hidden suppliers can make or break your operations - hbr
DESCRIPTION
super useful!TRANSCRIPT
-
OPERATIONS
Hidden Suppliers Can Make orBreak Your Operationsby Thomas Y. Choi, Benjamin B. M. Shao, and Zhan Michael Shi
MAY 29, 2015
With the size and complexity of supply chains
soaring, a daunting challenge is confronting
companies: identifying the critical nodes
hidden within the vast expanse of their supply
networks. These are suppliers, or supplier
sites, that might be in the second-tier or lower,
which means the big buying companies would
ordinarily have no contact and might not even
know exist.
These nexus suppliers could be important
for one or both of two reasons:
A disruption of its operation would have asurprisingly huge impact on the original-equipment manufacturers production. (Amuch-cited example is how an explosion at aGerman factory owned by Evonik Industriesthat supplied 70% of world demand for a type
of nylon resin wreaked havoc in the auto industry.)
-
INSIGHT CENTER
The Future of OperationsSPONSORED BY GE CORPORATE
The technologies and trends shaping tomorrowsbusinesses.
The supplier possesses critical market information. (For instance, LG Electronics learned byaccident that the Taiwan Semiconductor Manufacturing Company (TSMC), which hasconnections to lots of industries, can provide early signs of changes in economic conditionsand, as a result, supply and demand.)
We are the members of a research team at CAPS Research, a joint venture of Arizona State
University and the Institute for Supply Management, that is on the verge of creating a way to
identify these suppliers by doing three things: creatively applying network concepts, taking
advantage of emerging large databases, and utilizing business analytics, the practice of
methodically exploring data in an iterative fashion.
The field of operations is becoming more familiar with network concepts such as various
types of node centrality measures a gauge of how critical a node (each supplier) is to the
network: e.g., its number of connections, the variety of industries from which these
connections come, how quickly it can reach others in the network, and so on. If companies
could get their hands on such data for all the members of their supply networks, they could
compute centrality measures for all of their suppliers and identify the most critical ones based
their scores. Yes, there could be thousands of these nexus suppliers, but we now have the
computing power to identify how critical each is.
Currently, generating a map of supply
networks is a daunting task. Many companies
and research centers have attempted it and
found it to be labor intensive and time
consuming. See this article for a description of
one thats being tested at Ford and this one for
a sample supply network involving Honda that
took several years to complete.
-
The good news is in the last few years, companies have begun selling large databases that can
make this job much easier. We are using Bloomberg Supply Chain Database (SPLC), which
keeps track of about 28,000 companies worldwide. Other potential databases include Capital
IQ, FactSet Revere, and LexisNexis. For each company, SPLC provides a list of suppliers and
customers, based on information revealed in a variety of sources (public filings, industry
reports, etc.). For a given buying firm, we can identify all its suppliers, its suppliers suppliers,
and continue iteratively. We can then use the collected supplier-customer relationships to
construct an extensive supply network for the focal firm.
Then we can integrate complicated mathematical measures of centrality to create a nexus
supplier index (NSI), which is an aggregate measure of criticality of a supplier in a buying
firms supply network.
Once we have computed initial NSI scores for all suppliers, we can use business analytics to
validate the scores. We have compiled the data for the top three tiers of a particular
automotive company to its third-tier and identified over 8,000 suppliers. We have computed
NSI scores for second-tier suppliers and are in process of compiling fourth-tier data to
compute the NSIs for third-tier suppliers. We plan to provide a formal CAPS Research report
on our effort by September of this year.
Once a buying firm has identified and scored the nodes in its supply chain, it can group its
nexus suppliers into different categories according to their distinct network positions and
develop and implement suitable strategies to manage each type in order to achieve such
objectives as minimizing costs, mitigating risks, increasing responsiveness, and discovering
and accelerating the development of potential innovations. Then it can start monitoring its
nexus suppliers and make use of the knowledge they can provide.
In an era when extended, complex supply chains pose unprecedented risks and
opportunities, big buying companies cannot afford to be in the dark about suppliers far down
their supply chains. Thanks to advances in knowledge about network modelling, databases,
and analytics, they dont have to be.
-
Thomas Y. Choiis executive director of CAPS Research and chaired professor ofsupply chain management at Arizona State Universitys W. P. Carey School of Business.
Benjamin B. M. Shao is an associate professor of information systems at ArizonaState UniversitysW. P. Carey School of Business.
Zhan Michael Shi is an assistant professor of information systems at Arizona StateUniversitys W. P. Carey School of Business.
Related Topics: SUPPLY CHAIN | MANUFACTURING | OPERATIONS MANAGEMENT
This article is about OPERATIONS
FOLLOW THIS TOPIC
Comments
Leave a Comment
P O S T
3 COMMENTS
-
REPLY 0 0
Thomas Choi 23 days ago
There are several groups that use graph theory to understand supply networks, CAPS Research andElementum being two of them. There are differences. Suppose there is a critical supplier in the third or fourthtier level but a focal buying company such as GM or Siemens is not aware of this supplier. What we are tryingto do at CAPS Research is to identify this supplier. If there is a risk event at this supplier, Elementum wouldthen kick in and try to figure out how this event would actually impact the focal company.
POSTING GUIDELINES
We hope the conversations that take place on HBR.org will be energetic, constructive, and thought-provoking. To comment, readers must signin or register. And to ensure the quality of the discussion, our moderating team will review all comments and may edit them for clarity, length,and relevance. Comments that are overly promotional, mean-spirited, or off-topic may be deleted per the moderators' judgment. All postingsbecome the property of Harvard Business Publishing.
JOIN THE CONVERSATION