Consequences of Supply Chain Disruptions Dr. Etinder Pal Singh Feb 24, 2012 Presented at MDP organized by Center for Management Development & UPES Dehradun
• Impact of disruptions on supply chain performance: – Disruptions in the supply chain supply chain performance decreases – Higher costs, lower delivery dependability, lower service level etc. • Impact of disruptions on stock-related metrics and financial-statement metrics: – 10% decrease in shareholder wealth – 40% decrease in stock returns – 107% drop in operation income – 114% decrease in return on sales – 93% drop in return on assetsThe consequences of disruptions are severe but are they the same for all firms? Source: Hendricks and Singhal (2003, 2005a, 2005b) , Wagner and Bode (2008)
Step 1+2: Risk identification and assessment • Focus and create awareness • Create a cross-functional risk team • Determine potential risks (also unobservable risks) • Assess (quantify) risks and rank • Methods – Brainstorming, elevator pitches – Risk-matrix – Failure Mode & Effect Analysis (FMEA)Source: Lammers, Ploos van Amstel and Eijkelenbergh (2009)
Failure Mode and Effect Analysis (FMEA)Method for looking at potential ‘failure modes’ and its effects developed in the 1940s by the U.S. Army• Determine scope of analysis• Create a multi-disciplinary team• Describe processes• Describe potential failures (risks)• Determine the expected Effects of these failures (scale 1-10)• Determine the Probability of the failure (scale 1-10)• Determine the ability of Detection of the failure (scale 1-10)• Calculate Risk Priority Number (RPN = 5*6*7)• Choose target value RPN Step 3 of risk• Eliminate management• Recalculate RPN and make cost-benefit analysis
Step 3: Risk management • Treating the risks by means of a ‘strategy’ • Five classic strategies (but there are others) – Avoid – eliminate possibility of event – Reduce – minimise probability of occurrence – Transfer – shift risk to third party (e.g. insurance) – Retain – bear risk and do nothing – Exploit – reduce the impact • Subsequently, perform cost-benefit analysis of risk treatment and keep monitoringSource: DeLoach (2000), Husdal (2009)
Impact of Innovation• Allow the firm to address new or existing customer segments whose needs are NOT being served by current competitors.• Allow the firm to address new or existing customer segments whose needs are poorly being served by current competitors.• Change the design, manufacture, delivery, and distribution of existing products and services.
We need to answer the following• How do you design a supply chain for a specific desired outcome?• When can outcomes be blended and under what conditions should they not be?
The Emergence of the Blended Outcomes EnterpriseChallenge – How to achieve multiple objectives • Solution – Blended Outcomes
Blending Outcomes• Blending outcomes means making tradeoffs• When blending outcomes,one should stand out• Emphasis on the alignment of incentives within supply chain• It complicates the outcome measurement process• Some outcomes should not be blended (cost and innovation)
Success depends on• Critical SC drivers – Demand driven (Walmart/Dell) – Supply driven (oil/gas) – Technology driven• Global Cultural Differences• Location• Corporate culture (when boss is away)• Stage of product life – Early stages (responsiveness, innovation,security) – Maturity (cost and resilience)
• “The only constant is change.” – Heraclitus, 600 BC, Greek philosopher• “It is not the strongest of the species that survive, not the most intelligent, but the ones most responsive to change.” – Charles Darwin
Final Comments• If we shift from old view of supply chains to the new view, we have to rethink the supply chain.• To understand the new supply chains, we need to understand outcomes.• The new supply chain must be designed to make the blended outcomes inevitable.