Supply Chain Risk

Supply Chain Risk The dark side of supply chain mangement Guest lecture, LOG 711, 12.11.2008 Jan Husdal
[email protected]  71214289

Outline • What is (supply chain) risk? risk • What are typical supply chain risks? risks • How to manage supply chain risks?

Supply chain risk?

Loss of vehicle Replacement?

Loss of goods Insurance?

Injured personell Hiring and training?

Delayed delivery Brand reputation?

Weather conditions Detour?

Supply Chain Trends >>> Consequences • The trend towards just-in-time and lean practices >>> efficiency rather than effectiveness. • The trend towards reducing costs (at almost any cost) >>> globalization of supply chains, more complex and vulnerable.

• The trend towards economies of scale >>> centralized distribution and manufacturing >>> lower costs but at the same time less flexibility.

• The trend towards outsourcing non-core business activities >>> loss of control of the supply chain when it is most needed. • The trend towards consolidation of suppliers (intentional and incidental mergers and acquisitions) >>> increased potential for supply failure. Christopher, M. (2005) Managing risk in the supply chain. In: Christopher, M. (Ed.) Logistics and Supply Chain Management. 3rd ed., Prentice Hall, pp. 231-258.

Supply Chain Risk - Piracy

http://www.icc-ccs.org/

Why is supply chain risk important? • Even a relatively small supply chain disruption caused by a localized event may have consequences across the global economic system. system • Globalization, offshoring and outsourcing leads to >> “no” control over causes to events in the supply chain. >> “only” control over consequences of events in the supply chain. World Economic Forum (2008) Hyper-optimization and supply chain vulnerability: an invisible global risk? In: Global Risks 2008 – A Global Risk Network Report, REF: 090108, World Economic Forum, Switzerland. http://www.weforum.org/pdf/globalrisk/report2008.pdf

Supply Chain Risk – an example A wellwell-handled supply chain disruption

An illill-handled supply chain disruption

>>> business continuity

>>> business disdis-continuity

Norrman and Janson (2004) Ericsson’s proactive supply chain risk management after a serious sub-supplier accident. International Journal of Physical Distribution and Logistics Management, Vol 34, No 5, pp. 434-456

What is risk? Risk : - exposure to the chance of injury or loss - hazard or dangerous chance - chance of loss - degree of probability of such a loss

Aven, T. (2002) Foundations of Risk Analysis: A Knowledge and Decision-Oriented Perspective, John Wiley & Sons.

The risk concept • Risk is an ambiguous concept. concept • There are many definitions of risk, depending on their specific application and on their situational context. context • Risk denotes the precise probability of specific eventualities. eventualities • Technically, risk has no value, so these eventualities can be beneficial or adverse (i.e. financial risk).

RISK = Probability * Consequences

Risk analysis A commonly used method for risk analysis is by plotting unforeseen or unwanted events in a risk matrix. matrix This can be done qualitatively, qualitatively where probabilities and impacts are subjective values (e.g. low/high and minor/major),or quantitatively, quantitatively where probablities and impacts are objective values (e.g. frequency and cost in $$$).

Norman, A. and Lindroth, R. (2004) Categorization of Supply Chain Risk and Risk Management. In: Brindley, C. (Ed.) Supply Chain Risk. Ashgate, pp. 14-27.

Proactive versus Reactive

Mitigative actions address risk sources. Contingent actions address risk consequences. Asbjørnslett, B E and Rausand, M (1997) Assess the vulnerability of your production system. Report NTNU 97018. Norwegian University of Science and Technology NTNU, Department of Production and Quality Engineering, Trondheim, Norway. Tomlin, B. (2006) On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks. Management Science, Vol. 52, No. 5, pp. 639-657 Ritchie, B. and Brindley, C. (2004) Risk Characteristics of the Supply Chain – A Contingency Framework. In: Supply Chain Risk. Ed. Brindley, C. , Ashgate Publishing, pp. 28-42,197-202

Business risks In order to understand suply chain risk it is useful to first look at business risks in general.

• Externally-driven or environmental risk - external factors, competitors, customers, regulations

• Internally-driven or process risk - operations and processing

• Decision-driven or information risk - insufficient or erroneous decision support De Loach, J. W. (2000) Enterprise-wide Risk Management: Strategies for linking risk and opportunity, Financial Times/Prentice Hall

Supply Chain Risk Supply Chain Risk can be viewed as a 4-fold construct: Risk sources. sources Consequences of the risk sources. Risk drivers that turn risks into consequences. Strategies to address the risks.

Jütner, U., Peck, H. and Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for Future Research. International Journal of Logistics: Research and Applications, Vol. 6, No. 4, pp. 197-210.

Supply chain risk sources 1/2 Risks can be seen as internal or external to the focal firm, and be seen as internal or external to the supply chain:

•Process risk •Control risk •Supply risk •Demand risk •Environmental Environment risk

Internal to the focal firm External to the focal firm Internal to the supply chain External to the supply chain

Peck, H. (2003) Supply Chain Resilience. UK Department of Transport/ Cranfield University, Carnfield, UK.

Supply chain risk sources 2/2 Sources of risk can be broadly categorized along three different levels: 1)Organization 1)Organizational risk 2)Network 2)Network risk 3)Environment 3)Environmental risk

Jütner, U., Peck, H. and Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for Future Research. International Journal of Logistics: Research and Applications, Vol. 6, No. 4, pp. 197-210.

Types of supply chain risk 1/3 Organizational Risks • Procedure Risks - lack of formal procedures, lack of quality control system

• Decision Risks - bureaucracy (red tape), lack of authority, lack of decision support

• Communication Risks - cultural differences, language barriers, misunderstanding

• Knowledge Risks - lack of formal education, lack of training, unskilled labor Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics, Vol. 29, No. 1, pp. 133-155

Types of supply chain risk 2/3 Network (Supply Chain) Risks • Supply Risks - disruption of supply, inventory and schedules, incoming delays

• Operational Operation Risks - failure or breakdown of operations, changes in technology

• Demand Risks - variations in demand

• Security Risks - theft, counterfeiting, terrorism, piracy, infrastructure breakdown Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics, Vol. 29, No. 1, pp. 133-155

Types of supply chain risk 3/3 Environment Risks • Macro Risks - economic shifts, recession, labour costs, exchange rates, customs

• Policy Risks - actions and sanctions of governments, shifts in legislation

• Competition Risks - uncertainty about competitors’ moves and actions

• Resource Risks - lack of human resources, capital or technology Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics, Vol. 29, No. 1, pp. 133-155

Supply Chain Risks and Drivers 1/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46, No. 1, pp. 53-61.

Supply Chain Risks and Drivers 2/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46, No. 1, pp. 53-61.

Risk Management Strategies Before we look at strategies for managing supply chain risk, let us look at general strategies for managing risk

Avoid

Transfer

Reduce

Retain

Deloach, J (2000) Enterprise-Wide Risk Management: Strategies for Linking Risk & Opportunity. Financial Times Management/ Prentice Hall.

Supply Chain Risk Management

Supply chain risk management can be described as the intersection of supply chain management and risk management. 1 It has a collaborative and structured approach, and is included in the planning and control processes of the supply chain, to handle risks which might affect the achievement of the supply chain goals. goals 2 1

Paulsson, U. (2004) Supply Chain Risk Management. In: Brindley, C. (ed): Supply Chain Risk. Ashgate Publishing Limited, pp.79-99. 2 Kajüter, P. (2003) Risk Management in Supply Chains. In: Seuring, S Müller, M., Goldbach, M., Schneidewind, U. (eds.) Strategy and Organization in Supply Chains, Physica, Heidelberg, pp. 321-336.

Supply Chain Risk Management Strategies • Avoidance - exiting a market (or product) or delay entering a market (or product)

• Postponement - delay commitment of resources to maintain utmost flexibility

• Speculation - assuming risk to gain competitive advantage

• Hedging - globally dispersing your portfolio of suppliers, customers and facilities

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics, Vol. 29, No. 1, pp. 133-155

Supply Chain Risk Management Strategies • Control - vertical and lateral integration of suppliers and business partners

• Transferring/sharing risk - outsourcing, offshoring, contracting

• Security - identifying and protecting against unwanted penetration

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics, Vol. 29, No. 1, pp. 133-155

Supply Chain Disruptions What happens to supply chain performance during an unforeseen event?

Warning?

Sheffi, Y. (2005) The Resilient Enterprise - Overcoming Vulnerability for Competitive Advantage, MIT Press

Supply Chain Disruptions The difference between Robustness, Flexibility and Resilience •

•

•

Different supply chain characteristics will result in different ways a suply chain disruption is handled. A resilient supply chain is impacted, but it is able to come back to a stable state, although not necessarily to where it was before the disruption. In business setting the ability to survive (resilience) is more important than regaining stability (robustness)

Supply Chain Disruptions 3/3 Resilient organizations

Resilient organisations Resilient supply chains Mc Manus, S. et al (2007) Resilience Management – A Framework for Assessing and Improving the Resilience of Organisations. Research Report 2007/01, Resilient Organisations, New Zealand. www.resorgs.org.nz

Supply Chain Design vis-a-vis supply chain disruptions Factors (risk drivers) that can aggravate or lessen supply chain disruptions:

Supply Chain Design A supply chain is more likely to be severely impacted if there is supply chain density supply chain complexity node criticality

Supply Chain Mitigation Capability A supply chain is less likely to be severely impacted if there is adaptive capacity (recovery capability) information sharing/ visibility (warning capability)

Craighead, C. W., Blackhurst, J., Rungtusanatham, M. J. & Handfield, R. B. (2007) The Severity of Supply Chain Disruptions: Design Characteristics and Mitigation Capabilities. Decision Sciences, Vol. 38, No. 1, pp. 131-156.

Supply Chain Vulnerability 1/2

• • •

Which parts of the supply chain are most important? (”Criticality”) What can we do if something happens? (”Preparedness”) Not being prepared is the biggest risk (”Passive Acceptance”).

Supply Chain Vulnerability 2/2 • • • • • •

Prioritize earnings drivers Identify critical infrastructure that affect the earnings drivers Locate vulnerabilities in the critical infrastructure Model scenarios for the vulnerabilities Develop responses to the scenarios Monitor, detect and respond to potential disruptions as soon as possible Preparing for Evil, Harvard Business Review, April 2003, pp. 109-115

Selecting the right strategy Which strategy works best against which risk?

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46, No. 1, pp. 53-61.

Tailored Risk Mitigation 1/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46, No. 1, pp. 53-61.

Tailored Risk Mitigation 2/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46, No. 1, pp. 53-61.

Manage supply chain risk 1/2 • Understand the supply chain – view it from end to end, from supplier to end customer.

• Improve the supply chain – can you simplify and reduce complexity and variability?

• Identify critical paths – what are the bottlenecks and key nodes/links?

• Manage the critical paths – make contingency plans. Christopher, M. (2005) Managing risk in the supply chain. In: Christopher, M. (Ed.) Logistics and Supply Chain Management. 3rd ed., Prentice Hall, pp. 231-258.

Manage supply chain risk 2/2 • Allow network visibility – don't be afraid to share information.

• Establish a supply chain continuity team – make it cross-functional

• Work with suppliers and customers – are your suppliers and customers aware of their own vulnerabilities?

Christopher, M. (2005) Managing risk in the supply chain. In: Christopher, M. (Ed.) Logistics and Supply Chain Management. 3rd ed., Prentice Hall, pp. 231-258.

Summary • Supply Chains are exposed to a variety of risks that are unique to each supply chain. • These risks are related to actions and events that are inside and outside of the supply chain. • Supply Chain Risk Analysis seeks to identify these risks, their sources and drivers, driver and their impact on the supply chain. • Supply Chain Risk Management seeks to establish mitigative and contingent strategies for how to deal with the identified risks and their potential impact on the supply chain.

Thank you