The encyclopedia · Strategy & Leadership · Operational decision · 2011–2014
Ford ranked supply-chain risks by impact and won the 2014 Wagner Prize
The Risk Exposure Index scores each node's worst-case impact, no probabilities needed; Ford uses it daily.
Ford Motor Company
The solution
Supply-chain disruptions are low-probability, high-impact events. Without reliable probabilities, firms either waste resources over-mitigating risks that would do little damage or stay exposed to ones that would hurt badly.
Over a three-year engagement, MIT, Duke and Cornell researchers with Ford built the Risk Exposure Index: for every site in the supply chain, quantify the maximum financial and operational impact of a disruption, then prioritize. Ford's Decision Support System for Risk Management uses it daily for strategy, daily risk tracking and post-disruption response.
Deferring probabilities until after impact let Ford identify previously unrecognized risk exposures and evaluate pre-disruption mitigation and post-disruption contingency plans on the same measure. The work won the 2014 Daniel H. Wagner Prize and spread beyond automotive to telecommunications, pharmaceuticals and the UN's disaster-risk office.
Why it worked
- Impact-first ranking works even when probabilities are unknown
- Daily use embedded risk thinking in procurement
- Pre- and post-disruption plans came from the same model
What can be applied
You don't need probabilities to start managing disruption risk: measure worst-case impact per node first, then decide where mitigation pays.
Aftermath
The Risk Exposure Index was featured in Harvard Business Review and adopted by the UN Office for Disaster Risk Reduction, along with companies in telecom and pharma.
Sources
- Identifying Risks and Mitigating Disruptions in the Automotive Supply Chain
- Simchi-Levi and colleagues win INFORMS Daniel H. Wagner Prize for Excellence in Operations Research Practice
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