(PRWEB) March 08, 2012
Dayton, OH: Dr. David Simchi-Levi of MIT, one of the supply chain industry's foremost thought leaders, has released a new methodology he has developed for quantifying supply chain risk. The new Risk Exposure Index, which Simchi-Levi unveiled publicly for the first time on a Videocast last week on Supply Chain Digest, enables companies for the first time to be able to fully quantify their maximum risk across a given value chain from natural disasters and a series of other unpredictable supply chain disruptions.
Until now, companies have used a two by two matrix to assess potential supply chain risks, typically across dimensions such as the likelihood of an event occurring and the level of financial impact if it did, rating each event as low or high across each axis. This allows a company to put each potential event into one of the four quadrants.
The problems with such an approach include viewing risks as individual entities rather than in the context of an integrated supply chain, limited if any ability to really quantify the risk, and a general avoidance in the analysis of risks such as natural disasters that seem unpredictable.
The supply chain Risk Exposure Index addresses each of these challenges with the traditional approaches. It specifically assesses a cost across each level and node in a given supply chain that would occur from a potential disruption, based on the Time to Recovery (TTR) for each level/node and the resulting Financial Impact (FI), including market share losses. Those individual risk components are then totaled to produce a full Financial Impact for the entire supply chain.
The methodology also inherently addresses unpredictable risks, from natural disasters to a fire at a key supplier. While any one of these specific risks is unlikely and impossible to predict, the odds of one such disruption across all the possible events is actually quite likely over a given period of time.
Therefore, a company can use the Risk Exposure Index to help decide how much it might invest or actins it can take to reduce or mitigate these risks, given that the financial damage to the company from such a disruption has been calculated.
"Companies know how to handle day-to-day, normal risks and those where historical data exist, what we call the 'Known-Unknown,'" says Professor Simchi-Levi. "However, they are not adept at dealing with the "Unknown-Unknown" type of risks such as extreme disasters. These are sources of risks that are hard to predict but they can have a major impact on company bottom line, as we saw last year with the tsunami in Japan and the flooding in Thailand."
Simchi-Levi said that has recently assisted a major high-tech company in using the approach to better understand and mitigate its supply chain risk. That example was used as a case study during the live broadcast.
The full Videocast, now available on-demand at http://www.sctvchannel.com/webinars/videocast3.php?cid=5541, was based in part on Dr. Simchi-Levi's book Operations Rules: Delivering Customer Value through Flexible Operations, one of the supply chain industry's most popular books since its release in late 2010.