A new MIT study upsets everything you thought you knew about supply chain. As it turns out, their research demonstrates that there is “no correlation between the total amount a manufacturer spends with a supplier and the profit loss it would incur if that supply were suddenly interrupted.” It seems that the supply firms who provide manufacturers with their lower cost components are the ones who can actually wreck the chain most when disruptions occur. Conventional reasoning is that highest risk comes from risks with the highest probability of occurring, but in actuality it is the risks with low probability and high impact that cause the most harm.
Applying a multitier supply network model to Ford, researchers found that a short disruption to 61 percent of tier 1 firms would not cause profit loss, whereas a halt in distribution to a mere 2 percent of firms would cause significant profit loss. That tiny 2 percent is what provides Ford with its cheaper components. This new understanding of risk analysis will help to cast light on places of the supply chain that were previously pitch black, so stay tuned for more emerging information as MIT researchers soon publish the full study.