MIT Study: Lower-Cost Suppliers Could Cause Biggest Hit in Case of Disruption

A manufacturer’s highest-cost supplier isn’t necessarily the one that will cause the biggest expense from a supply chain disruption, according to new research from the Massachusetts Institute of Technology.

MIT Prof. David Simchi-Levi’s research found no connection between the total that a manufacturer spends with a supplier and the damage to profits if the supply chain were disrupted, the MIT News Office reports.

The quantitative analysis, which researchers applied to Ford Motor Co.’s supply chain, found that suppliers selling relatively low-cost parts to the automaker would cause the biggest hit to Ford’s profits in a disruption, MIT says.

The research by Simchi-Levi, co-director of MIT’s Leaders for Global Operations program, and two former graduate students is to appear in the January-February Harvard Business Review.

Simchi-Levi says the analysis helps explain why risk remains hidden in complex supply networks, as it occurs in unexpected places, MIT notes.

Low-probability, high-impact risks are difficult to count, and companies tend to assume the biggest risks come from the suppliers that cost them the most, the report says. If only 2 percent of Ford suppliers had to stop production, however, Ford profits would take a big hit. In contrast, a short disruption at a majority of the auto company’s tier 1 suppliers wouldn’t hurt profits, the institute says.

The professor recommends calculating the effects of any supply-chain disruption rather than assessing the probability of certain types of risks happening, MIT says. His model employs a list of materials used to manufacture a company’s products, traces the materials to company facilities, incorporates various tiers of supplier relationships, measures possible operational and financial effects of disruption, and calculates options for reallocating inventory.

A 2012 disruption to the auto industry supply chain illustrates the significance of Simchi-Levi’s methodology, according to an article in an MIT Department of Civil and Environmental Engineering publication last month.

An explosion at a chemical plant in Germany that year caused a shortage of a polymer that manufacturers use in different components; the six-month disruption “had high financial impact” for the auto industry, the article says. Simchi-Levi’s framework would have encouraged Ford to push the supplier to invest in building another plant in a different region, which the chemical company now is doing, the article says.

The Ford-MIT alliance helped fund the research.

 

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