Shedding light on hidden critical suppliers

Professor of Supply Chain Management Thomas Choi and his W. P. Carey colleagues uncover companies embedded in a large supply chain that can have profound effects on the overall system.

The devil is nearly always in the details, and recent instances of supplier-caused business disruptions have placed one vital set of details — hidden yet critical suppliers that reside deep within the supply network — squarely under a microscope.

Managing prominent strategic suppliers has become business as usual, but a second, less obvious type of critical supplier — called a “nexus” supplier — often eludes managers.

Nexus suppliers are critical because of their structural positions in the supply network. They may be several tiers removed in the extended supply network, and thus have no direct contact with — and are all but invisible to — the focal buying firm.

Now cutting-edge research is helping shed much-needed light on companies embedded in a large supply chain that can be easily overlooked yet have profound effects on the overall system.

Professor of Supply Chain Management Thomas Choi, together with a pair of his W. P. Carey colleagues, are providing the additional light by using a data-analytics approach to identify hidden critical suppliers in supply networks and the development of a Nexus Supplier Index (NSI).

Buyers’ blind spot for critical suppliers

In their study, Choi and his two co-authors uncovered and categorized nexus suppliers. Based on the theory of nexus supplier and data envelopment analysis (DEA), they proposed a data-analytics approach to compute what they have termed the NSI. It is a strategy that combines various network centrality measures to capture and reflect different aspects of a supplier's structural importance.

The study takes the concept of nexus suppliers that exists only in theory all the way to practice and demonstrates how companies can look for and find nexus suppliers. To achieve this, the three researchers developed a mathematical model for NSI, compiled a large data set using Bloomberg Terminal (a computer software system provided by financial data vendor Bloomberg LP), and used computations to identify and categorize nexus suppliers. The target company was Honda of America, where they reviewed the results with its top supply-management team.

“We know there are hidden, critical suppliers several tiers removed from a big buying company,” explains Choi, who has served as Harold E. Fearon Chair of Purchasing Management and executive director of CAPS Research, a joint venture between Arizona State University and the Institute for Supply Management since 2014. “If an accident or a disruption occurs with that supplier, its effect could be felt by many companies in the supply chain.”

Indeed, many of these critical suppliers are virtually hidden. “Big buying companies like General Motors or Apple may not know the identities of these critical suppliers,” Choi continues. So, they took the data that is available now in mathematics to reveal them.

“First we build up a complete supply network for a company,” says co-author Benjamin Shao, who’s an associate professor of information systems. “Then we apply the network theory to integrate four basic network centrality degrees, each of which reflects a certain aspect of a supplier's importance in the focal buying firm’s supply network to come up with a comprehensive index.”

The NSI model includes the four essential centrality measures most frequently used in social network analysis and combines them into one composite index that reflects the various aspects of node importance (i.e., supplier criticality).

“Strictly speaking, we haven’t done a supply chain study,” says co-author Zhan Michael Shi, who is an assistant professor of information systems. “We’ve built a network of buyer-supplier relationships. But these relationships are just as important, because a supplier that occupies an important network structural position that, let's say, goes belly-up, would have a ripple effect, and that is what we are trying to study.”

The ripple effect of hidden suppliers

There have been incidents in which “one small supplier in the network had a disruption to his operation, and the effects rippled throughout the network,” Shao explains. “There are many examples like that.”

Firms that understand the concept and importance of nexus suppliers can make the necessary adjustments, “but up until now, they have had little clue about how to identify — let alone manage — or exploit the potential advantages the supplier might offer.”

“What we have done is not rocket science,” Choi admits. “We have provided direction and said, ‘Hey guys, you want to look in this direction. It was like they were operating in the dark. Imagine you are in total darkness, and a small bit of light, a glimmer of light, would be helpful. It doesn't have to be a bright light. That's what we offer, a glimmer of light.”

According to Choi, this type of research has never been done to this degree. “I’m confident we are the first ones who’ve tried to empirically identify these hidden critical suppliers.”

Once he and his colleagues had completed the study, Choi took the results to Honda America in Ohio where they spent time with its executive vice president in charge of the North American supply chain and his deputies.

“Our list exposed names of suppliers that they had never heard of,” Choi recalls, “so we had been able to identify the blind spots.” Indeed, he was able to point to critical suppliers in the second and third tiers “that they never suspected; they never suspected (their key role). They told us, ‘We have to go and investigate what is going on here.’”

“After we listed the top-tier suppliers, we found out their suppliers, the second-tier suppliers for Honda,” says Shi. “Then we went further, all the way through the fourth tier. Eventually, we had 10,832 companies — Honda’s first-, second-, third- and fourth-tier suppliers — in our data set.”

Once identified, nexus suppliers can be categorized according to their distinct network positions and more effectively managed, resulting in lower costs, less risk, and improved responsiveness.

Bottom line

The authors say the research offers these takeaways for buyers:

1. Map your firm’s entire supply network. The idea is to make what has been invisible, visible. Once you identify it, you can work to manage it.

2. If possible, try and replicate the professors’ study using your own company’s product-level data.

3. Most importantly, implement it. Theory and planning are essential, but rolling up the sleeves and following through on it is what creates positive change.

“The research we've done is fundamental,” Shao says. “We took a baby step and said, ‘It is possible to identify these hidden critical suppliers. In the past, there was only the theory, which was proposed by Choi. When it came to ‘How do I identify and manage them?’ they had no clue. We are the first ones to show in our model that it is possible to both identify and manage nexus suppliers.

“If you have the resources and capabilities to map your whole supply network,” Shao concludes, “apply our model and our data and it will help you identify those hidden critical suppliers.”