Hidden risk in supply chains
A new MIT study on supply chain risk shows no correlation between the total amount a manufacturer spends with a supplier and the profit loss it would incur if that supply were suddenly interrupted. This counterintuitive finding defies a basic business tenet that equates the greatest supply chain risk with suppliers of highest annual expenditure.
When applied to Ford Motor Company’s supply chain, the quantitative analysis by Professor David Simchi-Levi of MIT’s Department of Civil and Environmental Engineering and Engineering Systems Division shows that the supply firms whose disruption would inflict the greatest blow to Ford’s profits are those that provide the manufacturer with relatively low-cost components.
“This helps explain why risk in a complex supply network often remains hidden,” says Simchi-Levi, who is co-director of MIT’s Leaders for Global Operations program. “The risk occurs in unexpected locations and components of a manufacturer’s supply network.”
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