Companies use MIT research to identify and respond to supply chain risks
Pinpointing risks can also help businesses save money as they become more resilient.
In February 2020, MIT professor David Simchi-Levi predicted the future. In an article in Harvard Business Review, he and his colleague warned that the new coronavirus outbreak would throttle supply chains and shutter tens of thousands of businesses across North America and Europe by mid-March.
For Simchi-Levi, who had developed new models of supply chain resiliency and advised major companies on how to best shield themselves from supply chain woes, the signs of disruption were plain to see. Two years later, the professor of engineering systems at the MIT Schwarzman College of Computing and the Department of Civil and Environmental Engineering, and director of the MIT Data Science Lab has found a “flood of interest” from companies anxious to apply his Risk Exposure Index (REI) research to identify and respond to hidden risks in their own supply chains.
His work on “stress tests” for critical supply chains and ways to guide global supply chain recovery were included in the 2022 Economic Report of the President presented to the U.S. Congress in April.
It is rare that data science research can influence policy at the highest levels, Simchi-Levi says, but his models reflect something that business needs now: a new world of continuing global crisis, without relying on historical precedent.
“What the last two years showed is that you cannot plan just based on what happened last year or the last two years,” Simchi-Levi says.
He recalled the famous quote, sometimes attributed to hockey great Wayne Gretzsky, that good players don’t skate to where the puck is, but where the puck is going to be. “We are not focusing on the state of the supply chain right now, but what may happen six weeks from now, eight weeks from now, to prepare ourselves today to prevent the problems of the future.”
Finding hidden risks
At the heart of REI is a mathematical model of the supply chain that focuses on potential failures at different supply chain nodes — a flood at a supplier’s factory, or a shortage of raw materials at another factory, for instance. By calculating variables such as “time-to-recover” (TTR), which measures how long it will take a particular node to be back at full function, and time-to-survive (TTS), which identifies the maximum duration that the supply chain can match supply with demand after a disruption, the model focuses on the impact of disruption on the supply chain, rather than the cause of disruption.
Even before the pandemic, catastrophic events such as the 2010 Iceland volcanic eruption and the 2011 Tohoku earthquake and tsunami in Japan were threatening these nodes. “For many years, companies from a variety of industries focused mostly on efficiency, cutting costs as much as possible, using strategies like outsourcing and offshoring,” Simchi-Levi says. “They were very successful doing this, but it has dramatically increased their exposure to risk.”
Using their model, Simchi-Levi and colleagues began working with Ford Motor Company in 2013 to improve the company’s supply chain resiliency. The partnership uncovered some surprising hidden risks.
To begin with, the researchers found out that Ford’s “strategic suppliers” — the nodes of the supply chain where the company spent large amount of money each year — had only moderate exposure to risk. Instead, the biggest risk “tended to come from tiny suppliers that provide Ford with components that cost about 10 cents,” says Simchi-Levi.
The analysis also found that risky suppliers are everywhere across the globe. “There is this idea that if you just move suppliers closer to market, to demand, to North America or to Mexico, you increase the resiliency of your supply chain. That is not supported by our data,” he says.
Rewards of resiliency
By creating a virtual representation, or “digital twin,” of the Ford supply chain, the researchers were able to test out strategies at each node to see what would increase supply chain resiliency. Should the company invest in more warehouses to store a key component? Should it shift production of a component to another factory?
Companies are sometimes reluctant to invest in supply chain resiliency, Simchi-Levi says, but the analysis isn’t just about risk. “It’s also going to help you identify savings opportunities. The company may be building a lot of misplaced, costly inventory, for instance, and our method helps them to identify these inefficiencies and cut costs.”
Since working with Ford, Simchi-Levi and colleagues have collaborated with many other companies, including a partnership with Accenture, to scale the REI technology to a variety of industries including high-tech, industrial equipment, home improvement retailers, fashion retailers, and consumer packaged goods.
Annette Clayton, the CEO of Schneider Electric North America and previously its chief supply chain officer, has worked with Simchi-Levi for 17 years. “When I first went to work for Schneider, I asked David and his team to help us look at resiliency and inventory positioning in order to make the best cost, delivery, flexibility, and speed trade-offs for the North American supply chain,” she says. “As the pandemic unfolded, the very learnings in supply chain resiliency we had worked on before became even more important and we partnered with David and his team again,”
“We have used TTR and TTS to determine places where we need to develop and duplicate supplier capability, from raw materials to assembled parts. We increased inventories where our time-to-recover because of extended logistics times exceeded our time-to-survive,” Clayton adds. “We have used TTR and TTS to prioritize our workload in supplier development, procurement and expanding our own manufacturing capacity.”
The REI approach can even be applied to an entire country’s economy, as the U.N. Office for Disaster Risk Reduction has done for developing countries such as Thailand in the wake of disastrous flooding in 2011.
Simchi-Levi and colleagues have been motivated by the pandemic to enhance the REI model with new features. “Because we have started collaborating with more companies, we have realized some interesting, company-specific business constraints,” he says, which are leading to more efficient ways of calculating hidden risk.
