In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Zach G. Zacharia about the Lehigh Business Supply Chain Risk Management Index, developed by the Center for Supply Chain Research at Lehigh University and the Council of Supply Chain Management Professionals. Zacharia is an associate professor of supply chain management and director of the Center for Supply Chain Research at Lehigh University, where he teaches graduate and undergraduate courses in supply chain and operations management and logistics and transportation.
He spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.
Below is an edited excerpt from that conversation.
Read the complete podcast transcript.
Jack Croft: The new Lehigh Business Supply Chain Risk Management Index, or LRMI for short, officially launched this week. What sparked the idea of creating an index that puts a number on the level of supply chain risks that businesses face in each coming quarter?
Zach G. Zacharia: In the supply chain industry, there are two other sort of famous indexes: the Purchasing Manager Index that looks at how purchasing managers perceive what's happening in terms of the number of products they're actually going to buy every month and logistics managers that look at logistics issues. But we believe we're the first to focus in the area of supply chain risk. And there really is no index out there that'll help supply chain managers identify the different levels of risk for standard supply chain activities that all supply chain managers, actually all managers in general, should be concerned about.
Croft: The risk index for supply chain is based on data you're receiving from supply chain professionals throughout the United States. Can you talk a little about who these supply chain professionals are and how you got them to take part in this index?
Zacharia: Our Center for Supply Chain [Research] here at Lehigh University has over 6,000 professionals who receive our newsletters, who have been involved in the two conferences we hold every year or the supply chain career fairs that we hold for our students. However, for the LRMI, we partnered with the biggest industry association that is specifically focused in the supply chain area, and that is the Council of Supply Chain Management Professionals, CSCMP, who helped send out our survey to their members and encouraged them to fill this out. So this helps ensure we have a broad area of companies and industries and managers represented throughout the US in developing the LRMI.
Croft: Looking at the new fourth quarter risk index that just came out, what are some of the main takeaways that supply chain managers should glean from it, and how can LRMI help them do their jobs better?
Zacharia: The LRMI report helps companies identify what risks are more likely to increase, and there are many different risks that supply chain managers can focus on. And by using this report, you can identify which risks are more critical or more important to look at.
So there are three parts of the report you really need to look at. First, there is what we call the average risk, which is an average of the 10 different categories of risk. In the third quarter, it was 69.49. It is now 66.97. So the one idea you get out from between the third quarter and the fourth quarter is that logistics managers, supply chain managers are seeing that the overall risk has decreased.
The second idea that you get out of the LRMI report is when we actually ask the supply chain managers to compare the risks head to head. And in this case, in the third quarter, the four biggest risks when compared head to head [were] economic risk, supplier risk, customer risk, and transportation disruption risk. The top four risks in the fourth quarter, however, according to supply chain managers, [are] again economic risk, but now operational risk is second, customer risk, and supply risk. So this means that supply chain managers have felt that operational risk has increased significantly in comparison to transportation risk. So that's the second aspect of the report.
The third aspect of the report is really looking at the different kinds of risks and see how the numbers have changed from one quarter to the next.
Croft: Let's drill down a bit with the new numbers. First, how significant is the 2.5 point decrease in overall risk from 69.49 to 66.97?
Zacharia: Remember, we're aggregating or taking an average of 10 different numbers across all of these risks. So when you have a decrease, in this case, of 3, that is significant. It shows that there is a significant difference between the two. Now, clearly, if it had been 10, or if it had been all the way down to 50 where there is no risk, that obviously means even more. But because this is averaged over these large numbers and because we are looking at proportions, the decrease from 69 to 66 is a signal that most supply chain managers are saying that the fourth quarter is less risky than what the third quarter was.
Croft: Besides supply chain managers, are there things that other businesses and even consumers can take away from the risk index?
Zacharia: Absolutely. Clearly, supply chain managers are not the only ones that have to look at risk and have to look at, "Do we need to build in some redundancy because there is somewhat risk associated with this?" And clearly, managers all along within companies have to look and see whether they're going to hire more employees, have a redundant supplier, maybe locate suppliers in different locations, and look at their opportunities to sell their product, look at their marketing side. Financial managers have to look at what kind of investments should they make because they're all looking at these kinds of risks.
So when you look at the index as a whole, again, it gives you an idea of where you should focus your limited time and resources on. So the index gives you a sense of what is important, and I think it's important for managers within companies to necessarily understand that. Now consumers, if they could perhaps look at the risk and they could perhaps say that there's a risk that, "My suppliers are not going to be able to produce the kind of products that I need, that I'm looking to buy as a consumer," I guess so. But it really is made for business managers. This is more of a business kind of index and not directly visible to the consumer.