers strike. Items supposed to be delivered for
Christmas sales season were delayed, and partly spoiled. The US economy as well
as large retailers had to bear enormous consequences (Hall 2004).
During the Great Japan Earthquake in 2011, automotive and electronics manu-
facturers felt the pain of the natural disaster. Even those companies with no
physically damaged facilities or whose Japanese suppliers could still produce parts
had to deal with shortages due to power outages, failed roads, sea ports and airports
(e.g. MacKenzie et al. 2012; World Economic Forum 2012).
The 2015 migration crisis in Europe, which has exacerbated since late 2015, has
caused severe disruptions to logistics and custom services to several European
centred supply chains. It has caused enormous disruption to the medical and other
essential supplies. Some European countries blocked or tightened security at their
borders, which, together with the influx of migrants, caused extremely long traffic
jams. The United Kingdom alone incurred 1 billion USD a year due to the supply
chain disruption because of the crisis (BSI 2015).
The aforementioned cases show how much modern global supply chains are
vulnerable to failures or unavailability of CIs, such as road transport, ports, elec-
trical power, water supply, fuel and gas supply. The vulnerability and the associated
consequences becomes much more severe when we consider key resource supply
chains, such as food or pharmaceutical products. We will get back to that in later
sections when we discuss the simulation model. Before that, let us briefly look at
modelling and simulation approaches used in SCRM and CIP-R research.

18.3 Simulation Modelling Approaches in SCRM and CI

Inheriting from the broader supply chain management domain, three main simu-
lation modelling approaches are used in SCRM and resilience. These are: Discrete
Event Simulation, System Dynamics and Agent Based Modelling (Fahimnia et al.
2015; Owen et al. 2010; Tako and Robinson 2012; Wu et al. 2013). We conducted a
literature search and reviewed the use of the three approaches depending on the
nature, goal and aggregation level of phenomena modelled. Discrete Event
Simulation (DES) is process-centric (mid-low abstraction level) and facilitates the
simulation of interdependent systems through occurrence of time-dependent dis-
crete events that approximate real-world processes. System Dynamics (SD) is a
rigorous top-down approach, with high abstraction level, used for modelling the
behaviour of a complex system over time (Sterman 2000). Stocks (the accumulation
of resources in a system), flows (the rates of change that alter those resources), and
feedback are the central concepts in this approach. Agent Based Modelling
(ABM) approach allows for emulating emerging behaviours resulting from the
interaction of autonomous agents (bottom-up approach) (e.g. Wu et al. 2013).
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 317

We extended the literature search to review the use of the same or compatible
approaches for simulation modelling of CI systems, identifying their main advan-
tages and drawbacks. This is described in the following sub-sections.

18.3.1 Simulation Modelling in SCRM

Tako and Robinson (2012) analysed simulation modelling approaches used in 127
journal articles published between 1996 and 2006. Their work was based on the
belief that SD was mostly used to model problems at a strategic level, whereas DES
was used at an operational/tactical level. The aim of the review was to test if this
hypothesis was true. The paper explored the frequency of application of DES and
SD as modelling tools for decision support systems in the domain of SC
Management by looking at the nature and level of issues modelled. The findings
suggest that DES has been used more frequently to model SC, with the exception of
the bull-whip effect which is mostly modelled using SD. The study concluded that
in terms of the level of decision making (strategic or operational/tactical) there is no
difference in the use of either DES or SD.
Owen et al. (2010) did similar literature review referring to the three approaches
(DES, SD and ABM) used in the papers reviewed. A total of 439 peer-reviewed
papers were identified and then a sample of 100 papers was selected, reviewed and
classified (Owen et al. 2010). This review revealed that both SD and ABM have
been equally used to address strategic issues. DES, on contrary, was more heavily
weighted towards planning problem types and was also the only approach to
address operational problems.
It can be observed how the SC modelling applications in the period 2007–2010
influenced the picture as a whole. In addition, the results of our search showed
examples underlining how the use of SD in the last years mostly focused on the
strategic view (e.g. Ivanov and Sokolov 2013; Kumar and Nigmatullin 2011). An
increase of using quantitative and analytical modelling approaches, including
simulation in risk management is observed particularly after 2005 as evidenced by
relatively large number of SCRM papers with modelling methodologies (Fahimnia
et al. 2015).
The bibliography dealing with simulation approaches applied to SCRM theme is
generally sparse. We did a literature search on the simulation approaches applied to
model and analyse supply chain risk and resilience using the keyword combinations
shown in Table 18.2a and we found very limited number of publications. Based on
our last search with the keyword combinations on Scopus, (dated 14 February
2016), only 19 journal articles and 16 conference papers were found to be relevant
after filtering for duplicates and relevance of content. Of the three simulation
modelling approaches in SCRM, ABM seems to be relatively limited. We identified
only 5 journal articles and 3 conference papers implementing this approach. Many
of the publications discussed risk at supply chain network level, even though some
had analysis at shop floor or inside a supply chain facility. For example, Wu et al.
318 P. Trucco et al.

Table 18.2 Literature search on the three simulation modelling approaches (a) in SCRM, and
(b) in CIP-R
Simulation modelling approach in Articles in Conference Total (a)
SCRM journals papers
DES 8 7 15
ABM 5 3 8
SD 6 6 12
Total 19 16 35
Search keywords: {“supply chain risk” OR “supply chain disruption”} AND {“discrete
event simulation” OR “agent based model*” OR (“system dynamics” AND
“Simulation”)}
Simulation modelling approach in Articles in Conference Total (b)
CIP-R journals papers
DES 1 6 7
ABM 8 11 19
SD 13 9 22
Total 22 26 48
Search keywords: “critical infrastructure” AND {“discrete event simulation” OR (“agent
based model*” AND simulation) OR (“system dynamics” AND “Simulation”)}

(2013) model risk of stockout at retailers to model the individual behaviour of

competing manufacturers using ABM, it considers the customers as autonomous
entities making their own decision towards the purchase of competing products.
The supply chain risks discussed in the different studies are often assumed to have
been “externally triggered” and not deliberate acts of the autonomous supply chain
actors. Perhaps this could be a reason why ABM was limited in the papers.

18.3.2 Modelling Approaches in CIP-R Literature

When it comes to CIP-R, Ouyang’s (2014) review on modelling and simulation of

interdependent infrastructure systems provides the dominant approaches in research
publications, including ABM, SD, and DES, as well as some other variants. In this
domain, we found a relatively higher number of publications that applied one of the
three simulation techniques (see Table 18.2b) compared to that of SCRM.
Especially SD seems to be used more dominantly. All of the abovementioned
papers focus on simulation modelling and analyses at supply chain network level
mainly, or consider only the failures of CI systems. Some papers discuss different
simulation approaches for SC risk modelling and analysis due to failure in CI (e.g.
Wu and Olson 2008; Yang and Wu 2007). However, most of them tend to assume
the CI failure simply as the given trigger that has a single point disruption impact on
the supply chain. Therefore, there is a clear lack of studies implementing simulation
modelling approaches to better represent the real complexity and dynamics of
interdependencies between CI and supply chain.
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 319

18.4 A Multilevel Modelling Approach

The different simulation approaches have differences in their underlying assump-

tions, strengths and implementation frameworks. It has been however recognised
that many management decision making problems may require more than one
possible viewpoint, even at the same level of abstraction, to accommodate different
frames of reference and reduce risk of missing some relevant aspects (Brailsford
et al. 2014; Pidd 2003).
For example, most modelling approaches to CIP-R are motivated by decision
making for better protecting CI systems that the dependency with KRSC are not
well addressed (Conrad et al. 2006; Santella et al. 2009). Creating a multilevel
(hybrid) model that combines different approaches in a uniform framework enables
to better represent and understand complex systems (Brailsford et al. 2014; Ouyang
2014) such as interdependent CI and KRSC. In the context of this chapter, by
multilevel modelling we are referring to what is described as multiscale and mul-
timethod modelling in Brailsford et al. (2014).
Being cautious about the differences, experts in the field have recognised the
benefit of having multimethod, multilevel simulation modelling for managerial
decision making. In fact, the different chapters in Brailsford et al. (2014) provide
empirical evidence of how different modelling approaches could be used comple-
mentarily or as alternatives. Recent developments in multimodel simulation soft-
ware packages, such as Anylogic®, appear to support efforts in this direction.
The conceptual model proposed in this chapter seeks to represent three levels
(see Fig. 18.1): the physical interdependencies between different CI systems, the
relationship between possible CI service disruptions and the availability of critical
resources and services for the different actors of the SC, and finally the dynamic
behaviour of the KRSC as a whole. In Fig. 18.1, the arrows indicate directional
dependence/interdependence of different CI and KRSC components. The output
variable represents the performance of the KRSC in generating turnover, given the
abovementioned dependencies and the resilience capabilities of the SC actors.
The model applies the hierarchical method wherein the lower level model runs
and generates data which is used by a higher level model, which again informs the
lower level.
In our model, we have chosen DES and SD simulation approaches. DES was
chosen as it is very appropriate to represent phenomena which are event based
involving queues, lead times, etc. The third level (KRSC) has these features,
making DES appropriate. We primarily assume that the behaviour of the overall
interdependent system involving the CI can be explained by the feedback nature of
causal relationships that characterise the structure of the system (Brailsford et al.
2014). In SD “agents” can be homogenously mixed and aggregated to the higher
level. Thus, to model the first and second levels in our study, SD is preferred over
ABM which models individual agent behaviour that may evolve heterogeneously.
320 P. Trucco et al.

Fig. 18.1 Multilevel simulation modelling framework

18.4.1 The First Level: Critical Infrastructure

In the first level, we can find the different CI systems and their sub-models of
supply. The level was built using System Dynamics methodology (Fig. 18.2a) and
is composed by the following sub-models:
• Sub-model of fuel supply through pipeline;
• Sub-model of fuel supply through road and rail;
• Sub-model of gas supply through pipeline;
• Sub-model of water supply through pipeline;
• Sub-model of power supply.

Fig. 18.2 An example sub-model of a fuel supply through pipeline; b staff availability at
distribution centres
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 321

18.4.2 The Second Level: Service and Resource Availability

The second level models the availability of services supplied by CI and of other
resources used either for the KRSC or for the first level needs. This level was built
with SD methodology as well. As example, Fig. 18.2b shows the computation of
the total staff availability at the distribution centres, taking into account the staff
which uses railway (StaffRailDC), road (StaffRoadDC), or the urban train
(StaffUTDC) transportation systems to reach the workplace.

18.4.3 The Third Level: KRSC Model

The third level represents the KRSC model. It embodies the internal production and
logistic phases, the import SC and the connection between distribution centres
(DC) and Retailers. This level was built with a multimethod approach. Indeed, the
initial part of the SC, in which we can find the flows of the internal and external
productions (import rate), implements a SD approach. The part of the SC between
the DC and retailers was modelled with DES instead. The rationale for adopting a
multimethod approach is that, on one hand it assures a continuous systemic view of
the dependencies from the upper levels, while, on the other hand, DES better
models the capacity and lead times involved in the distribution and delivery
processes.

18.4.4 Multilevel Model Assumptions

There are some key assumptions at the basis of the overall modelling approach:
• The model is isolated from outer environment, which means it can only be
affected by inner entities (concepts);
• The physical dependencies between CI systems and other services is linear. For
example, if 100 ton per day [t/d] of fuel is required to support 100% of gen-
eration capacity of a power plant, then 80 t/d of fuel supports 80% of the same
capacity;
• The amount of KRSC demand is constant (i.e. an average day is simulated).
Coherent with the abovementioned assumptions, the multilevel model is able to
implement inter-dependencies between CI systems. In our specific application,
power generation plants and airports need fuel and/or natural gas. Furthermore, fuel
is also used by road transportation. On the other side, power is used for fuel and gas
production, urban transport service, water supply, road, railway, and air trans-
portation. Staff availability is influenced by the status of urban transport: road and
322 P. Trucco et al.

railway systems. As for the FMCG sector, the production rate is influenced by
power and fuel, while the distribution process is affected by staff availability and
three kinds of transportation: road, railway and air. Finally, the purchasing rate is
influenced by staff availability and power.

18.5 Pilot Application: The Italian Fast Moving Consumer

Goods Supply Chain

FMCG supply chain deals with the delivery of non-durable goods, such as drinks
and grocery items. At the consumer side, the main characteristics of these products
are: high frequency purchase, low prices and low involvement. Looking from the
producers and distributors side, the main characteristics of these products are low
contribution margin, extensive distribution network and high stock turnover. A key
issue in managing this type of supply chains is the perishability of the products and
thus the lead-time that these goods can undergo.
The model of the FMCG supply chain consists of the following actors
(Fig. 18.1, level III):
• Producers (P)—can be classified considering both the firm dimensions (Big vs.
Small and Medium producers) and the typology of products (Food vs. Health &
Care);
• Distribution Centres (DC)—retailers’ facilities for temporary storage with the
main function of receiving daily orders from the retailers and deliver them to the
purchasing organization that will buy the products required (e.g. warehouse or
other specialised buildings);
• Retailers (R)—subjects who receive goods in large quantities from the DC, and
then sell smaller quantities to the consumer for a profit (e.g. Supermarket);
• Consumers (C)—persons who pay for the products intended for private
consumption.
The model of FMCG Supply Chain as it was implemented in Anylogic® is
partially presented in Fig. 18.3. In part (a) of the figure, an implementation of SD is
shown, representing flow of imported and locally produced FMCGs to the DC
using different modes of transportation (rail, road, air). Part (b) of the figure shows
DES implementation to model the flow of goods from distribution centres to
retailers.
In our analysis, we considered that the lead-times between the distribution centre
and the final retailers for different product categories vary between 7 and 12 days
(these figures represent the expected mean lead-time values assured by logistics
service providers for the Italian FMCG sector).
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 323

Fig. 18.3 FMCG supply chain model implementation in Anylogic® a SD model, b DES model

18.5.1 Resilience Strategies and Capacities

In face of a disruption, resilience capabilities to mitigate disruptions at the first level

CI—namely, gas, fuel, power generated and water—can be exploited at the three
segments of the SC. The downstream segment, which includes the part of SC
between DC and Retailers, the midstream segment dealing with the logistics from
Producers to DC, and the upstream segment, dealing with production planning and
324 P. Trucco et al.

management within the Producers. We assume that the part of the SC dealing with
import is not modifiable in the short range, thus its contribution to SC resilience is
negligible.
The strategies represent the package of actions that SC managers and other
company managers can actuate in order to sustain the business continuity of a
specific segment of the SC. In particular, four basic strategies were identified and
investigated:
• Strategy 1—Exploiting resilience capabilities within just one of the supply chain
members located in the upstream or downstream segments of the supply chain
(e.g. resilience capabilities of retailers only);
• Strategy 2—Extends resilience capabilities of strategy 1 to a pair of supply chain
members located in the upstream or downstream segments of the supply chain
(resilience capabilities of both retailers and producers);
• Strategy 3—Exploiting resilience capabilities of triple supply chain members in
the network by extending strategy 2;
• Strategy 3 plus water—This strategy adds a resilience capability of restoring
some level of water supply disrupted at the producer. The justification to include
this element is that restoring disrupted water supply is relatively low investment
compared to the other CI services (e.g. water tanks installed at production site).
We intend to observe the marginal effect of having this additional capability on
recovered turnover. Hence, this strategy applies to scenarios where resilience
capability of a producer is invoked.
A further dimension covered in the simulation deals with the capacity level (or
strength) of the resilience capabilities activated under different strategies. In par-
ticular, three levels of resilience capacity were considered for each strategy:
• Resilience capacity of 20%—i.e. a capacity able to mitigate up to 20% reduction
of critical services due to some CI disruption;
• Resilience capacity of 50%—i.e. a capacity able to mitigate up to 50% reduction
of critical services due to some CI disruption;
• Resilience capacity of 90%—i.e. a capacity able to mitigate up to 90% reduction
of critical services due to some CI disruption.
Consequently, a 20% reduction of critical services at some point of the
FMCG SC is the minimum “trigger level” for the activation of the available
strategies and capacities along the entire SC.

18.5.2 Data Specification and Collection

The initial set of data was collected from Eurostat (Directorate-General of the
European Commission), namely:
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 325

• European shares of electricity, gas and water supply;

• European shares of railway, road and pipeline transportation;
• Input-output data related to:
– Manufacture of coke, refined petroleum products and nuclear fuels;
– Electricity, gas, steam and hot water supply;
– Land transport and transport via pipelines;
– Air transport;
• Total turnover per single infrastructure sectors in Italy;
• Input value of single infrastructure sectors to the FMCG supply chain in Italy;
• Consumption (per year) of electricity, fuel, gas and water by DC, retailers and
transport infrastructures;
• Flow rates (per year) of fuel, gas, water and goods through pipelines and/or
roads, rails and air;
• Production and procurement rates (per year) in FMCG supply chain in Italy;
• Desired staff at different segments of the FMCG supply chain.
From Eurostat data, the conversion factors for each CI were also estimated, i.e.
coefficients to transform physical units, such as litres gas per year, kilograms of fuel
per year, kilowatt-hours of electricity per year, litres of water per year, into a
common unit of euros per year. This computational approach enabled the merging
of sub-models and the definition of a unique economic indicator to measure the
performance of the entire system-of-systems in terms of annual turnover.

18.5.3 Simulation Plan

Four simple crisis scenarios were defined, dealing with the disruption of each one of
the CIs at the first level: (1) 50% gas disruption for 5 days; (2) 50% fuel disruption
for 5 days; (3) 50% power generation disruption for 5 days; and (4) 50% water
disruption for 5 days.
For each disruption scenario the four strategies were applied independently at
different resilience capability levels (20%, 50%, and 90%), thus generating 48
different crisis scenarios to be simulated. The reference scenario (baseline), corre-
sponding to the full availability of all the critical services, was finally added to
complete the list of planned experiments. Due to the presence of stochastic pro-
cesses in the FMCG SC, introduced by triangular distributions of lead-times, 20
replications covering a time window of 100 days (after 10 days of warmup run)
were used to estimate the average performance values of each scenario.
326 P. Trucco et al.

18.6 Results of Numerical Experiments

18.6.1 Reference Scenario (No Disruption)

Under standard demand and nominal operational conditions, the Italian FMCG
supply chain generates an average daily turnover of 37,673 million euros (M€),
according to our model (baseline). If referred to the contribution of FMCG sector to
the Italian GDP in the years 2008–2012 (INIS 2015), the absolute percentage error
of our model ranges from −2.3 to +2.9%, with a mean absolute percentage error
(MAPE) of −0.2%.

18.6.2 Full Disruption (Worst Case) Scenarios

The aim of the second scenario simulated is to assess the impact on the FMCG
supply chain of a disruption occurring to each of the CI systems belonging to the
first level, where 50% of service is lost for 5 consecutive days. Results are shown in
Table 18.3. The change (D) in turnover and recovered turnover percentage are
based on the reference scenario of no disruption (baseline turnover = 37673 M€).
It can be seen that the CI with the heaviest impact on the FMCG SC was gas,
causing the major amount of turnover loss (4.6 billion Euros or 12.2% of baseline
scenario in the course of 100 days). On the contrary, power generation
(PG) presented the least severe consequences among the four. Fuel and water
unavailability had almost similar impacts on the economic performance of the
FMCG SC.

18.6.3 Disruption of CI with Different

Levels of Resilience Capacity

This final step is intended to estimate the expected benefits from the application of
the four strategies, in their multiple configurations, with different resilience capacity
levels (20, 50 and 90%). As stated earlier, each simulation run had warm-up time of
10 days, and lasted 100 days with a 50% unavailability of a single critical service
during 5 consecutive days. Results related to the disruption of the four CI systems

Table 18.3 Worst case scenarios with 5 days of CI disruptions

Disrupted CI Fuel Gas PG Water
Average turnover for 100 days [M€] 33518 33073 34373 33504
Average Δ in turnover [M€] 4155 4600 3300 4169
Average turnover loss [%] 11.0 12.2 8.8 11.1
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 327

are depicted in Figs. 18.4, 18.5, 18.6 and 18.7. The available resilience options are
reported in decreasing order of effectiveness (i.e. increase in the total turnover loss
in reference to the baseline). The notions used in the figures are described in the
notes of Table 18.4 where a summary of the simulation results is given.

Fig. 18.4 Average change in turnover with 5-day fuel disruption at different resilience levels

Fig. 18.5 Average change in turnover with 5-day gas disruption at different resilience levels
328 P. Trucco et al.

Fig. 18.6 Average change in turnover with 5-day power disruption at different resilience levels

Fig. 18.7 Average change in turnover with 5-day water disruption at different resilience levels
 18

Table 18.4 Summary of the simulation results—5 days of 50% service loss from different CIs
Actor(s) with resilience capabilitiesa Average D turnover from the baseline, at different resilience capability levels (ResLev) [M Average recovered
€] turnover [%] at
Fuel Gas PG Water different resilience
capability levelsb
0.9 0.5 0.2 0.9 0.5 0.2 0.9 0.5 0.2 0.9 0.5 0.2 0.9 0.5 0.2
P(+w) + DC + R 1977 3605 3976 2226 3842 4384 1514 2715 3131 2032 3630 4005 52.2% 15.0% 4.5%
P(-w) + DC + R 3352 3744 4017 3470 3950 4388 2348 2806 3126 2823 3704 4008 26.1% 12.5% 4.2%
P(+w) + DC 3619 3764 3998 3840 4084 4399 2648 2866 3145 3660 3811 4028 15.1% 10.5% 4.0%
P(-w) + DC 3826 3868 4054 4006 4127 4420 2780 2927 3157 3718 3838 4025 11.7% 9.0% 3.5%
P+R 3951 3969 4077 4230 4275 4462 2995 3056 3177 3915 3938 4064 7.0% 6.1% 2.7%
DC + R 3907 3939 4069 4183 4244 4452 2960 3023 3187 3879 3917 4057 8.0% 6.8% 2.8%
P(+w) 3936 3943 4068 4334 4347 4481 3048 3074 3198 3962 3988 4073 5.8% 5.4% 2.5%
DC 3997 4009 4082 4313 4334 4473 3054 3079 3196 3973 3974 4085 5.5% 5.1% 2.4%
R 4101 4095 4124 4520 4519 4567 3218 3231 3255 4122 4116 4151 1.6% 1.6% 0.8%
Note aP(+w) = Producer (with water included in the strategy); P(-w) = producer (with water not included in the strategy); DC Distribution Centres;
Assessing Supply Chain Resilience Upon Critical Infrastructure …

R Retailers
b
Percentage values calculated as the ratio of the difference between average turnover at some ResLev and worst case scenario, and difference between baseline
turnover and turnover at the same ResLev
329
330 P. Trucco et al.

18.7 Discussion

Resilience capacity of recovering 20% does not seem to be making a big difference
when applied across the different combination of actors. The recovered turnover
compared to the worst situation is very small except for the power generation which
showed marginally better values (compare Fig. 18.6 with Figs. 18.4, 18.5 and
18.7). The specific location of this resilience capacity level in the supply chain does
not seem to bring much difference as well; it is not much different if a supply chain
actor or multiple actors, upstream or downstream the supply chain, had little resi-
lience capacity. The maximum possible turnover recovered from the worst case
with ResLev = 20% (by multiple actors upstream the supply chain) on average
across the disruptions in the different CI systems is only 4.5%; the lowest is 0.8%
(see Table 18.4). It is to be noted that this resilience capacity equals the minimum
trigger level of disruption.
When it comes to a higher level of resilience capacity (ResLev = 50%), the
benefit of all the strategies are far more significant compared to the previous sce-
nario. Multiple supply chain members upstream the supply chain with this level of
resilience can recover up to an average of 15% turnover compared to the worst case.
The minimum value of recovered turnover is 1.6%, when the corresponding resi-
lience capacity is located only at the retailer.
In the best resilience scenario, involving the highest level of resilience capacity
(ResLev = 90%), improvements in turnover from the worst case range from a
minimum of around 1.6%, when the resilience capacity is concentrated at the
retailer, to a maximum of 52% granted by a mixed allocation of the resilience
capacity throughout all the three SC members, included the capacity to overcome
the water shortage.
In general, the results of the study show a very high vulnerability of the
FMCG SC when it is hit by the unavailability of some critical services; even with
the highest (90%) resilience strategies implemented and the capacities mobilised to
offset for a disruption in CI systems, the average recoverable turnover is about 52%
of the potential losses. It appears that there is a structural rigidity of the FMCG SC,
mainly due to the strong dependence of all transport systems on energy. The results
reveal that there is only limited room for making supply chains, and KRSC in
particular, more resilient against electrical blackouts and energy disruptions in
general.
As expected, the average turnover loss due to CI disruptions, compared to the
baseline (no disrupted scenario), is lower for higher value of resilience compared to
the lower values, under all disruption scenarios and resilience strategies. This result
is however limited to the benefits of resilience capacities in face of unavailable
work force at a respective supply chain actor.
Resilience strategies at multiple number of actors perform better than strategies
with a similar capacity level allocated at fewer or one supply chain actor only
(compare Figs. 18.4, 18.5, 18.6 and 18.7). Furthermore, resilience capacities at the
upstream of the supply chain (i.e. producer) are able to recover more turnover
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 331

compared to a similar level of resilience capacity in the downstream. This result has
at least two implications. First, SC resilience depends on a coordinated effort
between different actors independently from the level of available capacity. Second,
this collaborative approach to improve the SC resilience may lead to a rebalance in
the value chain, since under widespread CI disruptions, retailers benefit from
turnover recovery thanks to resilience capacities primarily implemented by pro-
ducers and distribution centres.
Another observation is that multiple forms of resilience capacities perform better
than a single type of resilience capacity at a higher level. In our case, the capacity to
offset water disruption in addition to other resilience capacities gave rise to recovery
almost the same turnover compared to a much higher resilience capacity without
mitigation strategies against water shortage; e.g. P(+w) + DC at ResLev = 0.5 is
estimated to recover 11% of turnover loss, whereas P(-w) + DC at ResLev = 0.9 is
expected to recover only 12% (see Table 18.4). This observation seems further
strengthening the role of interdependence relationships in a system-of-systems
resilience, not only those existing between CI systems and related services, but also
those influencing the effectiveness of resources allocation within the supply chain.

18.8 Conclusions

The results achieved with the present study are of relevance for both science and
practice. As for the scientific contribution, the study offers original results at both
methodological and content levels. Research on the analysis and modelling of the
dependencies between KRSC and CI is still limited, mostly if we consider the
resilience research stream. The majority of modelling techniques require a large
amount of detailed data that are difficult to collect; alternative solutions, demand
less data but model the non-linear dynamics of CI disruptions and the consequent
spread of cascading effects in a poorly detailed way. In the present study, we tested
a multimethod approach that uses a combination of SD and DES; based on the
achieved results, it is possible to conclude that it represents a good trade-off and a
better choice to support high-level system design or strategic decisions on resource
allocation and coordination towards better system resilience. In this regard, the
proposed multimethod approach expands the extant literature on system-of-systems
modelling, with the aim of better supporting the vulnerability and resilience anal-
ysis of global supply chains against their multifaceted dependence on a wide set of
CI systems. From a methodological point of view, further research is encouraged to
offer a broader set of test cases and a systematic comparison of different modelling
strategies and combinations of methods, including ABM also. Indeed, the mod-
elling approach implemented in the present study still suffers for some limitations:
• the contribution of tactical decisions made by different actors during the dis-
ruption event, and their direct influence on the evolution of the event are not
taken into consideration;
332 P. Trucco et al.

• similarly, the impact of geographical interdependencies is not accounted for,

since the current model is not able to address issues related to the topology of CI
systems, and the location of different supply chain facilities as well.
When these elements are the most relevant for the specific study, then ABM
simulation should be adopted to model actors’ behaviours at both CI and KRSC
levels, so as to account for the former; network-based and flow-based approaches to
CI modelling should be used to accommodate for the latter (Ouyang 2014).
Further developments at methodological level could also address:
• the extension of the simulation model to incorporate a cost index for different
strategies and resilience capacities;
• the integration of a set of resilience indicators enabling a more comprehensive
and detailed comparison of disruption scenarios and response strategies.
Indeed, just looking at the specific case application, there is wide room for
further in-depth investigation of cascading effects between CI and the FMCG SC, to
achieve a better understanding of the dynamics of bottlenecks within the FMCG SC
under different scenarios and response strategies.
As for the specific application domain, with reference to the FMCG supply
chain, the study offers some relevant and original insights toward a better under-
standing of the strength and dynamics of the coupling between KRSC and CI, and
consequently on resilience improvement efforts. Firstly, the study made it clear that
supply chains react in completely different ways under distributed or localised
disruptions. Cascading effects within the CI layer, activated by existing interde-
pendencies, clearly result into a dispersed impact at supply chain level despite the
location and the possible limited extension of the triggering event. Consequently,
the attempts to achieve higher supply chain resilience cannot concentrate on a
limited number of nodes, neither on a set of isolated investments and actions. The
nature and dynamics of supply chain disruptions induced by CI interdependencies
call for more coordinated and collaborative resilience strategies, involving all the
relevant actors of modern global supply chains. In this line, the study also gives
justification and support to future research on organisational capabilities and
operational coordination in the context of supply chain resilience. More specifically,
further research is needed to better understand the specific roles and contributions
that different actors may cover, as well as the type of support they should be granted
of, within a collaborative response and recovery set up. Resilience capabilities of
organisational nature, both intra- and inter-organisational, need to be better inves-
tigated and understood. Finally, larger studies are encouraged in future to overcome
some of the limitations that affect the present study when it comes with modelling
and quantifying the key processes and factors shaping the behaviour of CI. Indeed:
• some of the hypotheses at the basis of the CI model we adopted in the study are
still simplistic, such as neglecting staff factor in power, water and gas facilities,
so the assessment of critical service unavailability and the consequent turnover
loss in the FMCG supply chain may not be accurate (underestimated);
18 Assessing Supply Chain Resilience Upon Critical Infrastructure … 333

• the quantification of the FMCG model was based on secondary and sector related
data; to achieve better precision and reliability of results, more detailed data of
confidential nature should be collected (e.g., actual stock location and product
coverage, switch time and quantity between different mode of transports);
Supply chain managers may also benefit of the suggested prioritisation of resi-
lience strategies, according to their estimated benefits, when making decisions on
the amount and location of resilience capacities within KRSC, and the FMCG
supply chain in particular. Again, the results of the present study strongly support
managers’ commitment and decisions in favour of collaborative or coordinated
resilience practices among supply chain actors; as well as the adoption of advanced
tools and solutions to get higher visibility of risks coming from vital services and
related infrastructure.

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