Ground-Level Views of Risk Management

Supply chain disruptions hit on multiple levels

Supply chain disruptions hit on multiple levels

The ways companies respond to emergencies are as varied as the types of incidents that can disrupt operations. But a key feature of effective response efforts that emerged during a recent gathering of supply chain risk experts organized by MIT CTL is aligning the company’s reaction to the scale of the disruption.

A logistics services provider has three levels of response. Level 1 pertains to local crises, but these might still be serious in nature. The devastation caused by a tornado, for example, is usually localized but still extremely traumatic. Level 2 responses cover regional situations that often involve multiple business units and geographies, and Level 3 is a corporate-wide emergency.

Similarly, an automotive company has three response team structures. One structure is at the local level. A second structure consists of a series of security information centers located around the globe and at headquarters. These centers are staffed by 6-8 people whose primary responsibility is to monitor personnel, namely senior executives who are traveling around the world.

The company’s third response structure is supply-chain based. Located near the corporate HQ, this Command Center is a conference room equipped with wireless communication, laptops, whiteboards and flat panel monitors. The center responds to all manner of disruptions and is staffed by cross-functional personnel. Most recently, a steel supplier experienced a roof collapse and then a fatality during reconstruction that closed its facility for six weeks. The supplier served every one of the company’s assembly plants as well as 80 other automotive suppliers. The command center was activated within 24 hours of the incident, and the company’s supply chain team worked to identify which parts were affected, how much inventory was on hand, and what spot buys were necessary to plug gaps in supply.

The three-tier response structure helps companies to react quickly and decisively to disruptions – key to speedy recoveries. A CPG firm’s local/national/global response effort was called into action in April this year following an earthquake in Mexico. Six hours after the earthquake struck, the company had structural engineers at its facilities to verify safety and operational integrity.

Within the local/regional/global disruption response structure, multi-level alarm systems can be activated for handling events of escalating importance.

For example, the automotive company has set up a stepped alarm process in its plants that use exception-based monitoring to trigger alarms and alert response teams. The first alarm kicks in at the factory floor level when inventory falls below a certain threshold. Second and third alarms activate when carriers do not arrive within a 15-minute window and when a supplier is unable to ship parts. If there is no inventory to make a part, another alarm is triggered. If the situation is out of the plant’s control – when adverse weather is disrupting operations, for instance – the alarm system is escalated to the command center to decide how to allocate scarce supplies of the part(s) affected. The command center also gives guidance to suppliers; it might advise a supplier to deliver to an alternate facility that is not experiencing storm conditions.

Another way to streamline the recovery process is to build a response structure that clearly differentiates between staff safety and the demands of restoring the business to normalcy.

A high-tech company has two teams that work independently and in parallel when a disaster strikes: the Emergency Response team and the Business Recovery team. The former deals with safety issues, while the latter team focuses on what is needed to get stricken facilities back up and running. The company has learned that this parallel structure is necessary because it’s difficult for the same team members to handle the emotional issues of employee safety as well as the demands of business recovery.

For more information on MIT CTL’s supply chain risk research contact Deputy Director Jim Rice at

Photo: NASA


Collaboration the Key to Unblocking Megacity Streets?

Can city governments help to improve megacity logistics?

Can city governments help to improve megacity logistics?

Picture a truck delivering product in a traffic-choked megacity and physical obstacles such as a maze of one-way streets come to mind. But hindrances like these are manifestations of a more fundamental problem: constantly changing traffic regulations.

How do companies overcome regulatory speed bumps in sprawling urban areas where government is highly fragmented and the movement of passenger vehicles often takes precedence over freight flows?

One approach that some companies are trying is to develop win-win relationships with city regulators.

The idea that working alongside public sector traffic agencies could help to improve megacity logistics might seem like a stretch. But the approach is yielding results in some places.

Two companies that attended the Last-Mile Delivery Roundtable organized by the MIT Center for Transportation & Logistics explained their experiences. The roundtable took place on May 21, 2014, on the MIT campus.

A Spanish food company makes 37,000 deliveries a month in Madrid, Spain, a city with almost 7 million inhabitants and a population density of nearly 14,000 people per square mile. Some 45% of the deliveries go to the city center on 83 trucks. Hotels/restaurants and food stores account for 68% and 23% of the deliveries respectively. The company’s Madrid distribution center (DC) is located about seven miles outside of the city.

The company deals with traffic-related issues that are familiar to any enterprise that supports last-mile operations in urban centers. For example, deliveries made before 1:00 pm face parking constraints in the center of Madrid.

In an effort to smooth the way for their trucks in city environments, the company partners with municipalities to address freight issues. They even employ a person who is responsible for educating local agencies about the company’s city-related logistics challenges.

Both sides gain from the relationship. The municipalities benefit from having a corporate partner that is aware of traffic congestion problems and tries to help the city to develop solutions. For example, the company has consolidated its deliveries and acquired 17 electric-powered vehicles as part of a program to ease congestion and improve air quality. In return, the company’s parking fees have been reduced, it has access to restricted areas for vehicles with specific loads, and it uses city infrastructure for consolidation operations.

A convenience store chain in Bangkok, Thailand, has developed a similar symbiotic relationship with the City Council of Bangkok and the Thai government.

The company operates thousands of convenience stores in Bangkok – a city of 8 million people – and their network is growing at an annual rate of over 500 stores. Three dry goods DCs and a chilled goods DC serve eastern and western Bangkok, and the company also receives direct store deliveries from suppliers. Almost 1,700 vehicles supply the stores in Bangkok, and some 1, 200 delivery trucks support suburban outlets.

Trucks have to meet stringent size, location, and time-of-day restrictions imposed by the city. Limiting vehicle operation to tight delivery windows reduces the amount of time for consolidating loads in DCs, and makes it more difficult to ensure that fresh food is available during peak demand periods. In general the chain replenishes stores with fresh food three times a day, but in Bangkok can only mange one daily delivery.

The company is working with the City Council and the government to rethink the way buildings and distribution hubs are zoned in Bangkok. Other companies that are active in the city are also involved in this initiative. The aim is to provide more loading and unloading bays for commercial vehicles, and ease parking restrictions. In addition, the convenience store chain is purchasing vehicles that meet Bangkok’s four-wheel, small-truck size limits but can carry 1.5 tons of cargo – 50% more than a standard, four-wheel vehicle. Other measures the company is taking include the use of more sophisticated demand forecasting to optimize both loads and routes.

In megacities the frequency at which traffic regulations change compounds the level of disruption they cause. It can be a frustrating picture from a logistics perspective, but given the growing importance of these markets, it’s surely better to collaborate with city regulators than to fight them.

This post was written by Dr. Edgar Blanco, Research Director, MIT CTL, Founder & Director, MIT Megacity Logistics Lab,, and published by Connect, the supply chain expertise and technology Blog from TMC, a division of C. H. Robinson. 

Profiting from Cost to Serve

Cost to serve is a key financial measure that helps companies decide how to segment markets and support customers cost-effectively. However, the way this value is calculated varies from company to company, particularly in terms of how certain costs – including those associated with managing supply chains – are taken into account.

A top-down method for calculating the measure developed by the Center for Latin-American Logistics Innovation (CLI) offers a better way to compute cost to serve, especially for emerging markets.

The method is particularly useful in megacity markets (in cities with populations of at least 10 million people), where many variables such as population density and infrastructure constraints influence supply chain costs. Also, megacities are often served by two types of distribution channel. The modern channel includes outlets that are common in developed economies too, such as supermarkets and convenience stores. There is also the traditional channel based on nanostores; mom-and-pop outlets that serve low-income consumers. This dual structure makes it even more difficult to quantify supply chain costs accurately and to implement tailored strategies to reach the final customer.

There are a number of established ways to calculate cost to serve. An example is Activity Based Cost Analysis (ABC). This is a bottom-up method were the starting point is the cost of minor activities that are tallied up until a complete picture of value chain processes and affiliated costs is created. In general, these accepted methods account for supply chain costs by mapping each component activity and separating them into fixed and variable cost types.

However, it can be difficult for companies to apply these established methodologies to real-world operations. For example, the relationship between cost to serve and financial statements is often unclear, and how the measure supports decision-making over time is ambiguous.

CLI’s top-down method addresses these issues. The methodology comprises three phases.

  1. Objective definition

In this initial phase critical factors such as the distribution channels involved, customers, geographic regions, and products are clearly defined. These definitions are arrived at by mapping – on both macro and micro levels – relevant processes. CLI recommends that a multi-disciplinary team oversees these activities in critical areas including finance, logistics, sales, IT, and marketing.

  1. Data gathering.

The second phase involves a number of steps such as reviewing financial statements and identifying supply chain processes. It is the most valuable step since it forces the team to gain a thorough understanding of the company’s financial statements, as well as its performance and opportunities for improving cost effectiveness.

Measurement and results analysis

Having gathered all relevant information on variable and fixed costs, commercial and logistics activities, these values are added according to which client, product, or channel is involved, to arrive at the cost to serve. The results are validated by the multidisciplinary team and/or each discipline involved. The final, and very important step, is to delve into how supply chain costs impact profitability by customer, product, or channel. The team can create strategies for improving supply chain performance as well as customer service, reducing cost to serve according to the life cycle of a client and identifying the type of client (low/high profitability versus low/high cost to serve).

CLI hopes that the new methodology provides a tool that companies can use to translate cost to serve into a decision support mechanism for actual and future operations. Of particular importance is enabling companies to create strategies for developing markets profitability in emerging economies, including megacities.

Looking ahead, the methodology can be refined in a numbers of ways. For example, more accurate ways to determine individual costs could be developed, and the future analyses could make use of scenario planning. CLI also aims to look at customer retention in different market segments.

For more information on the research contact Christopher Mejia, Postdoctoral Associate, CLI, at: This article will be published in the summer 2014 issue of the electronic newsletter Supply Chain Frontiers later this month. Subscribe to Frontiers for free here.



Building a New Consensus on Infrastructure

As the US Congress struggles to find a long-term solution to funding the Highway Trust Fund, a new approach to prioritizing investments in transportation systems could greatly improve the infrastructure planning process.

The companies that rely on road, rail, and port networks to connect them to customers and suppliers worldwide, and the government planners responsible for building these trade arteries, exist in different universes.

They have different financial goals and work to very different timescales. While companies are tied to profit targets and product life cycles, planners develop infrastructure that can take a decade to complete and be in active service for many decades.

Another complication is that the public sector must deal with a diverse base of stakeholders, including public interests that often oppose new projects. There is political pressure too; pallets don’t vote, so consumer demands often trump commercial needs.

The way that new projects are planned also presents problems. Long-range planning is frequently driven by point forecasts based on macro factors to map future demands for infrastructure capacity. This approach is deeply flawed because it projects historic experience without paying due regard to future technological and economic changes.

In 2011 MIT CTL launched a research initiative sponsored by the National Cooperative Highway Research Program called Future Freight Flows (FFF), to develop a methodology that any transportation planning agency in the United States can use to allocate (scarce) funds to freight infrastructure projects. There were two main goals. First, expand the thinking of planners to consider multiple potential outcomes and futures. Second, enable better communication between the stakeholders.

Scenario planning, a decision-making process used for strategic and long-range planning, was at the heart of the initiative. In this method, users envision and prepare for different futures that are depicted in specially created scenarios. The method allows users to prepare for a range of plausible futures rather than trying to predict specific outcomes 20 or 30 years out. Scenario planning is also uniquely suited to bringing disparate parties together, and exposing them to the real-world consequences of planning decisions.

MIT CTL developed a scenario planning tool kit that includes four scenarios, guidebooks for facilitators and participants, and material such as brochures and videos that bring these futuristic worlds to life. In 2011 MIT CTL took the scenario planning program on the road in a series of one-day, interactive workshops in venues across the country.

Some two years later these efforts are yielding results.

For example, Delaware Valley Regional Planning Commission (DVRPC), an organization that took part in the interactive workshops, is using the internet to create greater awareness about the regional freight network. A web-based mapping application called PhillyFreightFinder enables users to gain a deeper understanding of how freight moves through the region’s airports, highways, railways and waterways, and the broader impact on transportation systems. Much of the inspiration for these tools came from the scenario planning workshop.

DVRPC is developing a working group of regional stakeholders, including businesses. The group will provide insights and perspectives on different projects, much like the user groups did in the MIT CTL workshops. And they will vote on their preferred options, and “game-changer” projects that could have a major impact on the region’s economy.

Another workshop participant, Washington State Department of Transportation, is using scenario planning to test the point forecasts it is mandated to use to predict freight growth in Washington’s new State Freight Plan. The scenarios provide a richer picture of the macro-level drivers that impact the volumes and types of traffic that WSDOT has to plan for.

While initiatives like these will not solve the nation’s infrastructure funding problems, they will help to bridge the divide between the public and private sectors.

The end result could be more responsive, cost-effective freight transportation systems that help US companies to sustain and improve their global competitiveness.

This article is based on the Harvard Business Review blog post A Better Approach to Infrastructure Planning by Dr. Chris Caplice, Executive Director, MIT CTL, and MIT CTL Researcher Dr. Shardul Phadis, published July 10, 2014.  

How to Cut Costs by Improving Product Punctuality

Products received from suppliers are not always available exactly when retail channels need them. Items that arrive way too early clog up warehouse space while latecomers often incur expediting costs and lost sales. By tailoring transportation methods and distribution center processes to match the delivery speed required of each product, companies can reduce the cost of transportation, prevent excess inventory, and eliminate lost sales.

Configuring supply chains in this way is often done through SKU segmentation, but this is difficult in complex operations where there are numerous products and an extremely diverse supplier base.

Researchers at MIT CTL have developed a model that uses purchase order (PO) information to help retailers determine when many different types of products need to be shipped to meet sales deadlines. The research was carried out by two students, Brad Gilligan and Huiping Jin, for their MIT Master of Supply Chain Management (SCM) thesis. The work was supervised by MIT CTL Research Director Dr. Edgar Blanco.

Lack of visibility

This retailer excels at capturing opportunistic business. For example, it might buy a product at low cost in the off season for sale during periods of peak demand.

This type of operation usually involves suppliers and stores in multiple countries. In order to make the project more manageable, the research focused on items purchased in China for sale in the United States. Even with this limitation the analysis covers more than 30,000 POs, 40,000 unique SKUs, and 1,000 suppliers.

Some products were received well in advance of the sale date, while others arrived with very little time to make the final delivery to the store. Moreover, the company was unable to see which products fell into the early and late categories.

There was a huge opportunity to achieve savings by introducing slower, more cost-effective supply chains for early items and faster delivery times for tardy products. The model aimed to achieve this by adjusting lead times so that zero to seven days elapsed between a product’s arrival at the DC and its required availability at the store.

Performance improvements

The researchers were able to identify PO attributes that can be used to predict with more than 90% accuracy how much time the retailer needs to ship a product from suppliers. In test simulations on-time performance was improved by 36% to 60%. Additionally, no products arrived late and those that were received before the agreed delivery date were less than 10 days early.

Using this information, the retailer can cut transportation and holding costs, and potentially increase total sales volumes because more products will be available at the store when required. Also, the model can be updated automatically as new data comes in.

Although the model is geared to the needs of one US retailer, it is of interest to any retail operation that procures product opportunistically.

This post was authored by Brad Gilligan and Huiping Jin and originally published on July 16, 2014, by Supply Chain Management Review, as the first in a monthly series of articles on SCM thesis research. For more information on the SCM program and the latest theses contact SCM program Director Dr. Bruce Arntzen. 

World Cup Plays that Build Winning Supply Chain Teams

The 2014 FIFA World Cup is finally over. If you’re not a soccer fan maybe you’re still wondering what all the fuss was about. But followers of the game (including myself) now have to wait four long years before the next tournament.

Until then, we can revel in the memories of what was one of the most entertaining competitions in recent decades. And we can draw some important lessons from this wonderful spectacle – including ones that are particularly relevant to supply chain leaders.

Here are a few for your consideration.

Reinvent or perish. Spain was the world champion at the start of the tournament, but went crashing out after being beaten 1-5 by the Netherlands in the team’s opening game. The most fancied competitor, Brazil, was humiliated, in front of its home crowd, in a 1-7 defeat by Germany (more of that later).

Brazil and Spain had established reputations for inventive, free-flowing soccer, but their pedigrees counted for little on the ground. Other teams had figured out ways to compete with them and adopted some of the methods that made these two soccer powerhouses such formidable competitors.

In other words, these leaders had not moved with the times; they had failed to reinvent the strategies and processes that underpinned past successes.

And so it is in the supply chain world. A market-leading supply chain has a relatively short shelf life, and must continue to evolve and reinvent itself to maintain a competitive advantage. For example, Dell Corporation was the leading personal computer manufacturer in the world, earning accolades for its vaunted manufacturing postponement strategy. Yet the company failed to adjust to the maturation of the market – the shift to laptops, the maturing of the technology, and other changes – and declined to 3rd place behind Lenovo and HP. The need to adjust and reinvent is only growing stronger given the continued volatility of markets and the shortening of product life cycles.

Simple is often best. Some of the most memorable goals in this year’s tournament were also the simplest and most direct. They were uncluttered by complicated plays and their directness was devastating. Take, for example, one of the tournament’s best strikes, a goal scored by Australia’s Tim Cahill in the game against the Netherlands. Cahill met a cross from the right and volleyed a shot into the net. Simple, direct, and unstoppable. Most of the seven goals that Germany scored against Brazil had the same quality.

Keep it simple is a hard-won lesson in the supply chain profession. Packing a supply chain with too many product variants, for example, adds complexity, and the more complex a supply chain the higher the likelihood that something will go wrong. Direct routes to the customer and standardized processes with a minimum of touch points are usually the most efficient.

Don’t operate without a Plan B. Germany’s 7-1 thrashing of Brazil in the first semi-final match was a case study in how to clinically dismantle inferior opposition.

To a large extent Brazil played into the Germans’ hands. They dwelled on the absence of two key players – the soccer superstar Neymar and defense mastermind Silva – and appeared to be totally lost when Germany took the lead. Brazil had no emergency plan when the game started to slip away from them.

In the supply chain world we call the ability to adapt to disruptions resilience. A resilient supply chain is able to sense adversity and respond quickly with a back-up plan. As the number and types of disruptions has increased over recent years, resilience has become a key feature of winning supply chains. For example, many observers noted that Nissan bested Toyota and Honda in its faster response and speedier recovery from the Japanese earthquake and tsunami and the Thailand floods in 2011. Nissan was faster to assess these situations, communicate to all stakeholders, come up with action plan, and recover production.

The playing field is leveling. One of the most pleasing features of the 2014 World Cup is how “small” teams such as Algeria and Costa Rica gave bigger teams a run for their money. Costa Rica reached the quarter-finals where they took soccer behemoth, the Netherlands, to a penalty shoot out. The smaller teams were not intimidated by more storied opposition.

An innovative, well-run supply chain can empower small, relatively unknown companies to compete successfully against much bigger opposition, and even redefine markets. Twenty years ago who would have thought that a company called that sold books online would grow into one of the world’s top retailers? Amazon’s supply chain is key to the company’s success. Similarly, it was difficult to imagine that the small store that Sam Walton opened in Rogers, Arkansas, in 1962, would grow to be the largest company in the world by revenue. Again, Wal-Mart’s supply chain processes are key to its success. Today, rapid technology innovations are bringing more opportunities for small, innovative players to compete successfully against larger incumbents.

The winners of the 2014 World Cup, Germany, had already learned lessons like these before they got to Brazil. The country reinvented its national soccer development program after performing miserably in a European championship. The goal scored by Germany in the final against Argentina to win the trophy exemplifies the simple-and-direct philosophy. And Germany demonstrated its resilience in the final match against an Argentine team known for grinding opponents down with its seemingly impenetrable defense.

Supply chain leaders should watch the next World Cup in 2018, and not just for the soccer!


This article was orignally published as a Yossi Sheffi Linkedin Influencer blog post. See the original post here.

Why Innovation Has to be More Than a Good Idea

Supply chain strategies often include some sort of commitment to innovation, but if the organization is not set up to be truly innovative it’s an empty promise. And the consequences can be severe if your competitors are doing more than paying lip service to innovation.

Here is an example of a company that paid a high price for this shortcoming. The names of the players and products involved have been changed.

In early 2011, Lamynix, a leading manufacturer of specialty laminates, was approached by VideoFlat, one of its major customers, with an enticing contract to buy, at a premium price, a protective film twice as wide as the usual size. The new laminate had to be in production within 12 months.

Fulfilling the contract required a significant innovation effort. But the venture also offered an opportunity for Lamynix to capture a share of a promising new market. The multi-million dollar contract was signed.

Twelve months later, Lamynix had failed to deliver the new product and VideoFlat found another supplier to work with.

What went wrong?

Lamynix’s supply chain enjoyed an enviable reputation for excellence. Underlying this performance was the company’s supply chain strategy: a set of strategic principles and objectives that served as a bridge between Lamynix’s competitive strategy and its supply chain decisions. The three principles were: (1) achieving the lowest product cost, (2) maintaining the best product quality, and (3) operating with the lowest working capital.

In order to support these principles, the manufacture operated high-volume plants that exploited economies of scale to the fullest. In fact, Lamynix had built the largest laminate extrusion plant in the world.

However, although the supply chain strategy had served Lamynix well in the past, it masked a three-way conflict between cost, service and inventory.

Because of high switch-over costs, high-volume plants can reduce product costs only if production runs are long enough. Long runs, in turn, diminish the plant’s ability to make as varied an assortment of products as needed in real time. With an inflexible plant, matching supply and demand required the company to keep sufficient inventory of the finished products at hand. But inventory costs money, and higher inventory levels, in turn, increase the final cost for the customer.

The manufacturer was juggling these competing goals when it was approached by VideoFlat.

Part of the challenge posed by this juggling act was the lack of a clear pecking order among the three strategic principles. Should cost reduction be pursued even if it meant sacrifices in service level, or should service level be fixed and costs adjusted accordingly? Likewise, should inventory levels be kept low to keep costs low, even if it meant sacrifices in service level, or should customer service goals dictate the inventory levels, even at the expense of higher costs?

These conflicts were the source of much tension within Lamynix’s supply chain function, and distracted it from meeting the terms of the contract with VideoFlat.

It transpired that the manufacturer created the wider laminate, but only in a small pilot plant maintained for R&D. The trials had uncovered some production issues with the new product, and it would have been expensive to equip the high-volume plants to deal with these problems. Moreover, at the time, Lamynix was under intense pressure from stakeholders to maintain high margins and, as a consequence, had little appetite for spending money.

The company’s unwillingness to solve the production issues deterred decision-makers from taking ownership of the project. Nobody wanted to be responsible for the high costs associated with stopping a profitable, humongous plant so that technicians could figure out how to solve an innovation problem.

However, the deeper reason for Lamynix’s failure to deliver was that innovation was not one of the organization’s top three priorities.

Subsequently, the business went to one of Lamynix’s competitors whose supply chain strategy called for flexible production through mid-size plants. These facilities were able to solve the production issues that Lamynix had encountered. In other words, the rival’s supply chain strategy was more welcoming to innovation.

The episode forced Lamynix to rethink its competitive strategy, and encompass a strong commitment to innovation in profitable market segments. The supply chain strategy was reformulated, to include among its three key principles real, meaningful support to innovation efforts.

As this example underlines, a company’s verbal commitment to innovation is not enough if its supply chain strategy frustrates innovation and key personnel are unwilling to commit the resources that innovation requires.

This post is based on the article Is Your Supply Chain Strategy Holding back Innovation? published in the July/August 2014 issue of the magazine Supply Chain Management Review, and written by Dr. Roberto Perez-Franco, Director, SC2020 Project, MIT CTL,


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