New Measures for Supply Chain Vulnerability: Characterizing the Issue of Friction in the Modelling and Practice of Procurement

Supply chains consist of readily recognizable linkages, often between commercially distinct organizations that must coordinate activities to ultimately meet customer demand. Such organizations are not necessarily bound by a central planner who can both determine and dictate what procurement policies are implemented across these inter-organizational links. In the absence of such coordination, each organization can be expected to resolve procurement and replenishment policies from a local perspective, passing the demands of such to its suppliers in a highly intuitive, pull-style fashion. While such policies may seem reasonable to all partners involved and may be the only solutions tolerable from a political perspective, there exists the possibility that the decentralized policies are operating at a combined cost substantially higher than that which could be achieved through global optimization. The purpose of this chapter is to define this vulnerability and to suggest methods for anticipating it, both in the simulation modelling of supply chains and in practice Efforts to characterize the vulnerability of inter-organizational links arguably predates the phrase 'supply chain'. As much of the early work on multi-stage inventory planning was being accomplished, Bowersox (1969) protested the inherent assumption of vertical integration in the formulation of many distribution problems, warning of inefficiencies that could arise in practice if, in fact, various stages represented distinct organizations. Working with small multi-stage networks, Schwarz & Schrage (1975) coined the phrase system myopic to identify policies in which inventory replenishment is planned locally, the connation of which implies potential weakness (the condition of near-sightedness) when conducted in a complex system. Nonetheless, supply chain literature has traditionally maintained what Otto & Kaab (2003) would later call the operations research perspective, relying heavily on the assumption that policies will be set by central decision-makers to optimize the performance of complex systems. The reality of inter-organizational dynamics in supply chain management has gained greater attention in recent years, highlighted in the taxonomy of Wang (1995) as a nexus of contract perspective on operations. The supply chain literature survey by Stadtler (2005) cited globally dispersed inter-organizational chains as a challenge central to this field. Disparities between centralized and decentralized procurement policies for specific instances are being