Supply chains are the backbone of global economies. As a result, governments and businesses hedge against major disruptions or operational risks that impact the supply chain, such as natural calamities affecting suppliers, manufacturers and vendors.
According to Supply Management, 90% of companies fail to apply an effective risk management plan prior to outsourcing. Most organizations are in the practice of preparing and maintaining an annual risk-register meant for insurance purposes, but this is a poor indicator for assessing risks in global operations, especially those with longer supply chains where more risk is involved.
Enter the New Risk Exposure Index (REI)
Supply Chain Digest reports that Risk Exposure Index (REI) is a powerful new tool for operational risk assessment. Created by Dr. David Simchi-Levi, a well-known professor from Massachusetts Institute of Technology and expert in engineering systems and supply chain management and logistics, REI unlike traditional practices allows managers to quantify risks in a proactive manner.
How REI Works
The approach focuses on Time to Recovery (TTR), the duration of time required to recover from a major disruption on any specific node in your supply chain. Once the TTR is determined, you can calculate the financial impact caused by major disruptions, which include occurrences that are difficult to predict, such as an earthquake or tsunami. A compiled summary of all potential impacts will generate a total Risk Exposure Index.
As a result, you can adopt a supply chain strategy that adequately prepares your business for any mishap or disruption and you can make an informed decision whether to invest in any number of production or process changes required to minimize the financial impact.
Dr. Simchi-Levi gives an example of a pharmaceutical company that was producing its product in two different factories, where each factory employed a different manufacturing process. The manufacturing costs for both factories were the same, but one had a shorter TTR. So, the company moved to standardize the processes in line with the factory with a lower TTR.
REI Gaining Traction with Toyota and Cisco
REI has been adopted by the likes of giants like Toyota and Cisco, and Nissan is soon to follow suit.
Toyota, whose supply chain came to a stand-still in March 2011 as a result of Japan’s earthquake and tsunami, is working on reducing its TTR from six months – the time it took to completely recover from these natural disasters – to as little as two weeks.
According to Reuters, Shinichi Sasaki, Excecutive Vice President of purchasing at Toyota, the company mapped the supply chain for over 250 direct suppliers. Of the 1,500 production sites, 300 were found to be ‘at risk,’ which means they are more prone to earthquakes and other calamities. These 300 sites are responsible for sourcing nearly 1,000 individual parts.
As a result, Toyota will ask these suppliers to produce across multiple locations or to stock extra inventory. Also, Toyota is looking to consolidate components across various car models – This would help increase the capacity of parts, so that suppliers can more readily justify moving or establishing new production sites in lower risk areas.