An empirical investigation into supply chain vulnerability

Abstract

A growing number of academicians and practitioners have put supply chain risks on their agendas, particularly triggered by a recent series of catastrophic events that have disrupted economies and supply chains around the globe. Given the increasing awareness of this important topic, the purpose of this research was to study supply chain risks in more detail and to investigate the relationship between supply chain vulnerability and supply chain risk. Responses from 760 executives from firms operating in Germany reveal that supply chain characteristics such as a firm's dependence on certain customers and suppliers, the degree of single sourcing, or reliance on global supply sources are relevant for a firm's exposure to supply chain risk. Overall, this research represents the first large-scale investigation of this important relationship and provides a finer understanding of the antecedents of supply chain vulnerability.

Introduction

In the past five years, a subject in the field of supply chain management research has gained considerable attention by both academicians and practitioners: supply chain risk management. The high regard that firms and researchers are paying to the topic is notably triggered by the frequency and intensity of catastrophes, disasters, and crises that seem to have increased on a global scale (Coleman, 2006; Helferich and Cook, 2002; Munich Re, 2006). The terrorist attacks on the World Trade Center on September 11, 2001, the SARS epidemic in South-East Asia in 2003, and the natural disaster of Hurricane Katrina in 2005 are three exemplary disasters and violent reminders that firms and their global supply chains operate in an unpredictable and increasingly uncertain environment. But not only these prominent “macro” events lead to costly supply chain disruptions. There is also a substantial body of recent literature that reports on events on the “supply chain level”, which resulted in serious problems for the involved firms (e.g., Latour, 2001; Norrman and Jansson, 2004; Sheffi, 2005). In Germany for instance, Robert Bosch GmbH, currently the world's largest auto-parts supplier, faced a severe supply chain disruption in January 2005. At that time, Bosch failed to detect a defect in the Teflon coating on a 1.5 cm small socket (worth only a few Euro-cents) that goes into some of its diesel injection pumps supplied to automotive OEMs such as Audi, BMW, and DaimlerChrysler. What makes this example noteworthy is that the socket was not produced by Bosch but by its US supplier Federal Mogul which in turn sources the Teflon from DuPont. Downstream the supply chain, the defect Teflon coating inside the diesel injection pumps resulted in a standstill of some of the OEMs’ assembly lines, a product recall of several thousand cars, consequential costs in the three digit million Euro area, and a negative impact on the brand image of Bosch and the involved OEMs (Wagner, 2006).

Based on a larger sample, Hendricks and Singhal, 2003, Hendricks and Singhal, 2005a, Hendricks and Singhal, 2005b underscore the relevance of supply chain disruptions by showing empirically that these events have a significant negative impact on shareholder value (2003, 2005a) and on operating performance (i.e., sales, operating income, return on assets) (2005b). In essence, it can be concluded from their research that capital markets severely penalise supply chain disruptions and attach high value to supply chain robustness. However, having a look at the current situation in business practice, the prevalent supply chain designs do not reflect this call for more robustness. In contrast, it seems that modern supply chains have become more prone to disruptions. Christopher and Lee (2004, p. 388) for instance argue that “the vulnerability of supply chains to disturbance or disruption has increased”. This is due to a combination of several factors and trends. In recent years, almost all industries have witnessed fiercer competition and accelerated globalisation of markets. This resulted in a massive pressure to make intrafirm and interfirm business processes more efficient and/or more responsive, for instance, by means of outsourcing and offshoring large portions of manufacturing and R&D activities, sourcing in low-cost countries, reducing inventories and slack, streamlining the supply base, and collaborating more intensively with other supply chain actors (Fisher, 1997; Hult et al., 2004). Often, the consequences of such initiatives are an increase in interfirm dependence as well as longer and more complex supply chain setups with globe-spanning operations which ultimately exacerbate the vulnerability of supply chains to unexpected events (Christopher and Peck, 2004; Harland et al., 2003; Hendricks and Singhal, 2005a; Tang, 2006a, Tang, 2006b). Thus, some scholars presume that modern supply chain management initiatives have great potential to make operations leaner and/or more agile in a stable environment but simultaneously amplify the fragility of supply chains, “that is, less able to deal with shocks and disruptions that can have a significant, if not catastrophic, impact on the firm” (Zsidisin et al., 2005b, p. 46). This is supported by findings of organisational scientists showing that due to their increasingly complex and technology-oriented processes, organisations are becoming more prone to disruptions (e.g., Grabowski and Roberts, 1997; Lin et al., 2006). This reasoning traces back to the socio-technological perspective of Perrow (1984) who proposed the Normal Accident Theory that holds the core hypothesis that in complex, tightly coupled technological systems accidents become inevitable, i.e. normal. Drawing from this theory, one could assume that the more complex the interactions and the tighter coupled the supply chain, the more prone the supply chain is to unexpected, untoward events.

Given this relevance, numerous proposals for best practices as well as guidelines for risk mitigation and business continuity planning that aim at ultimately creating secure, robust, and/or resilient supply chains have been published recently (e.g., Chopra and Sodhi, 2004; Lee and Wolfe, 2003; Martha and Subbakrishna, 2002; Rice and Caniato, 2003; Zsidisin et al., 2005b). In spite of their practical value, the vast majority of these contributions is of normative nature, anecdotal or case study-based. Results of large-scale empirical research on supply chain risk issues are scarce. In particular, current knowledge about the mechanisms and conditions that determine the vulnerability of supply chains and about the interaction of supply chain vulnerability and supply chain disruptions is quite limited. To the authors’ knowledge, only the event study-based contribution of Papadakis (2006) has attempted to shed empirically substantiated light on the vulnerability of supply chains by analysing and comparing the reaction of the stock performance of firms with make-to-order (MTO) supply chains and firms with make-to-forecast (MTF) supply chains after the 1999 earthquake in Taiwan.

A better understanding of how supply chain design effects supply chain risk exposure would enable supply chain managers to structure their supply chains in a way that they are in line with the firms’ willingness to take risks and hence would enable better supply chain design decision making. For instance, a firm that seeks to take advantage of economies of scale in its inbound supply chain by pursuing a single sourcing strategy concurrently might suffer from an increased negative impact of supply-side disruptions (e.g., supplier defaults). While this relationship might seem to be intuitively obvious at the first sight, it lacks empirically substantiated quantification.

By means of a large-scale survey, the objective of this research is to investigate the relationship between a set of supply chain characteristics—which are supposed to provoke the vulnerability of supply chains—and the impact on the performance from three classes of supply chain disruptions.

The rest of the article is organised as follows: In Section 2, we introduce the conceptual background of this study and put forward our model's underlying notions of the terms “supply chain risk”, “supply chain disruption”, and “supply chain vulnerability”. Moreover, the model and its hypotheses are developed by elaborating the relationship between supply chain vulnerability and supply chain risks. Section 3 describes the empirical study and the methodology used to test the hypothesised relationships. Section 4 presents the results of the study. Finally, Section 5 discusses the findings and Section 6 elaborates on the implications for managerial practice and future research.