Supply Chain and Risk Management

Constantine G. VassiliadisFigure 2Figure 3Figure 4Figure 5Table 1Figure 6Figure 7Figure 8Figure 9Figure 10Figure 11Figure 12Figure 13Figure 14Figure 15Figure 16Figure 17Figure 18Figure 19Figure 20Figure 21Figure 22Figure 23David Simchi-LeviIoannis M. KyratzoglouConstantine G. Vassiliadis

Making the Right Risk Decisions to Strengthen Operations Performance

By Ioannis Kyratzoglou
October 3, 2013

This study analyzes the supply chain operations and risk management approaches of large companies and examines their operations and financial performance in the face of supply chain disruptions. It proposes a framework and a set of principles to help companies manage today’s risk challenges and prepare for future opportunities. Using this framework, business leaders can increase their awareness of where their companies and their competitors stand.


Executive Summary

The MIT/PricewaterhouseCoopers Global Supply Chain and Risk Management Survey is a study of the supply chain operations and risk management approaches of 209 companies with global footprints. As globally operating organizations, they are exposed to high-risk scenarios ranging from controllable risks—such as raw material price fluctuation, currency fluctuations, market changes, or fuel price volatility—to uncontrollable ones such as natural disasters.

The findings validate five key principles that companies can learn from to better manage today’s risk challenges to their supply chains and prepare for future opportunities.

  1. Supply chain disruptions have a significant impact on company business and financial performance.
  2. Companies with mature supply chain and risk management capabilities are more resilient to supply chain disruptions. They are impacted less and they recover faster than companies with immature capabilities.
  3. Mature companies investing in supply chain flexibility are more resilient to disruptions than mature companies that do not invest in supply chain flexibility.
  4. Mature companies investing in risk segmentation are more resilient to disruptions than mature companies that do not invest in risk segmentation.
  5. Companies with mature capabilities in supply chain and risk management do better along all surveyed dimensions of operational and financial performance than immature companies.

"Capability maturity," as referred to above, was determined using our supply chain and risk management capability maturity framework. This framework assesses the degree to which companies are applying the most effective enablers of supply chain risk reduction (e.g., flexibility, risk governance, alignment, integration, information sharing, data, models and analytics, and rationalization) and their associated processes. The model depicts where a company stands in relation to its competition and the rest of the industry.

According to the survey results, as many as 60 percent of the companies pay only marginal attention to risk reduction processes. These companies are categorized as having immature risk processes. They mitigate risk by either increasing capacity or strategically positioning additional inventory. This is not a surprise as the survey also shows that most of these companies are focused either on maximizing profit, minimizing costs, or maintaining service levels.

The remaining 40 percent do invest in developing advanced risk reduction capabilities and are classified as having mature processes. Our research validated that companies with mature risk processes perform operationally and financially better—something for CEOs and CFOs to note. Indeed, managing supply chain risk is good for all parts of the business—product design, development, operations, and sales. Using the capability maturity model, companies can benchmark their ability to respond to risks and then increase their capability maturity to gain competitive advantage.

When Mature Risk Management and Operational Resilience Pay Off

On March 11, 2011[1], Nissan Motor Company Ltd. and its suppliers experienced a 9.0-magnitude earthquake as it struck off the east coast of Japan. The quake was among the five most powerful earthquakes on record. Tsunami waves in excess of 40 meters traveled up to 10 km inland, causing a "Level 7" meltdown at three nuclear reactors at Fukushima Daiichi. The impact of this disaster was devastating: 25,000 people died, went missing, or were injured; 125,000 buildings were damaged; and economic losses were estimated at $200 billion.

In the weeks following the catastrophic earthquake, 80 percent of the automotive plants in Japan suspended production. Nissan’s production capacity was perceived to have suffered most from the disaster compared to its competitors. Six production facilities and 50 of the firm’s critical suppliers suffered severe damage. The result was a loss of production capacity equivalent to approximately 270,000 automobiles.

Despite this devastation, Nissan’s recovery was remarkable. During the next six months, Nissan’s production in Japan decreased by only 3.8 percent compared to an industrywide decrease of 24.8 percent. Nissan ended 2011 with an increase in production of 9.3 percent compared to a reduction of 9.3 percent industrywide.

How was Nissan able to successfully navigate a disruption of this magnitude so successfully?

  1. To begin with, Nissan responded by adhering to the principles of its risk management philosophy. It focused on identifying risks as early as possible, actively analyzing these risks, planning countermeasures, and rapidly implementing them.
  2. The company had prepared a continuous readiness plan encompassing its suppliers, including: an earthquake emergency response plan; a business continuity plan; and disaster simulation training. Nissan deployed these advanced capabilities throughout risk management and along the supply chain.
  3. Management was empowered to make decisions locally without lengthy analysis.
  4. The supply chain model structure was flexible, meaning there was decentralization with strong central control when required. This was combined with simplified product lines.
  5. There was visibility across the extended enterprise and good coordination between internal and external business functions.

These capabilities allowed the company to share information globally, allocate component part supplies on higher margin products, and adjust production in a cost-efficient way.

Why This Study?

Counterintuitive stories such as Nissan’s are at the heart of this study, illustrating that companies with highly mature capabilities in both supply chain management and risk management will be able to effectively address risks, outperform the market, and even gain competitive advantage.

We believe that linking the customer value proposition, sound supply chain operations, and robust risk management is key to success. Moreover, there are supply chain and risk management principles, frameworks, and processes that enable companies to address complex market challenges and achieve superior performance.

The MIT Forum for Supply Chain Innovation and PricewaterhouseCoopers (PwC) launched the Supply Chain Risk Management Survey to assess how global organizations address these challenges and their impact on business operations. The survey was distributed to members of the MIT Forum for Supply Chain Innovation and worldwide clients of PwC. In total, 209 companies completed the survey. Appendix A characterizes the participant population.

The Challenges of a More Global Supply Chain

When a company expands from a local or regional presence to a more global one, the operations strategy needs to be adjusted to align with the changes. The economic crisis in Europe is a good example of this. Due to the decrease in demand for many products and services on the continent, companies are changing strategies, seeking alternate global markets. That’s when operations become more complex. Transportation and logistics become more challenging, lead times lengthen, costs increase, and end customer service can suffer. With a more a global footprint, different products are directed to more diverse customers via different distribution channels, which require different supply chains.

To address the challenge successfully, there are a number of questions companies need to consider as their operations globalize.

  1. What are the drivers of supply chain complexity for a company with global operations, and how have they evolved over the recent past?
  2. What are the sources of supply chain risk?
  3. How can vulnerability and exposure to high-impact supply chain disruptions be properly assessed and managed?
  4. How can supply chain resilience be improved?
  5. What supply chain operations and risk principles will guide the improvement of the company’s bottom line: the operations and financial performance?

Through this research, we aim to provide valuable insight in response to these questions.

What Are the Drivers of Supply Chain Operations Complexity?

Supply chains are exposed to both domestic and international risks. The more complex the supply chain, the less predictable the likelihood and the impact of any disruption. In other words, exposure to risk is potentially higher. We asked survey participants their views on how certain key supply chain complexity drivers have evolved over the past three years. The responses are shown in Figure 1.

Figure 1. Evolution of supply chain complexity over the past three years.

In recent years, the size of the supply chain network has increased, dependencies among entities and functions have shifted, the speed of change has accelerated, and the level of transparency has decreased.

Overall, developing a product and getting it to the market requires more complex supply chains needing a higher degree of coordination.

What Are the Sources of Supply Chain Risk?

Risks to global supply chains vary from known-unknowns and controllable, to unknown-unknowns and uncontrollable ones[2]. In the Nissan case, the devastating natural disasters were unknown-unknowns (difficult to quantify the likelihood of occurrence) and uncontrollable (you cannot manage the expected risk and its impact).

To understand the level of exposure to diverse and broad-ranging sources of risk, we asked survey participants to identify the sources of risks faced by their supply chain. The results are shown in Figure 2.

Figure 2. Survey participants’ view on sources of risks faced by their supply chain.

Interestingly, all the top six risks, with the exception of environmental catastrophes, are known-unknowns and controllable to some degree.

To What Parameters Are Supply Chain Operations Most Sensitive?

Respondents replied that their supply chain operations were most sensitive to skill set and expertise (31%), price of commodities (29%), and energy and oil (28%). See Figure 3.

As an example of the energy and oil parameter, according to the US Department of Energy Information Administration, US diesel prices rose 9.5 cents per gallon in February 2012. Cognizant of the sensitivity and impact diesel prices can have on their financial bottom line, shippers adjust their budgets to offset the increased costs higher fuel prices produce.

Figure 3. Parameters to which survey participants’ supply chain operations are most sensitive.

How Do Companies Mitigate Against Disruptions?

What kind of actions do our survey respondents currently take to reduce the exposure of their supply chain to potential disruptions or to mitigate the impact? Nissan had a well-thought-out and exercised business continuity plan ready to kick into action to facilitate a quick recovery. And indeed, 82 percent of respondents said they had business continuity plans ready. See Figure 4.

Figure 4. Actions companies take to mitigate supply chain risk.

The Supply Chain and Risk Management Maturity Framework

Strengthen Supply Chain and Risk Management

As Nissan illustrated, to reduce vulnerability and exposure to high-impact supply chain disruptions, companies need advanced capabilities along two dimensions: supply chain management and risk management. But how can they understand the maturity level of their capabilities in these areas before designing ways to strengthen them?

The Seven Supply Chain and Risk Enablers of Maturity

There are seven factors that enable stronger capabilities in both supply chain management and risk management. By matching their practices against these seven "enablers," companies can assess how mature or immature their capabilities are. This is the basis of our Supply Chain and Risk Management Maturity Model—an empirical framework that applies set questions across the seven enablers.

  1. Risk governance—the presence of appropriate risk management structures, processes, and culture.
  2. Flexibility and redundancy in product, network, and process architectures—having the right levels of flexibility and redundancy across the value chain to be able to absorb disruptions and adapt to change.
  3. Alignment between partners in the supply chain—strategic alignment on key value dimensions, identification of emerging patterns, and advancement toward higher value propositions.
  4. Upstream and downstream supply chain integration—information sharing, visibility, and collaboration with upstream and downstream supply chain partners.
  5. Alignment between internal business functions—alignment and the integration of activities between company value chain functions on a strategic, tactical, and operational level.
  6. Complexity management/rationalization—ability to standardize and simplify networks and processes, interfaces, product architectures, and product portfolios and operating models.
  7. Data, models, and analytics—development and use of intelligence and analytical capabilities to support supply chain and risk management functions.

According to our survey, companies consider alignment between partners in the supply chain as the most important factor in enabling risk reduction (60%). See Figure 5.

Internal and external process integration is also very important (49%) and (47%). Risk governance (44%) and network flexibility and redundancy (37%) are also being included in the mix. Finally, despite recent advances, data, models and analytics (28%), and complexity management/ rationalization (26%) are low on the priority list. As analytics continue to mature, this may change.

Figure 5. Survey participants’ view on which capability enabler they consider the most important.

Four Levels of Maturity in Supply Chain Operations and Risk Management

Supply chain operations and risk management processes go hand in hand and complement one another. At lower maturity levels, the processes are decoupled and stand alone, but at high maturity levels they are fully intertwined. For developing and deploying capabilities to manage supply chain risk effectively, a high level of supply chain sophistication is an absolute prerequisite. There are four levels of supply chain and risk management process maturity:

Level I: Functional supply chain management and ad hoc management of risk. Supply chains are organized functionally with a very low degree of integration. They are characterized by high duplication of activities, internally and externally disconnected processes, and an absence of coordinated efforts with suppliers and partners. Product design is performed independently and there is little visibility into partners/suppliers operations. Inventory and capacity levels are unbalanced, leading to poor customer service and high total costs. There is no risk governance structure and poor visibility into sources of supply chain risk. Only very limited vulnerability or threat analysis is performed. Risk is managed in an ad hoc way with no anticipation or positioning of response mechanisms.

Level II: Internal supply chain integration and positioning of planned buffers to absorb disruptions. Supply chains are cross-functionally organized. Internal processes are integrated, information is shared, and visibility is provided between functions in a structured way. Resources are jointly managed and there is a higher level of alignment between performance objectives. Integrated planning is performed at strategic, tactical, and operational levels—leading to a single company plan. Risk management processes are documented and internally integrated. Basic threats and vulnerabilities are analyzed. Scenarios concerning the base integrated plan are conducted to position targeted buffers of capacity and inventory to absorb disruptions. Postponement or delayed differentiation product design principles are explored to improve response to changing demand patterns. There is minimum visibility, however, into emerging changes and patterns outside the company.

Level III: External supply chain collaboration and proactive risk response. Supply chains feature collaboration across the extended enterprise. Information sharing is extensive and visibility is high. Key activities such as product design or inventory management are integrated among supply chain partners. External input is incorporated into internal planning activities. Interfaces are standardized, and products and processes are rationalized to reduce complexity. Information sharing and visibility outside the company domain is exploited to set up sensors and predictors of change and variability to proactively position response mechanisms. Formal quantitative methodologies for risk management are introduced and sensitivity analysis is conducted. Suppliers and partners are monitored for resilience levels and business continuity plans are created.

Level IV: Dynamic supply chain adaptation and fully flexible response to risk. Companies are fully aligned with their supply chain partners on key value dimensions across the extended enterprise. Individual strategies and operations are guided by common objectives and fitness schemata. Supply chains are fully flexible to interact and adapt to complex dynamic environments. Emerging value chain patterns resulting from this interaction are probed and identified and higher value equilibrium points are achieved. At this level, the supply chain is often segmented to match multiple customer value propositions. Risk sensors and predictors are supported by real-time monitoring and analytics. Risk governance is formal but flexible. Full flexibility in the supply chain product, network, and process architecture and short supply chain transformation lead-times allow quick response and adaptability. Supplier segmentation is performed. Risk strategies are segmented based on supplier profiles and market-product combination characteristics.

Table 1 summarizes the criteria used as a basis for the questions and the maturity levels.

Table 1. Capability maturity classification model.

How Mature Are Company Capabilities?

The framework is a useful tool in evaluating each company’s capabilities. Importantly, according to our study, it shows that the majority of the companies surveyed have immature supply chain operations and risk management processes in place. See Figure 6.

Specifically, of the companies surveyed, only 41 percent were classified as having mature processes, based on their responses; 59 percent of companies have immature processes in place to effectively address incidents. Only a minority of companies (9 percent) are fully prepared to address potential challenges from supply chain disruptions in increasingly complex environments.

Figure 6. Companies classified by capability level.

Key Insights—More Mature Capabilities Lead to Better Operational Performance

Having assessed the maturity levels of the 209 companies in the survey, we then analyzed their business and operational performance indicators over the previous 12 months. Our aim was to understand the impact of disruptions on mature vs. immature companies.

The indicators cover a wide spectrum of company performance including profitability, efficiency, and service. Both the scale of the impact and the time it took to recover to prior or improved levels of performance were measured. These are the key insights from the 209 companies surveyed.

1. Supply chain disruptions have a significant impact on company business and financial performance.

To better understand the impact of disruptions[3], we assessed the performance of companies that faced at least three disruptive incidents over the previous 12 months. If performance indicators were negatively affected by 3 percent or higher, this was considered "significant impact." As Figure 7 illustrates, 54 percent said that sales revenue was negatively affected and 64 percent suffered a decline in their customer service levels. Across all the operational key performance parameters (KPIs) examined, at least 60 percent reported a 3 percent or higher loss of value. For example, in India’s textile industry, raw material costs rose by 6 percent due to India’s recent sharp currency fall, causing fabric prices to rise[4]. This currency volatility triggered a rise in total costs for fabric makers.

The importance of having mature capabilities in place to deal with supply chain disruptions is clear.

Figure 7. Percentage of companies that suffered a 3 percent or higher impact on their performance indicators as a result of supply chain disruptions in the previous 12 months.

2. Companies with mature supply chain and risk management processes are more resilient to disruptions than those with immature processes.

According to the survey results, companies with mature (maturity levels III & IV) supply chain and risk management processes are more resilient to disruptions than companies with immature (maturity levels I & II) processes. The more mature companies suffer lower impact and enjoy faster recovery.

Figure 8 shows the percentage of companies with more than three incidents that suffered an impact of 3 percent or higher on their performance as a result of supply chain disruptions in the previous 12 months.

Only 44 percent of the companies with mature processes suffered a 3 percent or more decline in their revenue compared to 57 percent with immature processes. The higher resilience trend for mature companies is common for all the KPIs examined. The difference is striking in key areas such as total supply chain cost, order fulfillment lead times and lead-time variability. These KPIs are among those most heavily impacted by supply chain disruptions, so mature companies gain a distinct advantage by investing in the proposed set of capabilities.

Figure 8. Performance of companies with mature vs. immature capabilities.

3. Mature companies that invest in supply chain flexibility are more resilient to disruption than mature companies that don’t.

Flexibility is critical to a company’s ability to adapt to change. A greater degree of flexibility allows companies to better respond to demand changes, labor strikes, technology changes, currency volatility, and volatile energy and oil prices. However, flexibility does not come free, and the higher the level of flexibility the more expensive it is to achieve. Similarly, achieving a higher level of service can be costly. It’s a difficult trade-off between the desire to minimize costs vs. investing in flexibility or increasing customer service levels.

We asked the respondents to identify the key supply chain value drivers for their leading customer value proposition. High customer service level (34 percent) and flexibility (27 percent) were cited as the top two drivers followed by cost minimization (22 percent) and efficient use of inventory (14 percent). See Figure 9.

Figure 9. Key supply chain value driver to match customer value proposition.

Two distinctive groups emerge from this response:

  • The cost-efficient group—mature companies that selected cost or efficiency as their key supply chain value driver.
  • The flexible-response group—mature companies that selected flexibility or customer service levels as their key supply chain value driver.

When we compared the performance resilience of these two groups, we learned that the flexible-response group fared significantly better. The performance of cost-efficient companies suffered more from the changes and disruptions in their supply chains, even though they possess mature capabilities in deploying their strategy. Mature companies investing in flexibility, responsiveness, and customer service demonstrate higher performance resilience compared to companies whose strategies emphasize cost and efficiency. Figure 10 highlights the major differences.

Figure 10. Performance of mature cost-efficient vs mature flexible-response companies.

Figure 10 also illustrates that the largest majority of cost-efficient companies (80 percent) face high variability in their supply chain lead times once a supply chain disruption takes place. This is interesting given that low variability is one of the key drivers of an efficient operating strategy.

4. Mature companies that invest in risk segmentation are more resilient to disruptions than mature companies that don’t.

Companies with different market value propositions prioritize different value dimensions in their supply chains. Today, companies often target different market segments and therefore have several customer value propositions. For example, one part of the product portfolio may emphasize price as the key differentiator while another emphasizes product innovation or product selection and availability.

We asked our survey respondents to identify the key value dimension of their leading customer value proposition. The top three choices were: quality (23 percent), innovation (14 percent), and price (14 percent). See Figure 11.

Figure 11. The key value dimension of the leading customer value proposition of survey participants.

Different value propositions—and the corresponding operating strategies—do not necessarily have the same risk profile. Value dimensions are not exposed to the same threats and vulnerabilities. As a result, the management of supply chain risk—exposure reduction and mitigation strategies—may need to vary significantly based on the value dimension.

Consider a value proposition emphasizing product innovation. The high speed of innovation, the corresponding lower forecast accuracy, the higher price risk, and the higher supply risk will essentially determine the type of strategy the company deploys with its supplier. If the price risk or supply risk is higher as a result of the speed of innovation then it is more likely that flexible risk-sharing contracts, rather than a buildup of inventory buffers is appropriate. Thus, risk strategies needs to be segmented according to the value driver.

We asked survey respondents whether they actively pursued risk strategy segmentation. Almost 60 percent do and 40 percent don’t. See Figure 12.

Figure 12. Percentage of companies that perform risk strategy segmentation.

We asked the 59 percent of companies that pursued risk segmentation, "What product differentiators do you use as a basis for risk strategy segmentation?" The top three choices were: strategic importance (56 percent), demand volatility (52 percent) and sales volume (45 percent). See Figure 13.

Figure 13. Key product differentiators for risk strategy segmentation.

Companies with mature capabilities were clustered into two main groups: those that perform risk strategy segmentation and those that don’t. We then compared the performance resilience to supply chain disruptions for both groups. We observed that mature companies investing in risk segmentation based on different value propositions demonstrated higher performance resilience than companies that did not invest in risk segmentation.

Figure 14 highlights the major difference between the two groups across operations and financial performance indicators. Of particular note is the sales revenue category. Only 32 percent of the mature companies that segment their risk management strategy were significantly impacted as a result of incidents that occurred. This compares to 70 percent of mature companies that don’t segment—a 38 percent difference!

Figure 14. Performance of companies based on risk strategy segmentation.

5. Companies with mature capabilities in supply chain management and risk management do better along all surveyed dimensions of operational and financial performance than immature companies.

We compared how company operations and financial performance differed between the mature and immature companies over the prior 12 months. As Figure 15 highlights, companies with mature capabilities in supply chain and risk management did better along all surveyed dimensions of operational and financial performance.

This finding suggests that there is a direct link between having mature supply chain and risk management capabilities and higher overall performance.

Figure 15. Business and financial performance difference between mature and immature companies.

The capability maturity evaluation will enable company executives to gain insight into the risk position and maturity of the company measured in terms of operations and financial performance.

Appendix A: Survey Demographics and Trends

The majority of the 209 survey participants are from Europe. Figure 16 illustrates the geographical distribution of survey participants according to where their headquarters are based.

Figure 16. Distribution of survey participants’ headquarters by region.

Figure 17. Distribution of survey participants by industry.

Figure 18. Distribution of survey participants by annual sales revenue based on 2011 reported sales revenues.

The majority of survey participants (64 percent) are manufacturing companies. See Figure 19.

Figure 19. Percentage of manufacturing vs. non-manufacturing survey companies.

A total of 83 percent of the participating companies have their manufacturing operations dispersed in multiple geographic regions while only 17 percent have them in the same region as their headquarters.

Figure 20. Distribution of companies by scale of operations globalization.

With 83 percent of the companies having operations across regions, we examined how the split of operations volume by regions compared with the split of their sales volume by region to get an indication of the use of regional vs. global operations strategies to meet demand. For the previous 12 months, we observed that sales vs. operation volumes per region were mostly aligned—indicating use of regional strategies by survey participants.

Figure 21. Comparison between manufacturing operations volume and sales volume by region.

This is a comparison between the current and the future operations volume in 2015 by region based on the expectation of survey participants. America’s operations remain constant. A 3 percent growth is shown for Asia and a corresponding 2 percent decline for Europe, indicating a shift of operations from Europe to Asia.

Figure 22. Comparison between current vs. future expected operations by volume.

Survey participants expect a drop in their sales volume in Europe by 2015 and an increase in sales volumes in most of other world regions with Asia, the Middle East, and Africa contributing the biggest part.

Figure 23. Comparison between current vs. future expected sales volumes by region.

Appendix B: Key Performance Indicator Definitions

The key operations[5] and financial performance indicators used in this study are described below:

Market value
The current market value of a company is the total number of shares outstanding multiplied by the current price of its shares. Recent research has shown that shareholder value can be significantly impacted by severe supply chain disruptions. An example is Mattel, the world’s largest toymaker, which had to issue a major product recall due to quality issues. Mattel’s stock price suffered a steep fall when the recall was announced in Q3 2007 and did not recover for many months.

Sales revenue
The revenues a company makes after the sale of its products. Supply chain disruptions or structural market shifts can impact a company’s ability to deliver the value proposition and lead to loss of sales volume and sales revenue.

Market share
The company’s sales over the period divided by the total sales of the industry over the same period. Loss of delivery capability or damaged brand image can lead to market-share loss, especially when the impact of a supply chain disruption is long-lasting.

Earnings before income and taxes margin
The earnings before interest and tax (EBIT) divided by total revenue. EBIT margin can provide an investor with a clearer view of a company’s core profitability.

Total supply chain cost
The sum of fixed and variable costs to perform the plan, source, make, and deliver functions for company products. Supply chain disruptions have an impact on total supply chain cost as a number of activities need to be expedited or redesigned across the various functions.

Supply chain asset utilization
Supply chain asset utilization is a measure of actual use of supply chain assets divided by the available use of these assets. Assets include both fixed and moving assets. Fixed assets enable direct product development, transformation, and delivery of a company’s products or services, as well as indirect support, and typically have greater than one year of service life. A disruption can directly impact the usability of assets and resources or cause their repositioning. As a result, the utilization of key assets and resources may deviate significantly from the set targets.

Inventory turns
Inventory turnover ratio measures the efficiency of inventory management. It reflects how many times average inventory was produced and sold during the period. A disruption or change may impact inventory efficiency either by introducing increased obsolescence or by changing inventory positioning and consumption plans.

Customer service levels
The probability that customer demand is met. The loss of delivery, customer communication, or customer service capability due to a supply chain disruption can impact customer service levels.

Order fulfillment lead time
The average actual lead times consistently achieved, from order receipt to order entry complete, order entry complete to start build, start build to order ready for shipment, order ready for shipment to customer receipt of order.

Total supply chain lead time
Total supply chain lead time in supply chain management is the time from the moment the customer places an order (the moment you learn of the requirement) to the moment the product is received by the customer. In the absence of finished goods or intermediate (work in progress) inventory, it is the time it takes to actually manufacture the order without any inventory other than raw materials. Supply chain disruptions can introduce significant delays across all stages of the supply chain.

Total supply chain lead-time variability
Total supply chain lead-time variability is the time variation around the total supply chain lead-time mean. Exposure to incident disruptions introduces variability and fluctuations in the standard lead-time levels within the supply chain.

About the Project Team

Professor David Simchi-Levi, MIT

Department of Civil and Environmental Engineering and the Engineering Systems Division, MIT

Professor David Simchi-Levi is considered to be one of the thought leaders in supply chain management. He holds a Ph.D. from Tel Aviv University. His research currently focuses on developing and implementing robust and efficient techniques for logistics and manufacturing systems. He has published widely in professional journals on both practical and theoretical aspects of logistics and supply chain management. He is also the editor-in-chief of Operations Research, the flagship journal of INFORMS, the Institute for Operations Research and the Management Sciences.

Ioannis M. Kyratzoglou

System Design and Management Fellow, Massachusetts Institute of Technology

Mr. Ioannis M. Kyratzoglou is a fellow at the MIT Sloan School of Management and the School of Engineering. He holds a master of science and a mechanical engineer’s degree from MIT. He is currently a principal software systems engineer with The MITRE Corporation. His interests are in software engineering and data analytics.

Constantine G. Vassiliadis

Principal Manager, PricewaterhouseCooper, The Netherlands

Dr. Constantine Vassiliadis holds a Ph.D. from Imperial College, London, in process systems engineering. He has been working as a consultant on supply chain improvement programs with companies worldwide for the past 15 years. In parallel, he is involved in supply chain research and thought leadership initiatives with leading academic institutions.


  1. Nissan Motor Company Ltd.: Building Operational Resiliency: William Schmidt, David Simchi-Levi, MIT Sloan Management: Case Number 13-150
  2. Operations Rules: Delivering Value Through Flexible Operations, David Simchi-Levi, 2010, The MIT Press.
  3. Information about disruption impacts is self-reported by survey participants.
  4., Fabric prices rise on weaker rupee, 5 September 2013
  5. David Simchi-Levi, Phil Kminsky, Edith Simchi-Levi (2008). Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies, 3rd Edition. McGraw-Hill Irwin