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Sources of Supply Chain Disruptions,

Factors that Breed Vulnerability, and


Mitigating Strategies

Kathryn E. Stecke*
and
Sanjay Kumar

University of Texas at Dallas


School of Management
Richardson, Texas

April 2006

* Corresponding author: kstecke@utdallas.edu


Sources of Supply Chain Disruptions,
Factors that Breed Vulnerability, and
Mitigating Strategies
During recent times, supply chain literature and industry practices have been devoted primarily
to increasing efficiency and reducing costs. This has resulted in supply chains that are efficient
during normal times, but at the cost of being vulnerable to disruptions. From time to time
frequent as well as rare catastrophes also disrupt supply chain operations.
In this paper we focus on developing robustness and mitigation abilities in supply chains.
In our examination of the literature, no previous work has yet examined catastrophes, prevalent
supply chain management practices, and mitigation strategies in such detail.
We collect and compile data from many sources and show that there has been a marked
increase in the frequency and economic losses from natural and man-made catastrophes. We find
that business losses constitute a major percentage of the total losses caused by these catastrophes.
Moreover, the statistics suggest that for terrorist attacks, the vulnerability of US business
interests is higher than others. Examination of the geographical and chronological distribution of
catastrophes provides useful information for managers concerned about such disruptions.
Mitigation planning is difficult because of the many types and severities of catastrophes.
We develop a catastrophe classification scheme that matches different types of catastrophes to a
variety of infrastructural components of supply chains. We also connect a variety of mitigating
strategies to appropriate catastrophe types. We identify current supply chain practices that have
the unfortunate consequence of increasing vulnerability. We also identify strategies to mitigate
the undesirable effects of these prevalent supply chain practices.
To manage vulnerability in supply chains, we propose strategies that can be implemented
by a company to decrease the possibility of occurrence, provide advance warning, cope, and
survive. We reveal potential benefits from mitigating strategies during normal times, which
indicates that well-developed strategies can result in better efficiency. We identify 16 future
research areas concerning disruption handling in supply chains.

1. Introduction
The frequency of natural and man-made catastrophes is increasing. In recent years the monetary
losses associated with catastrophes have also increased significantly. With an escalating threat of
terrorist attacks and changing geographical climatic conditions, catastrophes are expected to
occur more often in the future.
Frequent events such as snow storms, heavy rain, excessive wind, hurricanes, industrial and
road accidents, fires, strikes, and changes in government regulations regularly interrupt normal
operations in supply chains. Large catastrophes such as hurricane Katrina in 2005, Asian tsunami

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in 2004, September 11 attacks, Mad Cow disease in the UK in 2001, and the Taiwan earthquake
in 1999, although occurring rarely, can have severe consequences for companies far away from
the incident. The global spread of modern supply chain organizations can cause relatively small
disruptions to reach companies located far from the catastrophes.
The recent research and industry emphasis on supply chain management is devoted to
increasing efficiency and speed, which is motivated by the desire of businesses to compete cost
effectively in todays markets. This focus on efficiency has resulted in supply chains that are
more vulnerable to disruptions. Despite this, to our knowledge there is little literature related to
studying supply chain management practices during catastrophes. This research begins to fill this
void by identifying problems, strategies, and future research needs to increase supply chain
effectiveness during catastrophes.
After the 9/11 terrorist attacks, research has focused primarily on increased security measures
to reduce the occurrence of terrorist attacks and decrease supply chain disruptions (Rosoff and
von Winterfeldt, 2006; Sheffi, 2003; Rice and Caniato, 2003; and Lee and Wolfe, 2003).
However, security cannot eliminate the possibility of a terrorist attack or help avoid or manage
natural catastrophes. Therefore, in addition to catastrophe avoidance, supply chain managers also
need strategies and tactics for catastrophe mitigation.
We collected a large amount of data on catastrophe and economic losses from a wide variety
of sources to understand the effects of catastrophes on supply chains. The data sources include
research articles, Department of State, Center for Research on the Epidemiology of Disasters,
Federal Emergency Management Agency, US Department of Commerce, National Climate Data
Center, and National Counterterrorism Center. Data compilation reveals geographical and
chronological inferences on catastrophe concentrations and the need of mitigation strategies. The
findings from the data should help managers make robust decisions about location of facilities
and suppliers, transportation modes, contingency measures, inventory policies, and levels of
flexibility and redundancy. In Sections 2 and 3 we discuss these findings.
In Section 4, we identify 8 common supply chain practices, designed for greater efficiency,
that have the unfortunate consequence of increasing vulnerability. These practices should be re-
examined to allow supply chains to be both efficient and robust in a disruptions-prone
environment. Supply chains can be made robust by managing these vulnerability-causing
practices.

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Different catastrophes may have widely varying consequences for a supply chain. Managers
cannot anticipate all. Catastrophes affect a company by disrupting one or more of its components
such as labor, equipment, and communication. We propose a classification, presented in Table 2
and described in Section 5, which outlines the possible effects and their severity with which the
different supply chain components are affected by different catastrophes. This can help to
provide a greater understanding of causes and effects of disruptions.
We propose the most complete set of strategies to date to avoid or mitigate a wide variety of
catastrophes in Section 6. Popular literature lists a few mitigation strategies applicable to specific
types of industry. However, the strategies identified in this paper can be applied across industries
to help deal with many catastrophes. We identify proactive strategies that can help a company
avoid or decrease the possibility of certain types of disruptions. To gain benefits from advance
information, advance warning strategies that can help forecast a catastrophe are proposed.
Flexibility and redundancy in various supply chain components help define coping strategies to
help mitigate catastrophes. Survival strategies are also listed to aid companies to reduce losses
and duration of disruptions.
Some managers are aware of the vulnerability of their supply chain, but most are uncertain as
to how to manage the risk of disruptions. To help managers choose strategies appropriate for
mitigating disruptions in their organizations, we developed Tables 3 and 4. These identify the
appropriateness and effectiveness of various mitigation strategies to address catastrophe types
and diminish vulnerability from common practices.
Contrary to common belief that mitigation strategies are a source of cost and inefficiency, we
emphasize that well-developed strategies can actually increase efficiency. In particular, we
reveal some of their efficiency-improving effects.
Finally, Section 7 identifies 16 future research areas that should be addressed by researchers
and managers to encourage a robust supply chain. This paper focuses on manufacturing and
distribution. However, many of our findings can be applied to service industries as well.

2. Man-Made Catastrophes
Humans are an integral part of organizations and in many ways influence its operations. This
influence gives workers, managers, customers, and outsiders (i.e., terrorists, political parties,

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government) an ability to manipulate the operations of supply chains. In Sections 2.1 and 2.2, we
discuss potential disruptions caused by intentional and unintentional acts, respectively.

2.1 Intentional Acts


Disruptions in supply chains can be caused by conscious acts by a person or a group. Depending
on the intention, these acts can be classified as terrorist or non-terrorist. Terrorist attacks are
often intended to destroy while non-terrorist acts are not.

2.1.1 Non-Terrorist Intentional Acts


Labor strikes and management problems can have severe economic consequences. Recent
management manipulations by Enron and accounting scandals in WorldCom resulted not only in
their closure but also created disruptions for employees, customers, and suppliers dependent on
them. Most industries at some time have faced disruptions because of strikes within a company
by workers or general strikes outside the company by political parties. Examples from diverse
industries include the UK film industrys 36,000 actors in 2001, Bharat Petroleum Indias 30,000
workers in 2003, Vancouvers coastal forest industrys 8,000 workers in 2003, and Germanys
engineering and metalworkers union in 2003 that involved 8,000 workers.
Strikes in industries that provide utilities often result in disruptions in many dependent
industries. For example, the Royal postal strike (UK) in 2003 impacted many business
establishments. Specifically, small firms were hit the most because of their reliance on postal
services for invoices, contracts, legal forms, and checks. During a 2002 lockout of 29 west coast
ports for 10 days, the Fremont-based Toyota-GM NUMMI plant was shut down because it ran
out of parts (Monahan et al., 2003). The Pacific Maritime Association estimated that it would
take eight to ten weeks to clear the cargo that piled up for 10 days. Helferich and Cook (2002)
identified union strikes, lifestyle changes, government spending shifts, economic downturns,
competitive service improvements, hostile corporate takeovers, changes in operations
technology, and changing product technology as factors that originate from intentional human
acts that disrupt supply chains.
Although some of these non-terrorist intentional acts happen over time (lifestyle changes,
operational technology advancements), others such as strikes or management problems can
happen suddenly. In September 2000 in the UK, fuel prices rose sharply resulting in an impact
on almost every industry (Chapman et al., 2002). The event severely disrupted over 34% of the

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companies in the UK (Peck and Juttner, 2003). After 9/11, only 21% of companies suffered
severe disruptions. This suggests that relatively small, perhaps unintended disruptions in
common markets (fuel price rise) can cause greater disruptions in supply chains than dramatic
intentional acts such as 9/11.
Labor relations, employee motivation, customer relations, technology changes, and
government regulations are some areas that in isolation have been the focus of organizational
behavior, strategy management, and industrial psychology literature. However, the system-wide
effects of such disruptions in supply chains from an operations management perspective are
largely unexplored.

2.1.2 Terrorist Acts


In recent times, the world has seen a reduction in conflicts between countries for causes such as
territory and/or natural resources control. Unfortunately, simultaneously there has been an
increase in terrorism. In 1999, the Department of State designated 28 foreign organizations as
terrorist organizations. Since then the number has steadily increased to 40 in 2004.
Traditionally, terrorism was often seen as a political problem, whose analysis was outside the
domain of economists (Kurg and Reinmoeller, 2003). Recently, political economists studied
terrorism and its economic consequences. Some aspects of terrorism and the economy that have
been examined include terrorism and tourism (Pizam and Smith, 2000) and terrorism and trade
(Enders and Sanders, 2000).
Typical terrorist organizations of the past (before 1990s) operated in small areas, with little
influence outside their primary areas of operation. The actions of these organizations had little
impact on the economy (Deutch, 2002). In contrast, todays terrorist organizations do not limit
themselves to national boundaries. These organizations threaten the international community in
part in order to attract worldwide attention.
Terrorist attacks are not new, but viewing them as global economic catastrophes is. This has
happened because of globalization and increasing trade between countries. Even before 9/11,
industry was occasionally impacted by terrorist attacks. Examples include the Oklahoma City
bombings in 1995 and the Olympic park bombing in Atlanta in 1996. However, there was no
effect of these disruptions on the economy as a whole.

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Using statistics we analyze terrorist attacks worldwide and on US interest targets. Here we
define US interests as US residents, infrastructure (military, diplomat, government), and
industries that are partially or fully owned by US companies. Statistics shows that from 1991 to
2003 a startling 62% of the total attacks were on business interests (Figure 1). This indicates that
the vulnerability of businesses from terrorist attacks is more than that of all other types of targets
combined. Despite being the favorite terrorist targets, businesses have given disaster
preparedness a low priority (Helferich and Cook, 2002).
After 9/11, many businesses around the world and in the US responded to attacks by
increasing security around their premises and their transport carriers. The investments paid off.
In 2002 and 2003, attacks on business interests decreased considerably. See Figure 2. The total
number of attacks also decreased sharply in 2002 and 2003. See Figure 3.
Figure 2 presents an alarming scenario for the US. In 2003, of the total terrorist attacks
worldwide, 50% were on US interests. Moreover, from 1996 to 2001, the percent attacks on US
interests to total worldwide attacks increased steadily. The US is a highly preferred target for
terrorists. Since 2001, despite investing over $500 million on homeland security, the US remains
extremely vulnerable to terrorist attacks (Flynn, 2004). In 1996, for every 100 attacks on US
interests, 67 were on business interests. The percentage steadily increased to 94 in 2001. US
supply chains are highly vulnerable to terrorist attacks.
100%

90%
Others
80%
23%
No Data

70% Attack on Non-US


targets
Military
Percentage

60%
Attacks on US non-
50%
2% business interests
40% Attacks on US
business interests
Government Business 30%

4% 62% 20%

10%
Diplomat 0%

9% 1996 1997 1998 1999 2000 2001 2002 2003

Figure 1. Percentage attacks on various classes of targets Figure 2. Percentage attacks on US business interests to total attacks
from 1991 to 2003. on US interests.

For supply chains and residents, North America continues to be safe from terrorist attacks as
it suffered less than 1% (19/2439 =0.7%) of the total terrorist attacks that happened throughout
the world. See Table 1. However, with outsourcing and globalization, many modern supply
chains are spread throughout the world. This makes them susceptible to disruptions that can
happen anywhere. US supply chains are increasing outsourcing operations to Asia, which has
seen a many-fold increase in number of attacks from 1996 to 2003. See Table 1. In fact, since

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911, Asia is the only region which has not seen a significant decrease in number of attacks. The
information presented in Figures 1, 2, and 3 and Table 1 is compiled from terrorism data
published by the National Counterterrorism Center and 13 annual reports on Patters of Global
Terrorism published by the Department of State in the years 1991 through 2003.
Table 1. International terrorist attacks by region.

International terrorist attacks by region


Latin Middle North Western
Year Africa Asia Eurasia America East America Europe
1996 11 11 24 84 45 0 121
1997 11 21 42 128 37 13 52
1998 21 49 14 111 31 0 48
1999 53 72 35 122 26 2 85
2000 55 99 31 192 20 0 30
2001 33 68 3 201 29 4 17
2002 5 101 8 46 29 0 9
2003 4 70 2 53 37 0 24

700

600
Total number of attacks

500

400

300

200

100

0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Figure 3. Total numbers of attacks worldwide.

2.2 Accidents
Accidents are unintentional man-made catastrophes. Accidents, being related to equipment, tend
to happen in the proximity of industries, with the exception of transportation accidents. For
example, the big industrial catastrophes, Three Mile Island, Chernobyl, Union Carbide, Bhopal,
and Exxon Valdez, happened near industries.
More recently, a series of blackouts in the US, Italy, and the UK, caused by accidents at
power generating stations, revealed the vulnerability of supply chains to disruption in utilities.
For US industries, the blackout of August 2003 was the most disruptive event after 9/11 (Zwin,
2003). The automobile industry was paralyzed. More than 50 assembly plants operated by GM,
Ford Motor Co., and Daimler Chrysler were shut down by the blackout. Retail industry was
severely affected. Wal-Mart shuttered about 200 stores.

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During the 20th century, the number of technological and transport accidents that affected a
large population and resulted in declarations of emergency has increased from 1 per year in the
first 3 decades to 220 in the last decade. See Figure 4, which is a summary of large databases
maintained by the Center for Research on the Epidemiology of Disasters on various types of
accidents and economic losses from around the world. Along with the count the resulting
economic damages have also increased many-fold. Over the years industrial systems have
increased in number. With advancements in technology, the complexity of industrial systems
increases, which in turn increases the potential for breakdowns (Perrow, 1984). These statistics
suggest that economic losses from accidents are relatively recent and large in magnitude. Supply
chains must effectively cope with disruptions whether they be intentional or accidental.
250 1
0.9

Damage in billion US dollars


200 0.8
Number of accidents

0.7
Average yearly
150 0.6
accidents
0.5
Average yearly
100 0.4 losses
0.3
50 0.2
0.1
0 0
0

0
19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

19 99

00
-1

-1

-1

-1

-1

-1

-1

-1

-1

-2
01

11

21

31

41

51

61

71

81

91
19

Figure 4. Average yearly accidents and the yearly damage caused.

3. Natural Calamities
Natural catastrophes have always been a threat for humans and their property. In the US, heat,
tropical storms, floods, severe weather, blizzards, wild fires, and ice storms cause over 90% of
the total economic losses from natural catastrophes (Ross, 2003). Early natural catastrophes
(before the 1990s) had strong regional but relatively limited global effects. Recently,
catastrophes such as Katrina, Asian tsunami, SARS, and Bird Flu resulted in severe global
economic consequences.
For example, SARS disrupted electronics supply chains worldwide. It caused huge economic
damages in the Asia-Pacific region. Ironically, because of trade and travel restrictions, Australia,
with no diagnosed case of SARS, suffered an estimated loss of $1 billion (OMalley, 2003).
Similarly, Bird Flu is creating disruptions for food and travel industries. The Taiwan earthquake

8
in 1999 disrupted the global electronics industry. The disruptions in Taiwan, which fabricates
over 50% of the worlds computer memory chips, resulted in an estimated 5% loss in earnings
for manufacturers such as HP, Dell, Apple, IBM, Gateway, and Compaq (Monahan et al., 2003).
Increase in population and infrastructure have placed more humans and economic interests at
risk. For example, according to the US Census Bureau, the population of coastal areas in Florida,
which are highly vulnerable to hurricanes and tropical storms, has increased from one million in
1940 to over 10 million in 1990. At present in the US, about 36 million people live on the
hurricane-prone coast line. In 2010, the population in these areas is expected to rise to 73 million
(Helferich and Cook, 2002). Similarly, in many earthquake-prone areas such as San Francisco
and Tokyo, population has increased steadily. UN Secretary General Dr. Annan says, A wide
variation in the number and intensity of natural hazards is normal and to be expected. What we
have witnessed over the past decades, however, is not natures variation but a clear upward trend
caused by human activities. There were three times as many great natural disasters in the 1990s
as in the 1960s, while disaster costs increased more than nine-fold in the same period.
In contrast to the increasing trend for natural catastrophes, from 1940 to 1960, the US
suffered 18 major hurricanes. Surprisingly, for the next 30 years (between 1960 and 1990), only
one major hurricane struck the US coastline. However, natural phenomena are cyclic (Helferich
and Cook, 2002). A possible return of active hurricane seasons, along with increased population
along the coast, provides conditions that may result in severe natural disasters. Pielke and
Landsea (1998) state that it is only a matter of time before the nation experiences a $50 billion
or greater storm, with multi-billion dollar losses becoming increasingly more frequent.
Hurricanes Katrina and Rita showed that the damages can be far beyond Pielke and Landseas
estimation. In the last 100 years, the frequency of natural catastrophes reported has increased
over 40-fold. See Figure 5, which is compiled from data on natural catastrophes maintained by
the Center for Research on the Epidemiology of Disasters. During the same period, the economic
damages have also increased considerably.
The increasing trend in number and damages is much more prominent in the last quarter of
the 20th century. Shaw (1994) estimated the economic damages from an earthquake in Tokyo, of
a magnitude similar to the Great Kento earthquake of 1923, to be over $1.2 trillion. In the Tokyo
geographical area, a large earthquake is expected about every 60 years (Skidmore and Toya,

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2002). Similarly, an anticipated earthquake in the San Francisco area, of the magnitude of the
Kobe earthquake, can cause damage of over $150 billion (Helferich and Cook, 2002).
Number of natural catastrophes

Damage in billion US dollars


350 70
300 60
250 50 Average yearly
200 40 natural
catastrophes
150 30 Average yearly
100 20 losses
50 10
0 0
11 10

21 20

31 30

41 40

51 50

61 60

71 70

81 80

91 90

0
00
19 -19

19 -19

19 -19

19 -19

19 -19

19 -19
19 -19

19 -19

19 -19
-2
01
19

Figure 5. Average natural catastrophes reported and the yearly economic losses caused.
US supply chains faced a greater threat from disasters in the 1990s than in the eighties. In the
nineties, both the numbers of disasters, as well as those resulting in losses of over a billion
dollars, were considerably higher (see Figures 6 and 7). This information came from Ross (2003)
and various publications from the US Department of Commerce, National Climate Date Center,
and Federal Emergency Management Agency. The billion dollar catastrophes increased over
300%. The locations of natural catastrophes depend primarily on the geography of the region.
For example, Asia is more prone to earthquakes than Europe (Jones, 1981). Similarly, most
hurricanes occur between the latitudes of 30 degrees North and South, but not within 5 degrees
of the equator (Alexander, 1993).
80
7
70
.

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To ta l d isa ste rs re p o rte d in th e U S

Number of billion dollar disasters

60
5
50

4
40

3
30

20 2

10 1

0 0
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Figure 6. Total natural disasters in the US. Figure 7. Total number of disasters in the US with
economic losses exceeding one billion dollars.
Widespread geographic human presence has increased the possibility for a natural
catastrophe to cause human and economic losses. Therefore, in the present world, a natural
disaster such as a snowstorm has greater chance of impacting a supply chain as it may disrupt
transportation routes. The increasing number of natural catastrophes and the resulting economic
losses calls for focus on better preparedness and proper contingency planning for supply chains.

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4. Factors that Breed Vulnerability in a Supply Chain
Traditionally, supply chain designs primarily focus on cost efficiency (Nahmias, 2005). Also,
supply chains and business practices are designed for a stable world (Monahan et al., 2003). This
has resulted in supply chains that are vulnerable to disruptions. In this section, we identify
common business practices and the present business realities that contribute to supply chain
vulnerability.
Globalization. Offshore sourcing, manufacturing, and assembly extend the reach of supply
chains, making them global (Peck et al., 2003). With more countries open for trade, coupled with
advancements in transportation and information technology, globalization is a common business
practice.
Globalization provides strategic cost and expertise advantages. However, global presence
comes at a cost. Global organizations are often excessively dependent on transportation, the
political situation, and the graphical environment of the constituent organizations. A catastrophe,
such as an earthquake or a terrorist attack in Asia, has a potential to interrupt supply chains in the
US.
Decentralization. To achieve economies of scale, some production facilities use decentralized
production, with companies focusing on specific product(s) as opposed to a larger range of
products. This has resulted in factories producing larger numbers of fewer products for a large
customer base, which in turn requires a product to travel large distances (often across borders).
For example, electronics chips that are made in US, are shipped to Asia to be assembled into
various electronics devices, and return to US markets in final products.
For facilities separated by large distances, coordination may not be as easy as for facilities
that are situated close together. Furthermore, a focused factory producing components for a
variety of final products can be a reason for disruptions in many supply chains. For example, a
disruption at a computer chip manufacturer can cause disruptions in supply chains, such as
computers, phones, home appliances, TVs, and others. Focused production also reduces
flexibility to react to disruptions.
Outsourcing. A recent trend is to outsource activities that were previously conducted within the
organization (Peck et al., 2003). Outsourcing, globalization, and decentralization are interlinked
supply chain practices. By outsourcing, organizations motivate decentralization, while

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globalization provides options for the outsourced operation to be sourced globally. Outsourcing
increases the number of external disruption points for a supply chain. For example, overseas
shipments may pass through as many as 11 middle-men (Monahan et al., 2003), which greatly
increases the risk of disruption. Outsourcing makes it harder for a company to foresee a brewing
glitch in the supply chain (Murphy, 1999). Furthermore, when compared to in-land suppliers, an
overseas supplier may have a longer lead time and greater security concerns. Outsourcing may
lead to loss of cross-functional skills of the outsourced operation, which reduces the ability to
react to disruptions.
Reduced number of suppliers. Over the last decade, there has been a dramatic decrease in the
number of suppliers (Peck and Juttner, 2003) from whom an organization procures raw
materials, components, and/or subassemblies. A limited number of suppliers ensures that an
order size is larger (than an order when there are more suppliers). Thus a firm can often enjoy
lower prices. During normal production, cost advantages and efficiency is realized. However,
using very few suppliers can create a dependence on supplier(s). In November 1998, Hurricane
Mitch destroyed 10% of the worlds banana plantations in Honduras, Guatemala, and Nicaragua,
including one quarter of Doles banana plantation. A greater dependence of Dole on these
plantations interrupted its supply chain for more than a year. In the fourth quarter of that year
Dole suffered a 4% decline in revenue (Martha and Subbakrishna, 2002).
Business risks, such as bankruptcy, can also disrupt an organization that relies excessively on
a single supplier. For example, UPF Thompson became insolvent at the end of 2001. The impact
on Land Rover, which had UPF as its only supplier of chassis, was sudden and severe as it had to
lay off 1,400 workers at its Solihull UK plant (Chapman et al., 2002). Thus, disruption at the
supplier has the inherent potential to disrupt other members of the chain.
JIT. JIT and lean inventories have intuitive economic rationale. Over the past decade, the US
auto industry, by using JIT, has saved an estimated $1 billion a year in inventory carrying costs
(Martha and Vratimos, 2002). Along with reduction in inventories, JIT management practices
helps in improving the quality of output (Alles et al., 2000). However, the savings has a cost of
making a supply chain vulnerable to disruptions. Buffer inventories, which provide supply chains
an ability to absorb unusual system disturbances, are minimum in a JIT inventory management
system. If a company zealously go after efficiency and be lean, having less inventory, and

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just-in-time manufacturing, then I think it is definitely more vulnerable to the major disruptions
that can be man-made or natural (Lee, 2001).
During the weeks following 9/11, organizations using JIT inventory management techniques
faced severe disruptions and loss of production. This resulted in researchers and practitioners
questioning the validity and effectiveness of JIT in the present disruptions-prone environment.
Complexity. Todays supply chains are not a linear chain of companies, but a complex web of
companies. In order to achieve efficiency, the increasing complexity of products is motivating
supply chains to transform into systems that are decentralized (to achieve expertise and
efficiency) and use global sourcing. For example, electronic products such as computers use
thousands of components. These components may come from hundreds of suppliers, from all
over the world. A small disturbance in any one of these suppliers may stop the final product from
reaching customers.
Reduced lead times. Increased customer expectations for faster delivery along with industrys
desire to reduce inventory has resulted in reduced lead times. Lead time includes slack, which
provides a hidden flexibility to absorb disruptions. Reducing lead time may reduce slack,
thereby increasing the possibility of a disruption to affect subsequent stages of a supply chain.
Legislation. Recent Homeland Security measures such as Customs-Trade Partnership Against
Terrorism (C-TPAT), Container Security Initiative (CSI), and the 24 hour manifest rule have
served to introduce additional stages, transactions, lead time, lead time variability, and
uncertainty into supply chains.
In todays business environment, companies are working together to create innovative ways
in sourcing, transportation, inventory, and demand planning. Supply chains have been driven
over the years to increase productivity, remove redundancy, minimize waste, and continuously
lower costs. This has resulted in an inverse relationship between efficiency and resiliency.

5. Catastrophe Classification
For a supply chain, not all catastrophes pose the same type or amount of risk. For example, a
biological attack can have the severe consequence of inducing large human losses, while an
attack on transportation may affect supplies. However, different catastrophes (for example, a
hurricane and an earthquake) may have similar consequences for a supply chain. It may be
difficult for companies to plan for every type of catastrophe. Therefore, classifying catastrophes

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may ease the planning for catastrophe coping strategies. Our classification below can also help to
identify areas within a company that should be focused on to mitigate disruptions.
A catastrophe disrupts a supply chain by affecting one or more of its components.
Components internal to an organization, such as equipment and facilities that are typically
owned by organizations, may remain unaffected by an external catastrophe (a catastrophe that
does not affect the premises of the organization). External components, i.e., supplies,
transportation, labor, utilities, communication, laws/regulations, and finance/banks, are typically
affected by catastrophes that happen outside of an organization. In contrast, an internal
catastrophe, such as fire and small industrial accidents, may affect internal components only. In
Figure 8, internal components are represented inside the boxes denoting various stages of a
supply chain. External components are shown by arrows.
Communication

Communication

Communication
Communication
Utilities

Utilities

Utilities

Utilities
Labor

Labor

Labor
Labor

SUPPLIER MANUFACTURER DISTRIBUTOR CUSTOMER


Raw Material Equipment Value Added Equipment Value Added Equipment Value Added Equipment
Transportation Transportation Transportation Transportation Raw Material
Facilities Facilities Facilities Facilities Transportation
Laws/Regulation

Laws/Regulation
Laws/Regulation

Laws/Regulation
Finance/Banks

Finance/Banks
Finance/Banks

Finance/Banks

Figure 8. Components at Various Stages of a Supply Chain.

In Table 2, we identify the severity and possibility of effects on components resulting from
various classes of catastrophes. The severity and possibility corresponds to how much and
how likely a catastrophe might affect a component. The table can help managers and planners
identify the vulnerability of various components in the event of a specific catastrophe. It is
important for managers to focus on mitigating catastrophes that have a high possibility and
severity of affecting critical components. For example, for a call center, communication links
could be very critical for their operations. Table 2 shows that terrorist attacks on infrastructure,
cyber terrorism, and infrastructure destruction by a natural catastrophe have a high possibility as
well as severity of disrupting communication media. Thus, a call center may benefit by adopting
migration strategies that alleviate the effect of these three types of catastrophes.
For a supply chain, the threat posed by a catastrophe depends on factors such as industry,
geographic location, political situation, culture, location of suppliers and customers, economy,

14
and the crises preparedness. Depending on these factors, the entries in Table 2 may vary for
different companies. Our table depicts a typical manufacturing oriented supply chain.
Table 2. Severity and Possibility of Effects of a Catastrophe.
Transportation Utilities Commu- Suppliers Custo- Labor Laws Finance
nication mers

Possibility

Possibility

Possibility

Possibility

Possibility

Possibility

Possibility

Possibility
Severity

Severity

Severity

Severity

Severity

Severity

Severity

Severity
Classification of
Catastrophes Examples
Attack on Infrastructure Power and communication
M M H H H H L M L M L L L L L L
services
Public services, i.e., hotels,
L L L L L L L L M M M M L L L L
banks, and distribution services
Violence, Mass Killing, Bombing public places
M M L L L L L L H L H L M L L L
Ethnic Killing
Biological, Chemical, Sarin gas, anthrax
Terrorist

H H H M H M H H H H H H H H H H
and Nuclear Terrorism
Hoax or Propaganda Bombing
H L H M L L M M H L H L M L M L
Intended to Terrorize
Political Assassination H L L L L L L L L L H M H H L L
Sabotage of Airplane bombing/hijacking,
Transportation Media pirates, train derailment, H H L L L L H L H L M L M L L L
bombing airplane/rail terminals
Cyber Terrorism Computer viruses H L H H H H H L H L L L H L L L
War Gulf war H L L L L L H L H L L L H M L L
Infrastructure Destruction Earthquakes, hurricanes, floods H H H H H H H L H L H H H L H M
Transportation Dust storms, blizzards, storms,
Disruption snow, hail, rain, avalanches, H H M L L L H L H L M L L L L L
Natural

winds, erosion, landslide


Health Hazard Epidemic, famine L L H L L L H M H M H H H L L L
Extreme Weather Cold wave, extreme temperature H L M L L L M L M L H L L M L L
Natural Fires Eruption, volcano, forest fires H L H L M L H L H L M L L L L L
Industrial Accidents Gas leakage M H M L M L H L H L H H M H L L
Acci-
dent

Transport Accidents Train derailment, airplane crash H H M L L L H L H L M L L L L L


Strikes Workers strikes L L L L L L L L L L H H H L L L
terrorist

Political strikes H H H L H L H M H M H H H L L L
Non-

Environmental Changes in government


spending, lifestyle, L L H L M L H L H L L L H L M L
manufacturing technology.

Severity and Possibility: High (H), Medium (M), or Low (L)

Besides severity and possibility of effects on components, various other useful classification
schemes can be devised. Preparation time, i.e., the time between the forecast or awareness and
the occurrence of a catastrophe could be important in mitigation planning. A hurricane can be
forecast, to a certain degree of accuracy, days in advance. However, earthquakes do not give
preparation time. The length of disruption is another important factor that is critical for supply
chains. Sheffi (2002) classified disruptions from catastrophes based on supply chain failure
modes. He considered disruptions in supply, transportation, facilities, communications, demand,
and freight breaches as possible modes of failure.

6. Catastrophe Mitigation
Managers should investigate ways to manage their companies in the event of catastrophes. A
challenge is to find economically viable ways to reduce vulnerability. A company or stage of a

15
supply chain is susceptible to disruptions by not only the catastrophes that affect their own
assets, but also those that affect their suppliers, customers, transport network, and utilities.
Therefore, planning should encompass the entire supply chain.
Mitroff and Alpaslan (2003) analyzed crisis readiness of Fortune 500 companies over the
past two decades. They found that during most of this time, only 5 to 25% of the companies were
prepared for crises. At times, 95% of Fortune 500 companies were not equipped to manage an
unfamiliar crisis, i.e., one that the company has not experienced before.
Planning for robustness requires identification of critical components that a company is
excessively dependent on, or those that, if disrupted, can have a severe impact on supply chain
performance. What if analyses and supply chain drills that simulate various catastrophic
scenarios can help identify critical components. Intel performs drills to identify the components
and activities that would cause death for the company, if they were disrupted (Lund, 2002).
Monahan et al. (2003) identifies the following characteristics of a vulnerable component: a
bottleneck that other processes depend on; a high degree of concentration of information flow;
single or scarcity of suppliers; limited alternatives; association with high risk geographic areas;
and insecure access to important infrastructure.
In this section we identify strategies that can help make supply chain components robust.
Sections 6.1 through 6.4 identify mitigating strategies. In Section 6.5 we discuss cost-benefit
tradeoffs in implementing mitigating strategies.

6.1 Proactive Strategies


Feasibility and cost permitting, it is in the best interest of an organization to choose strategies
that make supply chain components unaffected by any or many catastrophe(s). This section
identifies such proactive strategies, which are decisions/plans/actions that are aimed towards
reducing the vulnerability and probability of disruptions. Proactive strategies are implemented
prior to having information (forecast) of a catastrophe. Decisions made after a forecast are
reactive strategies, which we identify in Sections 6.3 and 6.4. Well-developed and implemented
proactive strategies can reduce the need of mitigating strategies discussed in Sections 6.2 through
6.4.
Locate facilities at safe locations. Catastrophes are not evenly distributed across geographical
regions and countries. For example, the frequency of hurricanes and earthquakes varies across

16
geographical regions. Similarly, terrorist attacks occur more in some countries than others.
Therefore, risk of disruption can be considerably reduced by choosing locations that are less
susceptible to catastrophes. As noted in Section 2, US owned companies face a higher risk of
terrorist attacks outside the country. Therefore, it might be advantageous for companies to sell or
lease their vulnerable overseas assets to local companies (Simchi-Levi et al., 2001).
Selection of a plant or business location should use models that can consider risks while
comparing potential locations. Risk assessment can be made by considering both the past history
of catastrophes and the potential for future terrorist attacks and natural calamities. Besides
geographic location and country, other factors such as ownership, symbolic importance, type of
construction, neighbors, government, community, and economic situation affect the probability
of a catastrophe.
Moreover, with time either the vulnerability or the preference level of a location can change.
After the 1993 World Trade Center bombings, Morgan Stanley realized the risks associated in
having offices in such symbolic buildings. The company moved its offices to several locations
outside the towers. The strategic decision paid returns on September 11, 2001.
Choose suppliers located at safe locations. Disruptions at supplier operations have the
potential to disrupt the entire supply chain. Therefore choosing a supplier that is located at a safe
location can considerably reduce the probability of disruption.
Choose a robust supplier. A supplier that is well-prepared to cope with catastrophes can reduce
the vulnerability of the entire chain. Many auto manufacturers such as GM help their suppliers
develop certain strategies to mitigate disruptions. Past performance of suppliers during
catastrophes can be used as an indicator of their reliability and robustness.
Robust transportation. Often transportation is the most vulnerable part of a supply chain. A
transport network, in general, is not secure and is extensively dispersed. Selecting a transport
company that has the ability to handle disruptions can provide stability to companies during
catastrophes. In Sections 6.2 and 6.3, we identify desired abilities that can help make
transportation robust.
Establish secure communication links. A key to efficient supply chain operation can be
communication. With globalization, outsourcing, and widespread applications of computers, the
use of communication links has increased. Reliable and robust service providers can be used for

17
telephone, internet, and wireless communication. For large companies, buying personal satellite
communication channels may be the most secure option.
Enforce security. Security can help prevent some intentional man-made catastrophes. Physical
security can prevent pilferage, leaking of sensitive documents, and disruptions at a plant by
terrorists. Information security can prevent cyber attacks by hackers, computer viruses,
accounting scandals, and unauthorized access to communication media. Ensuring freight security
with measures such as CT-PAT certification, and development of tracking and anti-tampering
technologies can considerably reduce the threat of terrorist attacks and delays at customs and
entry points at borders. Technologies such as e-seals, radio frequency identification tags on
containers, and global positioning systems can help in achieving this aim.
Terrorists are well aware of the increasing security measures and can use smart and
innovative ways to reduce the effectiveness of advanced security devices. Therefore vigilance by
company employees, dock workers, and pedestrians is desirable.
Efficient human resource management. Understanding employees can have huge returns for a
company. For example, background information can prevent the hiring of workers that have a
wrong type of criminal background. Moreover such information can be used for assigning
critical and sensitive responsibilities. Worker training programs should not only focus on
increasing efficiency but also make it harder for anomalies and violations to occur. Coutu (2002)
emphasized worker resilience as a determining factor in their performance during catastrophes.
Finally, a close understanding and relationship with workers can help avoid strikes and
production stoppages.

6.2 Advance Warning Strategies


An advance warning or forecast of a catastrophe can provide a company valuable preparation
time to align its capabilities to minimize disruption effects. Prior information may allow
complete prevention of a disruption. For example, a hurricane forecast provides preparation time,
which helps reduces the loss of life and property. The goal of an early identification of potential
catastrophes requires foresight on the working environment, i.e., supplier, market, inventories,
competitors, laws, and transportation. It also requires constant monitoring of the geographical
environment.

18
Besides better catastrophe mitigation ability, foresight can provide strategic advantages. In
2000, by watching their supplier processes, Nokia increased its market share by 4%. Philips, a
chip manufacturer, suffered a fire in its Mexico plant. Both Nokia and Ericsson relied on Philips
as the only supplier for their cell phone chips. Nokia, anticipating the potential disruption,
responded fast to contact Philips to use its alternate facilities to meet Nokias demand. Ericsson
was late. All available capacity of Philips was taken by Nokia. Consequently, Ericsson reported a
loss of $1.8 from the shortage of chips (Chopra and Sodhi, 2004).
Enhance visibility and coordination in a supply chain. Organizations in a supply chain are
vulnerable to catastrophes that can affect any stage of a supply chain. Vertical coordination can
help prevent a catastrophe from disrupting multiple stages. Sharing information such as demand,
production processes, inventory levels (excess, shortage), and processing capacities can help
companies anticipate a brewing problem at a supplier or customer that may affect them.
Horizontal coordination can also allow companies (even competitors) to forecast disruptions
such as a change in law, shifting customer preferences, and changes in technology.
Many vendors, such as I2, Manugistics, ViewVelocity, and Celarix offer specialized software
to enable extensive visibility across a supply chain. Such software provides information about
goods location, inventory status, production processes, and other internal systems such as ERP
applications. For example, eHub, developed by Cisco, provides links between multiple layers of
a supply chain. It keeps supply chain organizations up to date on potential supply shortages,
capacity limitations, or other disruptions (Lee and Wolfe, 2003).
Increase transportation visibility. It may not be possible to prevent transportation catastrophes
such as border closings, highway closings, truck breakdowns, and transportation sabotage by
terrorists. However, prompt information about such disruptions can allow managers to prepare
supply chains in a better way, thereby avoiding disruptions at their facilities. For example,
transportation vehicles can be rerouted through alternate routes, orders at other suppliers for
which transportation routes are undisrupted can be increased, and orders can be expedited.
Monitor weather forecasts. In 1998, Toyota lost production of about 2000 vehicles, as its
Georgetown plant was shut down for a day because an ice storm made roads impassable.
Learning from this disaster, Toyota hired WeatherData Inc., a weather forecasting company, to
monitor weather conditions. Payoff came in 1999. A similar snow storm disrupted production at
Ford Motor Company. However, Toyotas plants were uninterrupted (Murphy, 1999). For

19
Toyota, WeatherData Inc. forecasts weather for all 330 suppliers and their transportation routes.
Other natural calamities such as hurricanes, tsunami, and extreme temperatures can also be
forecast.
Act according to terrorist threat level. The homeland security advisory system announces the
terrorist threat level using five colors. An increase in threat level not only signifies greater
possibility of terrorist attack but also increases delays at entry ports because of higher custom or
border checks. It may also require companies to follow strict rules which can disrupt normal
operations. Therefore, supply chain components should note the threat level and look for
possible ways in which the level can impact them.
Sandia National Labs has developed an early-warning color coded system by region and by
resource (gas/oil, electric power, telecommunication, transportation mode.) This uses real-time
data and statistical control limits to predict out-of-control situations.
Monitor trends. Trends such as changes in customer preference, laws and regulations, and
technology can create disruptions. These disruptions can result in loss of market, increased taxes,
and increased competition. In most cases trends occur slowly, and provide time for organizations
to adjust. Other changes such as laws and regulation can happen suddenly.

6.3 Coping Strategies


Coping strategies provide a supply chain with the ability to mitigate the effects of a disruption.
These strategies are built on flexibility and redundancy in components, which provide options
that can allow a company to offset the losses in a part of a supply chain by gains from available
alternatives (options).
Redundancy provides options by keeping extra (redundant) resources. Flexibility can hedge
risks without having redundant resources. Flexible resources can be used for multiple options.
For example, a flexible manufacturing facility may allow processing multiple products using the
same set of resources. In the remainder of this section, we identify various coping strategies.
Maintain multiple manufacturing facilities with flexible and/or redundant resources.
Having multiple facilities in different geographical and political regions can reduce the
probability of simultaneous disruptions at multiple locations. Redundant or flexible resources at
these facilities can provide disruption mitigation ability. When a facility is disrupted, production

20
at other locations that are up and running may be changed or increased to compensate for the loss
of production at the disrupted facility.
Volkswagen manufactures cars in multiple countries, such as the US, Brazil, Mexico, and
Germany. These are also major markets of Volkswagen. Therefore, besides reducing the
probability of simultaneous disruptions at multiple plants, this strategy provides the advantage of
being close to major markets. Moreover, these facilities have both the flexibility to produce
different models as well as excess capacity to meet demand fluctuations. Disruptions at a specific
plant can be compensated for by increasing production at other locations using resources that are
otherwise redundant (Simchi-Levi et al., 2001).
Centralization has a higher possibility of severe disruption. However, multiple facilities
increase the chances of smaller disruptions because of the larger number of possible disruption
points. A tradeoff exists between a higher probability of small disruptions and a lower
probability of severe disruptions.
Carry extra inventory. Excess inventory can mitigate disruptions without affecting normal
supply chain operations. A disruption at a supplier can result in a shortage of supplies at
organizations down the line in a supply chain. However, availability of extra inventory can allow
a company to continue production (and meet customer demand) without disruptions. In addition
to mitigating disruptions, extra inventory provides the advantage of helping to meet day to day
demand fluctuations.
Determining inventory levels involves a tradeoff between the risk of production shutting
down with associated losses and the cost of carrying extra inventory. A firm with a higher risk of
disruptions may need more inventory. Managers should be selective in buffering decisions. For
example it pays more to buffer more for items with longer lead times, sole sourcing, and
inexpensive C items.
Alternate sourcing arrangement. Nonavailability of an alternate supplier can considerably
increase the risk of disruption. Such a risk is significantly high for products that are made by
assembling hundreds of components. For example, electronics products may have over 700
components. During a disruption at a supplier, other un-disrupted suppliers should have the
capability and capacity to increase their output to meet production share from the disrupted
suppliers. Therefore, multiple sourcing strategies are more effective when suppliers have flexible
and/or redundant facilities.

21
Li and Fung, a Hong Kong-based garment manufacturer, reserves manufacturing capacities
at multiple suppliers. This strategy ensures the availability of flexible capacity when their
customers such as Gap, Disney, and Gymboree order various different designs and quantities
(Lee and Wolfe, 2003).
Flexible transportation. Supply chains should have flexibility in using alternatives such as air,
ground, and sea transportation. Alternate transportation is more important for companies having
suppliers outside the US. Options such as multiple transport companies, alternative routes, and
expedited service are also important. After September 11, Continental Teves, an auto industry
supplier, identified that some critical parts might be delayed because of air restrictions.
Continental Teves used a contingency relationship with transport firms to supplement air
transport by land (Martha and Vratimos, 2002).
Maintain redundant critical components. It is advantageous to have backup for critical
components that can be maintained with limited investment. The appropriate level of investment
depends on the vulnerability of the company to failure of the component. For example, auto
companies maintain power generators that can run the plants for some time. Intel maintains a
redundant communication system.
Standardize various processes. A product with a standardized and well-documented process
can be easily processed at different facilities and by different workers. If production at a certain
plant (producing non-standard products) is disrupted, other non-disrupted plants may not be able
to substitute its production. Non-standardized processes make it difficult for facilities to
coordinate their efforts.
Redesign products for component and process commonality to pool risks. Inventory pooling
by designing products with common components across multiple products allows a limited or the
same set of facilities to satisfy demands for multiple products. Postponement, mass
customization, and centralized inventory management are other techniques that take advantage of
risk pooling by component commonality.
Influence customer choice. The ability of a company to motivate customers to buy what they
want to sell is important, both during normal operations and catastrophes. For example, during
the Taiwan earthquake in 1999, Dell was able to steer customers to buy computer configurations
that Dell could make from the available components, by giving them either a free or cheap

22
upgrade. To influence customer choice, a deeper understanding of their requirements,
preferences, and price sensitivity is required.
Insure against various risks. Buying insurance for various components and types of
catastrophes is one option open to companies. Various supply chain components such as
supplies, facilities, transport, and labor can be insured against natural calamities, accidents, and
theft. Some coverage includes loss of assets, profits, extra costs, and expenses because of
physical loss or damage to property.

6.4 Survival Strategies


A severe catastrophe and/or lack of proactive and coping strategies may result in supply chain
breakdowns, which can make a company inoperative. This section identifies strategies that can
be used by companies in such situations. The severity of a catastrophe and the uncertainty of its
possible effects make it difficult to develop survival options. However, past examples of survival
can be used to identify possible strategies that might be suitable for a company. Helferich and
Cook (2002) provide a detailed guideline for a disaster management process.
Survival strategies can be implemented in two stages. An immediate response to a
catastrophe can be followed by steps taken to recover. The aim during the response stage is to
save life and property. Recovery refers to re-organizing resources to restart supply chain
operations.
Implement organizational emergency plans. These include emergency safety procedures for
life and property. A response team should analyze the need for emergency assistance and
community support. In some instances, extreme measures such as shutting down can be taken.
For example, after the 9/11 attacks, Starbucks closed all locations in North America. This
decision ensured safety of the workers and avoided the potential security and transportation
problems that Starbucks might have encountered. Pre-assigned roles and responsibilities can help
in maintaining control and preventing chaos.
Maintain communication. During catastrophes, communication helps in maintaining command
and control of facilities and personnel. During recovery, communication can help in reorganizing
personnel and resources. Above all, most survival strategies identified in this section need
communication as a pre-requisite. Argenti (2002) discovered that during a catastrophe, internal
communication takes precedence over every other component. He also stressed the need for

23
setting-up crisis management centers that have a good communication infrastructure. American
Airlines has a crisis management center with an ability to accommodate 200 outside callers
simultaneously.
Keep control of the organization at all times. Minimum losses and efficient recovery require
managements direction and control. Other management responsibilities include identification of
emergency services needed, ensuring critical tasks are done, arranging for suppliers during the
post-emergency period, and identification of inventories and other resource status. Most
operations are decentralized during catastrophes. However, decision making should be
centralized.
Identify needs to resume operations. Important tasks at the recovery stage include assessment
of undamaged and undamaged resources and identification of the human resources and physical
infrastructure needed. Cooperation with law enforcement and government efforts is essential. In
certain disasters, it is possible to get state or federal help, which can be critical in recovery.

6.5 Cost/Benefit Trade-offs of Mitigation Strategies


Investment in mitigation planning and implementation consume resources. This may increase
costs and reduce efficiency, which can result in lower competitiveness. The challenge is to
determine the right set of strategies and trade-offs between losses caused by reduction in
efficiency and benefits from increased robustness. It is not clear as to which strategies can reduce
risks without hurting efficiency (Sheffi et al., 2003).
In the present context, supply chain managers should note that improving robustness can also
increase efficiency, which is a lesser understood and emphasized effect of mitigating strategies.
Therefore, in this section we focus on identifying the potential benefits of these strategies during
stable times. Lee and Wolfe (2003) emphasize that it is possible to design a robust supply chain
that can increase efficiency. They provide a parallel from the quality movement of the 80s, when
it was recognized that increased quality pays benefits. The following discussion concerns the
possible benefits that can occur from implementing some risk mitigation strategies.
Reduction in lead time and lead time variability. Secure transport mediums can help reduce
the time needed at customs and checkpoints, while reliable suppliers can reduce the need for
inspection, accounting, and bookkeeping. Moreover, traceability of transport mediums, with
devices such as global positioning systems and radio frequency identification devices, allows

24
real-time monitoring and control. Real-time tracking and monitoring can decrease accounting
and bookkeeping. It can also increase the predictability of delivery time, thus reducing the
associated uncertainty and variability.
Better inventory management. Increased visibility of supplier operations and transport
mediums can reduce the uncertainty in supplies. This along with reduction in lead time can
reduce the amount of safety stock needed. This can also help match demand and supply.
Efficient production planning and forecasting. Better inventory decisions and reliable
information about exact customer demand can increase the efficiency of production planning and
forecasting. Flexibility and redundancy can provide options for smoothing variations in
production because of demand fluctuations.
Reduction in the bullwhip effect. Increased information sharing and coordination can reduce
bullwhip effects (Lee et al., 1997). Furthermore, reduction in lead times also reduces bullwhip
(Chen et al., 2001). A robust supplier can be expected to have higher reliability in fulfilling
orders at the right time and quantity. This implies a lesser probability of rationing demand among
customers, which in turn reduces bullwhip (Lee et al., 1997).
Increase in customer service. Companies can win customers by making products available
during catastrophes, when competitors may not be able to reach customers. A better coordination
between supplier, manufacturer, and retailer can also help in understanding and meeting the
expectations and choices of customers. Such information is critical to improving customer
service and satisfaction.
Better demand management. Coordination and visibility between supply chain organizations
can provide critical information for demand management. For example, price and promotion
decisions can be made based on availability of supplies and customer demand. A possible
shortage of units could be managed by a short term increase in price or a reduction in price of
substitute products. Companies such as Dell and Amazon dynamically change the price
depending on the supplies and customer demand.
Modular products also help in demand management as such products use common
modules that assemble to form final products. Using modularity and postponement, companies
can reduce the number of components required to make variety of final products. Fewer
components can reduce the effect of compounded service levels. Thus the firm can achieve a
high service level with limited inventory of components.

25
6.6 Selection of Mitigation Strategies

Mitigation planning requires identification of vulnerability causing practices and the catastrophes
that can affect a company and then choosing strategies to mitigate them. The choice of
appropriate mitigation strategies depends on various factors such as location, market, culture,
operations, suppliers, product and process characteristics, ownership, and manufacturing type, to
name a few. Such a complex dependence may make it difficult to find the strategies that best suit
a company. In this section we develop two tables that can be a useful aid for managers in
achieving this aim.

A specific mitigating strategy can help to address many catastrophes, while a catastrophe
can be mitigated by choosing from many different strategies. Moreover, not all catastrophes can
be mitigated by any single strategy. Therefore, each company may require a different set of
strategies. In Table 3, we present the effectiveness tendencies of various strategies against
different catastrophes as high, medium, low, and very low. Depending on the type of
catastrophes a company faces, managers can use Table 3 to choose strategies that best fit their
needs. For example, environmental catastrophes such as changes in government regulations,
customer preferences, and technological changes can be addressed by using the strategies of
building an ability to influence customer demand and proactively monitoring trends/changes in
the environment.

For the vulnerability-causing practices used by a company, managers can use Table 4 to
choose the most suitable mitigating strategies. For example, the vulnerability resulting from
outsourcing can be managed by selecting suppliers located at safe locations, monitoring for
natural calamities, and using flexible transportation. There can be correlations between
vulnerability causes and the catastrophe types that affect companies. For example, many US
companies are vulnerable because of outsourcing manufacturing to Asia (Section 4). We also
found that Asia has the fastest increasing rate of terrorist attacks (Section 2). Thus companies
outsourcing operations to Asia should choose mitigation strategies (from Tables 3 and 4), which
are most effective for outsourcing and terrorist catastrophes.

26
Table 3. Interrelationship of strategies and catastrophe types.
Natural Accident Non-terrorist Terrorist

Political Assassination
Biological, Chemical,

Transportation Media
Hoax or Propaganda
Transport Accidents
Industrial Accidents

Nuclear Terrorism
Extreme Weather

Cyber Terrorism
Violence, Mass
Environmental
Transportation

Health Hazard
Catastrophes
Infrastructure

Infrastructure
Natural Fires

Sabotage of
Destruction

Disruption

Attack on

Killing,
Strikes

War
communication, and
Cold wave, extreme

bombing/hijacking,
spending, lifestyle,
Eruption, volcano,
Hurricanes, floods

Sarin gas, anthrax


Epidemic, famine

Computer viruses
Train derailment,
landslide, snow,

Workers strikes,

Bombing public
rain, avalanches
Examples

political strikes
Storms, winds,

public services
airplane crash

pirates, train
Earthquakes

Gas leakage
temperature

government
Changes in

technology
forest fires

derailment
Bombing

Gulf war
Airplane
Power,

places
Strategies
Locate facilities at safe locations H H H L M H M L H L H M H L L L L H
Choose suppliers located at safe locations H H H L L M M L M VL H M H L L L L H
Proactive

Choose robust suppliers H H H - H H H H L L H M L L L H L M


Choose robust transportation M M H - L M H H L - M M H L M H L L
Establish secure communication links H H - - - M L L - - M L H L L VL H -
Enforce security - - - - - - H M H - H H M H L H L -
Efficient human resource management - - - - - - H H H - H H M H - H H -
Enhance visibility and coordination M M H M M H H H M L L L H L M H L
Increase transportation visibility M M H L M H H L - H L L H L H H L
Warning
Advance

Monitor and react to weather forecasts - H H H H H - - - - - - - - - - - -


Act according to terrorist threat level - - - - - - - - - - - - - H - - - -
Monitor trends: customer preferences,
- - - - - - - - - H - - - - - - - -
regulations, and technology
Maintain multiple manufacturing facilities
M M H L H M H H M - H L M L M H M M
with flexible and/or redundant resources
Carry extra inventory M M H - H H H H H - H H L H M H L L
Secure alternate suppliers H H H - M H H H H - H H H M H H L H
Coping

Choose flexible transportation options M M H - VL M H H L - M M H L M H - L


Maintain redundant critical components M M - - L L L L VL - H L L L L - M L
Standardize/simplify processes M M M H M M M H M M H H L M M L M
Product Design for product commonality,
H H H M H H H H M H H M L H H L H
controlled architecture, and postponement
Influence customer choice H H H H H H H H H H H H H H H H H H
Insurance against various risks H H H VL H H H H H - H L H - VL M M L
High (H), Medium (M), Low (L), or Very Low (VL).

27
Table 4. Interrelationship of strategies and vulnerability breeding factors.
Vulnerability Breeding Factors
Reduction in Reduced
Globali- Decentrali- Number of JIT Supply Chain Lead
Strategies zation zation Outsourcing Suppliers Practices Complexity Times Legislation
Locate facilities at safe locations M M M L H M VL H
Choose suppliers located at safe locations H H H H H M VL H
Proactive

Choose robust suppliers H M M H M - - -


Choose robust transportation M M M M H H L H
Establish secure communication links L L L - VL - - M
Enforce security - - - - - - - L
Efficient human resource management - - - - - - - M
Enhance visibility and coordination H H L M H L L -
Increase transportation visibility M L M M H L - H
Warning
Advance

Monitor and react to weather forecasts L M H H H H - -


Act according to terrorist threat level L L L - M - - H
Monitor trends: customer preferences,
regulations, and technology - - - - - - - H
Maintain multiple manufacturing facilities
with flexible and/or redundant resources M M M M L - - -
Carry extra inventory M M M H H M M L
Secure alternate suppliers M M M H H M - H
Choose flexible transportation options H H H H H VL - L
Coping

Maintain redundant critical components - - - - H - - -


Standardize/simplify processes H H M L L H VL -
Product Design for product commonality,
controlled architecture, and postponement M L L L L - - L
Influence customer choice - - - - - - - -
Insurance against various risks M M M M M L - -
High (H), Medium (M), Low (L), or Very Low (VL).

28
Investment in mitigation planning needs justification by appropriate cost/benefit analysis,
which requires an estimation of losses and benefits in numerical quantities. In many cases this is
not easy to calculate. Another difficulty is a lack of understanding of potential long-term effects.
For example, to mitigate the risk of disruptions, companies can increase inventory. This can be a
short-sighted strategy. Increased inventory may not be an economical alternative as it may result
in quality problems from waste of resources, higher rejection rates, and poor management. Such
a strategy may make a company worse off than a catastrophe. Therefore, more research is needed
in identifying the potential long term deleterious effects of various strategies. Section 7 identifies
such research issues.

7. Research Problems in Disruptions Management


This section describes 16 important problem areas for future research on managing disruptions in
a supply chain. Some of these research problems have been examined to some extent, while
others are new to the supply chain management paradigm, and have not yet attracted the
attention of operations management researchers. We also identify types of catastrophes that can
be mitigated by addressing these issues.
Build and analyze a catastrophe database, which includes affected regions, economic
consequences, and industries affected. Such a database can aid in identifying the possibility
and severity of disruptions for a company located in a specific region. Complex operations and
dependencies between various businesses make it difficult to identify the catastrophes that might
affect them. For example, extreme cold may kill honey bees, which may result in a low honey
production. Cold weather may not affect fruit yield, but a low number of bees could affect the
yield by reducing flower pollination. The Inter-university Consortium for Political and Social
Research and the Center for Research on the Epidemiology of Disasters maintain databases for
natural and terrorist catastrophes. The National Counterterrorism Center maintains a publicly
accessible database of all terrorist events worldwide. However, these databases lack an explicit
identification of the affected regions and industries. Information from such databases could be
modeled or used to provide useful results for industry risk mitigation.

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Well maintained databases can help to plan for possible major terrorist events, industrial
and transport accidents, and health hazards. These can also facilitate in making better decisions
such as location of facilities, choice of transportation routes and media, and location of suppliers.
Identify which catastrophes affect each type of business and what their effects are. A
catastrophe may affect businesses differently, causing disruptions to varying extents. Moreover,
a business is not affected by all catastrophes. Therefore, there is a need to identify a list of
catastrophes, for each business type, that can cause substantial losses and thus should be planned
for. For example, before the outbreak of SARS in 2003, it was very difficult to predict its effects
on the airline and electronics industries worldwide. Empirical studies, using the statistics of past
disruptions, can help identify the catastrophes that can affect a business.
For each industry, an analysis outlining the duration (average and range), probability, and
severity of catastrophes can help in justifying the need for mitigation techniques. Identification
of the effects can also help in evaluating the monetary losses associated with catastrophes.
Kleindorfer and Saad (2005) emphasize the importance of fit between a company and the
mitigation strategies used. They conclude that while choosing mitigating strategies for various
companies, one size will definitely not fit all.
Develop models that can rank various catastrophes, based on their severity and possibility,
for a business located at a geographical location. A business may benefit by a ranking of
catastrophes based on severity and probability. Such a ranking may help managers to identify
catastrophes that should be planned for each individual location. It can also help in capacity and
location planning decisions. For example, some businesses plan for continuity of operations
when a particular location is affected by catastrophes. The location of facilities could be chosen
to reduce the possibility of simultaneous disruptions at multiple locations.
Identify indicators that can forecast potential disruptions. Such indicators could be an
abnormal variation in supplies or demand, change in fuel prices, disruptions in related industries,
political changes, and technological developments. An indicator of supply shortage is an increase
in security level from yellow to orange, which often results in extended delays for components
and supplies to enter the US. Once identified, indicators can help a company align its strategies
and resources, in advance, to mitigate disruptions.
Develop methods to evaluate the risks of various unknown events. It is difficult to identify
the possibility and the impact of certain less-familiar disasters such as a dirty bomb. The effects

30
of these catastrophes can be understood by identifying similar catastrophes that have occurred in
the past. For example, learning from the effects of the Sarin gas attack in a Tokyo subway could
help in assessing the disruptions caused by a biological attack. Developing such evaluation
methods can help in mitigating catastrophes such as terrorist attacks, severe industrial accidents,
and climate changes. Sodhi (2005) developed a general method for risk measurement, which can
be used for applications such as capacity allocation and demand planning. von Winterfeldt
(2006) developed a decision analysis framework for Hurricanes of the scale of Katrina.
Evaluate the effectiveness and appropriateness of JIT in an environment prone to
disruptions. JIT systems have been effectively used by many companies. Despite this, there
have been numerous examples of JIT system failures when faced with a catastrophe-prone
environment. See Section 5. Techniques such as JIT, Six-Sigma, and TQM help to decrease
system variability. Perhaps, with the increase in volatility in operating environment, there is a
need to re-analyze the suitability of JIT systems and identify conditions under which such
systems are appropriate (or not).
Find optimal inventory policies in uncertain environments. Much of research identifies
optimal inventory policies while considering a stationary demand process. Unexpected events are
not consided. Disruptions, of the magnitude of port strikes, Katrina, and 9/11, are rarely
addressed in the literature. Uncertainty increases the complexity of these analyses, thereby
making it difficult to identify optimal inventory policies. Various policies for expediting,
subcontracting, setting order-up-to levels, and reorder points need further investigation (Schmitt
and Stecke, 2003). Nevertheless, it is important to analyze supply chains considering not-so-rare
disruptions caused by, for example, extreme cold or heat, transport accidents, terrorist attacks,
and increased security at the borders.
Investigate the justification of globalization, outsourcing, and reduction in the number of
suppliers while considering the possibilities of disruptions. Proponents of globalization and
outsourcing often fail to consider the increased risks that are induced because of the global
spread of modern supply chains. Moreover, supply chain theorists often analyze the cost benefits
of such strategies without considering possible disruptions that might happen at an offshore
supplier because of political, sociological, or climatic catastrophes. In Section 3, we showed that
offshore businesses, when compared to businesses located inside the US, have a higher chance of
becoming a terrorist target. The possibilities of disruptions because of larger distance between,

31
for instance, a supplier and a manufacturer, as well as border restrictions also increase the risks
associated with an overseas supplier. Researchers should develop models to analyze disruptions
at various stages of a supply chain. Such analyses can help compare various alternatives that
differ in the level of risk, for example, of choosing either an overseas or a local supplier. These
analyses can also aid in building supply chains that can mitigate catastrophes such as overseas
terrorist attacks, transport accidents, and government border restrictions. Chopra et al. (2005)
studied the effect of bundling the uncertainties arising from alternate suppliers. They showed that
bundling hurts a supply chain by underutilizing a reliable supplier.
Establish measures to evaluate the effectiveness of various catastrophe mitigation
strategies. Catastrophe mitigation strategies aim to reduce the effects from disruptions but often
require capital investments. The benefits of these strategies, however, can be difficult to
quantify. Managers should be interested in determining a tradeoff between investment in
mitigation techniques and benefits achieved. To find such tradeoff, there is a need to develop
global measures of the effectiveness of catastrophe mitigation. Moreover, it is not clear as to how
the performance of various response or recovery strategies can be evaluated.
Identify how much and what kinds of flexibilities and redundant resources are required or
are useful to mitigate risks. Redundant and flexible resources are sometimes used to mitigate
disruptions. The amount and kinds of resources, however, can vary depending on many factors
including industry, location of facilities and markets, customer preferences, and laws, to name a
few. Therefore, the identification of the amount and kinds of these resources is difficult.
Capacity decisions should consider planning for disruptions.
Identify industry best practices for mitigating risks in a supply chain. A compilation of such
strategies for many industries and catastrophes can help managers in choosing mitigation
strategies appropriate for their companies. For example, identifying effective strategies to
mitigate effects of hurricanes or terrorist attacks can provide managers with a benchmark to
compare their companies preparedness and mitigation abilities.
Identify strategies that can be used to react to government warnings for increased terror
alerts. An elevated threat of terrorist attacks often results in delays of shipments to enter or leave
a country. Such warnings may affect daily operations because shipping delays can starve a
supply chain for components or raw materials. Therefore, if a terror alert is expected to last for a

32
long time, a company may benefit by arranging alternate sources of supplies, for example, local
suppliers.
Investigate the role of supply chain coordination while considering disruptions. Current
supply chain literature addresses coordination while considering variations in demand and price.
Prevalent coordination mechanisms do not hedge a supply chain stage against disruptions. The
effects of a catastrophe are not symmetrical in a supply chain. For example, a relatively small
disruption at a manufacturer may not affect a customers operations as the lead time between
these stages may provide a cushion to absorb the disruptions. However, a disruption at a
customers facility is more likely to affect the manufacturer because of increased bullwhip.
Examine how expediting affects the long term performance of a supply chain. A disruption
at a stage of a supply chain affects other stages by creating shortages of supplies or demand. A
short term solution to reduce shortages, often used by managers, is to expedite orders. However,
the effect of expediting on the long term performance of a supply chain has not yet been studied.
Schmitt and Stecke, 2003, show that for and assembly supply chain expediting can undermine
the long term performance. Expediting of orders may increase the magnitude of a bullwhip
effect. Moreover, with expediting, the effects of a disruption may last a longer time, when
compared to a supply chain without expediting.
Identify effects of disruptions on bullwhip. The bullwhip effect has been studied under
restrictive assumption of a stationary demand process (Lee et al., 1997, Chen et al., 2000, and
Meters, 1997.) However, disruptions cause the demand to be non-stationary. It is intuitive that
non-stationary demand could add to the amplification. To our knowledge, researchers have not
yet addressed bullwhip while considering disruptions.
Study various supply chain network structures while considering the possibility of a
disruption. Modern supply chains have diverse structures. These structures vary depending on
many factors including process, product, and market characteristics. These structures should be
analyzed considering disruptions at various stages. Brown et al. (2003) analyze the performance
of a power distribution network when certain parts of a grid is unavailable because of a
disruption. This type of modeling and analysis is popular in the military and are useful in
designing strategies for the battlefield when a part of an army is not operational. Network
structure analysis while considering disruptions can be useful in designing critical facilities such
as power plants, communication media, and water distribution facilities. These can also be used

33
to analyze supply chain performance when a stage, i.e., a supplier or manufacturer, is
unavailable. The advantages of component commonality and postponement strategies should be
evaluated. Santoso et al. (2004) provides an algorithmic approach to design supply chains
considering uncertainty. They provide methodology to compare alternate supply chain designs
and find the ones that have least uncertainty.
In summary, to help make a supply chain robust to disruptions, there is a need to address the
research problems identified in this section. In recent times, among CEOs across the world, there
has been an increased awareness and focus on risk management in supply chains
(PricewaterhouseCoopers, 2004). Such a focus shows the need and desire for businesses to
addresses risk management in supply chains.

8. Conclusions
We conclude by suggesting implications of our research for managers and academicians. This
research stresses the need for higher awareness of catastrophes and their effects on supply chain
operations. We compile catastrophe and economic data from various sources to reveal
information of managerial importance. We show that the monetary losses caused by catastrophes
are increasing, especially for businesses. This implies that industry needs strategies and tactics to
handle disruptions. We contribute to the understanding of supply chain management by
identifying prevalent practices that are often attributed for higher efficiency during normal times
but that can hinder operations during catastrophes.
From a managerial perspective, this research is appealing because it provides a
comprehensive set of mitigating strategies that can help reduce the risks of disruptions. The
strategies presented can be used for proactively managing, developing advance warnings, coping,
and surviving a catastrophe. We also reveal potential benefits of these strategies during normal
times, which are important for their economic consideration and justification. Managers should
focus on identifying strategies best suited for their companies. We develop various tables to help
managers determine the supply chain components that could be affected by catastrophes and
choose strategies to mitigate catastrophes and to overcome the vulnerability causing factors.
We hope that this study and the research problems identified will provide impetus for future
work on understanding, developing, and quantitatively analyzing mitigating strategies. While we
present qualitative strategies, future research should focus on quantifying the costs and benefits

34
to businesses. There is an abundance of literature on supply chain efficiency, but very little that
studies their operations during catastrophes. Case studies outlining past successes and failures of
companies during catastrophes and identification of their strengths and weaknesses can help in
identifying good mitigation practices. These can also reveal survival strategies that can help in
fast and cost effective recovery, after disruptions, to normal operations.

Acknowledgement
The authors would like to thank Tom Schmitt at the University of Washington at Seattle for
communicating ideas that increased the contributions of this paper.

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