Week 6

Exposure to negative consequences of uncertain events is called risk

• Buffering

• Pooling

• Contingency planning

• Crisis management

Maintaining excess resources (inventory, capacity, time) to cover for fluctuations in supply or demand.

Sharing buffers to cover multiple sources of variability (e.g., demand from different markets or production from different processes).

Establishing a preset course of action for an anticipated scenario. We can think of this as “virtual buffering,” because it involves securing buffers only when needed, rather than holding them continuously in advance

Generating responses to events for which buffers (individual or pooled) and contingency plans are inadequate. This is the last line of defense and so constitutes a default option; if the above proactive strategies are not used, reactive crisis management will be needed. The challenge is to do it well, rather than badly.

Pooling is the practice of combining multiple sources of variability to make extreme values less likely, which in turn reduces the total amount of buffering that is required

• Combining sources of variability so that they can share a common buffer reduces the total amount of buffering required to achieve a given level of performance

• “The capacity of a single 16-person lifeboat will be smaller than the total capacity of 16 single-person lifeboats capable of serving the same percent of the passenger population”

• The variability buffering law is very general and fundamentally simple. It is basically the law

• The magnitude of variability from the individual sources.

• The number of individual sources that can be combined

• Make use of (regional) distribution centers and keep stock there

• Can also be digital; if a product is not available in one store, it can be delivered to from a store that has the product

• Combination of a central distribution center and regional facilities is fairly traditional

• More components mean more fabrication and/or purchasing, more assembly, more inventories to maintain, and more complexity to manage

• The process of simplifying the components themselves so as to make them easier to manufacture and assemble, is termed design for manufacture.

• A general strategy for using a single type of inventory to meet pooled demand for multiple products is called postponement.

• The basic idea is to hold partially completed goods in a generic state and customize them only when demand becomes known

• It can reduce costs due to obsolete inventory and deliver variety with short lead times

• A common application of pooling, which is almost never referred to as pooling, is the use of cross-trained labor to staff multiple tasks. In unromantic technical terms, an operator is a source of capacity. If the worker can’t work (machine breakdown), the worker is idling

• If the worker can do multiple jobs it won’t be idling for long. The buffer capacity provided by a cross-trained worker is pooled between multiple task types

We can also pool capacity in the form of physical equipment

• Full flexibility on the part of the plants means that capacity is completely pooled. However, making the plants flexible enough to produce every type of car will require a significant investment in tooling, so this solution is apt to be very expensive, if it is even feasible.

• With option B, the elimination of just one link in the chain severely limits the overall flexibility of the system and thus significantly reduces its ability to respond to fluctuations in demand or disruptions in production

• A Multinational diversification

• A simpler hedging strategy than multinational diversification is business disruption insurance. Such policies are explicitly written to pay out when events result in costly supply chain disruptions

A contingency plan is a strategy for securing buffer resources if and when they are needed.

• Anticipate an event or class of events for which a contingency plan is needed.

• Design the plan to be implemented if the anticipated event occurs

• Prepare the organization to implement the plan

• Execute the plan if and when the event occurs

• Update the plan over time

• Scanning failures—a threat or event is not detected due to inadequate resources or lack of organizational attention.

• Information failures—data are available to identify a threat and formulate a response, but the organization fails to assemble the various pieces of data into a useful body of information.

• Incentive failures—the organization fails to act on available insight due to a lack of incentive.

• Learning failures—lessons from previous events are not adequately distilled and disseminated to the right people in the organization

represent resources that become available to the organization on an as-needed basis during an event

• Flexible supply contracts:

• Multisourcing

• Reserve shipping capacity

• Temporary workers

Developing a plan in real-time while the event is unfolding

• Anticipate the needs of the organization during an event

• Prepare the organization to act in the event of a crisis

• Design the response to the crisis.

• Execute the response

• Update capabilities over time.

• Flexibility refers to the ability of an organization to adapt to changing, possibly unfamiliar, conditions.

• Flexibility can be enhanced with speed and capacity buffers

• Encouragement for flexibility to employees help as well

Empowerment is the authorization of employees at all levels to make independent decisions.

Awareness is critical for an organization to detect and respond to an emerging crisis

• Make sure the internal communicator (e.g., vice president of public relations) is someone with authority and credibility.

• Prepare for crisis communication by gathering relevant information

• Avoid responding to inquiries with “no comment” and never assume that statements can be made “off the record.