Mitigation strategies
The first key message of Chopra and Sodhi is that some mitigation strategies may actually increase risk in some business areas, rather than reduce it, see figure left. The figure shows how different strategies affect different areas of the supply chain differently. Major risks that need special attention are: Disruptions, Delays, Forecast risk, Procurement risk, Receivables risk, Capacity risk and Inventory risk. Some of the strategies to address these risk are: Add capacity, Add inventory, Have redundant suppliers, Increase responsiveness, Increase flexibility, Aggregate or pool demand, Increase capability, Have more customer accounts. The matrix shows how risks and mitigations measures are interlinked and affect each other.
Rules of thumb for tailored risk management
The second key message of Chopra and Sodhi is that the cost of mitigating or building up a reserve must be balanced against the level of risk, see figure left. Three time-tested approaches that can be used are: Pooling inventory, Creating common components across products and Postponing or delaying the last stage of production. In addition, companies can minimize inventory by working with highly responsive supplier, especially for high-value products with short life cycles.
Reference
Chopra, S., & Sodhi, M.S. (2004). Managing Risk to Avoid Supply-Chain Breakdown MIT Sloan Management Review, 46 (1), 53-61
Author Links
- kellog.northwestern.edu: Sunil Chopra
- cass.city.ac.uk: ManMohan S Sodhi
Related
- husdal.com: Global Supply Chain Risk Management