Supply Chain Risk Management

Supply Chain Risk Management Minimising Risk Exposure in Supply Chain Anand Subramaniam

“Only those who risk going too far can possibly find out how far one can go."
- T.S. Eliot

Highlights
Supply Chain (SC) Today..
SC & Risk - Realities
Internal & External Drivers
Managing Risk Exposure
Risks Managing Suppliers
Risk Planning
SC Risk Framework
Risk – Tools, Techniques, Checklists

Supply Chain Today… Challenges

Supply Chain Today..

Supply Chain Today.. Riskier !!
Faster (Growth, Innovation)
Stronger (Competition)
Cheaper (Lean, Efficient, Savings $$)
Quicker (JIT, Short Product Lifecycle, Agile)
Shorter (Effective, Lead Times)
Wider (Globalisation)
Lesser ( Back up Vendor, VMI, Resources)
Changing (Demands, CPFR, Technology)
Heavier ( Requirements, Workload)

Risk Exposure – SC Network Design Top Pressures Driving Supply Risk Management 82% 79% 78% 77% 73% 70% 69% 59% 58% SC Disruption within past 24 mos Longer lead times Pressure from executives Customer pressures Global sourcing Lean/JIT initiatives Supply assurance outweighs cost Supply base reduction Regulatory pressures Transportation constraints 73% 20% 12% 10% 8% Supply Chain Price Fluctuations Labor Issues IT Systems Mgt Malfeasance 8% #1 Threat Factor To Revenue Source: Managing Business Risk 2006 & Beyond, FM Global & Harris / USA Today, 2006 Survey 602 Global CFOs / Financial Executives

AMR Research 2008 on Risk Change in level of risk from 1 year ago

Supply Chain disruption would mean..
“ Survival of the fittest”
Increase in cost / losses
Loss of reputation / image
Civil and criminal penalties
Liquidation / Chapter 11
Customer unhappy & lost to competition
Fall in revenue, profit, market share

AMR Research 2008 - SC Risk Mitigation 44% 33% 31% 29% 27% 42% 27% 10% 4% 10% 12% 5% 14% 10% Performance-based contracts with suppliers or service providers Increase in IT investment for better visibility across the supply chain Closer collaborative relations with trading partners Utilising modeling tools (optimisation, simulation) to be proactive about risk by conducting what-if analysis Outsourcing logistics function Dual/multi sourcing strategies and using redundant suppliers Outsourcing manufacturing function Top 10 methods used to mitigate risk Most successful method used to mitigate risk

Supply Chain & Risk - Realities

SCM Components.. Ideal World !! Store In-Stock Channel Design Network Rationalisation Flow of Merchandise Distribution Operations/ Transportation Planning, Buying, Allocation Supporting Infrastructure Right goods, right place, right time, right cost The optimum combination of facilities and transportation modes that achieve service targets The cost effective Distribution Channels at the lowest cost Synchronised flow of merchandise to optimise inventories and meet customer demand The most appropriate operational linkage between client and vendors Functions and processes consistent with vendor operating strengths and needs The most appropriate information systems and support areas to plan and manage the flow of goods strategy

Industry Challenges
Attracting and retaining employees
Workforce productivity
Data security
Network interruption
Working Capital
Cost allocation
High consumer debt
Globalisation
Foreign sourcing/outsourcing
Vendor indemnification management
Product recall
Creating a “customer experience”
Consolidation
Innovation
Training
Business continuity
“ Shrink” and other product losses
Workplace violence
High cost of employee benefits
Employment practices
Logistics and transportation issues
Brand integrity
Quality assurance
Supply chain disruptions
Product/brand mix complexity
2 6 7 4 3 9 8 1 10 5 High Low Relative Cost Manage Business Impact 11 High 12 13 14 15 16 17 18 19 21 20 24 22 23 25

Risks Impact - Strategy / Initiatives Shareholder Benefits Asset Utilisation Plant Specialisation
Product Profitability
Customer Value-based pricing
Matching strengths with segment
Product rationalisation
Customer survey implications
Shorten concept-to-market
Link demand chain to supply chain
Better architecture design
Capital appropriations
Selective outsourcing
Make/buy decisions
Retire unused assets
Capacity utilisation
Non-value adding elimination
Portfolio Management
Sales and Operations planning
Business resource planning
Best practice documentation
Safety stock reduction
Virtual inventory tracking
Redundant shipping elimination
Emergency shipping reduction
Reconciliation costs
Distribution/logistics improvement
Service cost analysis
Transportation routing and scheduling
Manufacturing flexibility
Plant yields
Profit / Revenue Growth Cost/ Productivity Improvement Capital Asset Evaluation Selling/Pricing Selectivity New Product Development Market/ Customer Segmentation Infrastructure Optimisation Acquisition Divestiture Inventory Management Shipping Efficiency Error Elimination Manufacturing Efficiency Strategy Initiatives Risk / Opportunity

Risks – Managing Stakeholder … Supplier SC Disruption Capacity / Quality Supplier Performance Supplier Environment Financial Distress Product / Process innovation Relationship Regulatory Disaster Customer Environmental Volume / Product mix Brand / Reputation Data Sharing Product Liability Legal Liability Market Mix Disasters Quality Internal Environmental Legal / Financial Technical / Operational Staff Turnover /OH&S SC disruption history Capacity / Sourcing Quality / Delivery Spend Leverage Innovation

Risk Management Realities… Insurance Not Purchased Political Risk Environmental Advertiser’s Liability Professional Liability E-Commerce Liability Certain lines of Products Patent Infringement Product recall Non-Owned Terrorism Liability Insurance Not Available War / Strike Reputational Terrorism Biological Nuclear / Radiation Regulatory Fines & Penalties Poor Business Judgment Supply Chain Interruption Loss of Market Share Breach of Contract Global Pandemic Fraud

Internal & External Drivers

Exposure – External & Internal Drivers Environment Supply Demand Process Governance / Controls Risk Response / Contingency Exposure External Internal External Internal

Risks - External Factors
Demand
Loss of major accounts
Volatility of demand
Concentration of customer base
Short life cycles
Innovative competitors
Buying to much / little
Environment
Natural disasters
Terrorism and war
Regulatory changes
Tax, duties, quotas
Strikes
Supply
Dependency on key suppliers
Downtime
Consolidation in supply markets
Quality issues
Potential disruption
Replenishment – lead times & variability

Risks - Internal Factors
Process
Manufacturing yield variability / quality
Lengthy set-up times, inflexible processes
Equipment reliability
Limited capacity / bottlenecks
Outsourcing key business processes
Product Complexity
Risk Response / Contingency
Awareness
Prevention
Remediation
Knowledge
Controls
Poor pipeline visibility
Inappropriate rules that distort demand
Lack of collaborative planning / forecasts
Bullwhip effects due to multiple echelons
Proprietary Technology

Risk Response / Contingency
Awareness
Probability & Impact
Recognition of effects of risk on: Physical assets & Information
Awareness on Internal & External Environment
Prevention
Goal is to reduce likelihood and / or impact of supply chain disruptions.
Key Processes include - risk identification, risk assessment, Risk treatment & risk monitoring
Remediation
Goal is to identify procedures for managing 4 stages of a disruption - Interruption, response, recovery, restoration of operations
Minimise adverse impact on:- Time, Cost, Resources
Determine most effective allocation of resources
Knowledge
Goal is to learn from experience by tracking results - things gone wrong, things gone right, future action list. & results of remediation efforts
Modify current procedures and systems to reflect lessons learned.
A SCP “post mortem”
Formalised activity

Risk Exposure in Managing…..

Risks -Managing Shareholder Value

Risks - Managing Competitive Pressures Requires a change in Business Model Serving localised customer with complex supply lines Demanding customers Changing market boundaries and new channels Aggressive global competition Industry consolidation and alliances Environmental and risk issues Stakeholder pressures Speed of technology change Shortening product life cycles Pressure on margins, growth, cost Supply & Demand Co-ordination Hyper – competition & Globalisation Compliance Green SCM Catastrophic events

Risks - Managing End to End Networks Supply Chain Redesign New Materials Cooperative Development New Relationships New Processing Product Adaptation Integrated Solutions Key Process Improvement New Products Supply Chain Responsiveness Alternative Channels Cost to Serve New Sales Sales Leadership Strategies New Business Systems Suppliers Manufacturing Distribution Retailer Consumer Flow of information, products, services and financials Capture Buying Habits Product Development Distribution Efficiency Product Replenishment Order Fulfillment Marketing Strategy Business Development

Risks - Managing SCM Performance Sell Product recall, service and quality issues can impact brand image High turnover coupled with poor training can result in serious customer service issues Plan Poorly designed products can result in future recalls Product complexity can create downstream execution issues Missed or lagging trends Design flaws & cycle time Source Globalisation & sourcing from emerging markets leads to product safety, quality, supply disruptions & monitoring issues, which Can impact customer perceptions Single / sole-sourcing creates failure points Deliver Consolidation of distribution and fulfillment creates risks - product theft, labour shortages / stoppages. Less resilient local hauling lanes create significant exposures within the last few miles of the delivery process Make Realigning and consolidating facilities creates risks – product rationalisation, labor disputes, stoppages etc. Outsourcing can create vulnerabilities that extend beyond the immediate business Service Fall in service levels (after Sales ), process returns, lack of spares etc can influence future buying behaviors brand image Lack of visibility across reverse logistics can impact top & bottom line Warranty failure can impact loyalty / image. Suppliers Manufacturing Distribution Retailer Consumer

Risks - Managing Product / Information Flow Postponement Vendor managed inventory Cross docking Continuous replenishment Flexible automation Modularisation Mass customisation Quick response Efficient consumer response End to End Supply Chain Time-based logistics Extended warehouse Visibility Integrated business planning / Sales & Operations Planning Cloud based services: Managed Services, On-Demand, SaaS Sustainability & Green Supply Chain Closed-loop Supply Chain Execution & Supply Chain Planning Demand Driven Lean Supply Chain Transportation Management & Global Trade Management Convergence Continuous Monitoring & Control of Risks

Risks - Managing SC Change Initiatives Supplier Rationalisation Flexible Manufacturing Strategies Cross- docking Activity- Based Costing CPFR Salesforce Planning Production Scheduling Inventory Planning Distribution Scheduling Integrated- Micro Marketing Customer-Focused Planning Vendors Inbound Logistics Manufacturing Transportation Warehousing Delivery Retailer Consumer Quick Response Forecasting EDI Category Management, Continuous Replenishment Net Landed Cost Palletisation, Bar Coding Vendor Managed Inventory Supply Chain Systems Selection and Implementation Promotion Planning Information, Finance & Product flows

Risks – Managing Inventory
Spend Aggregation
Procurement Expense
Direct / Indirect Materials Cost
Supplier & Material Rationalisation
Raw Materials Inventory
Throughput
Equipment Uptime
Parts / Spares Inventory
Replacement Part ID
Revenue
Selling Expense
Customer Retention
Competitive Advantage
Market Share
Maverick buys
Supplier proliferation
Parts proliferation & duplication
Disparate parts & supplier databases
Ineffective Supply Chain communication
Lack of visibility to inventories
Can’t locate parts & spares
Maverick buys
Disparate data sources
Lack of standardised product information
Can’t see product inventory
Can’t compare products
Lack of competitive differentiation
Key Success Metrics Risks Preventing Success
No tools to find parts
Lack of technical detail
Lack of standardisation
Can’t find alternates
No lifecycle status info
No tools for parts re-use
No visibility to supplier preferences
Engineering Productivity
R&D Costs
Time to Market
Product Quality
Design for Supply Chain
Product Design Supply Chain / Procurement Manufacturing & MRO Sales & Marketing Core Business Process

Risk Exposure - Managing Suppliers

Supplier - Risk Sources
Ineffective management
No sharing of information
No alternative suppliers
Inability to influence suppliers
Inability to meet required volumes
Lack quality process in operations
Financial instability or financial failure
Incorrectly interpreting requirements
Political instability/ war affecting suppliers’ operations
Suppliers exiting market on short notice
Product quality problems
Labour / Management problems
New or unproven product / process technology utilised
Long physical distances between buyer and suppliers
Variability / transportation disruptions with inbound supply channels
Currency rate & material price fluctuations
Natural disasters or “acts of God” affecting suppliers’

Managing Supplier
Supplier Handbook
Performance Measurement (Report Card)
Purchasing contracts
Weekly / Monthly / Quarterly Meetings
Audit planning; execution; reporting
Change Management
Continuous Risk Assessment and Response Strategies
Supplier Profiles & Risk Assessment Supplier Audits & Certification Non-conformance / Corrective & Preventive Actions Product Sampling & Test Results Performance Monitoring & Reporting

Root Cause Analysis Supplier Supply Chain Involuntary (bankruptcy) Voluntary (exit market) Business Exit Supplier Business Continuity Sole / Single Source Environmental Control Security Natural Disaster Building Contamination Inventory Handling & Managment Warehousing Poor RM Quality RM Out of Spec Contamination Inadequate Documentation Compliance Systems Process Procurement Raw Material Supply

Risk Planning - Integration (People, Process & Systems)

Risk Planning – Competency & Performance
Customer Integration
Relationships beyond sales transactions
Planning for individual customer requirements
Synchronising activities with customers
Continuously exploring new working relationships
Better Fulfillment Performance
Delivery to promise
Fill rate
Perfect order fulfillment
Internal Integration
Cross functional awareness of responsibilities
Common prioritisation of customers
Common product roadmaps
Sharing of operational information
Performance metrics that promote cost / service trade-offs
SC Network Integration Technology
Dist order management
Event management
Enterprise app integration
RFID

Risk Planning – C & P (Contd.)
Supplier Integration
Developing relationships to build on key supplier capabilities
Exchanging operational information
Synchronising activities with suppliers
Better Product Quality
Product conformance
Product design (performance and features)
Product reliability
X-functional awareness of responsibilities

Supply Chain Segmentation
Continuously updating customer segmentation strategy
Segmenting products based on profit contributions and lifecycle stage
Better Asset Utilisation
Cash-to-cash cycle
Inventory days of supply
Asset turns
Forecast accuracy
Planning Effectiveness
Formalised, disciplined processes addressing both long and short term planning
Contingency and risk analysis with scenario evaluations
Feedback loops addressing variances
Vulnerability and continuity planning
SC Network Integration Technology
Dist order management
Event management
Enterprise app integration
RFID
Strategic Planning Technology
Bus & SC intelligence
PLM
Network optimisation
Tactical Planning Technology
S&OP
APS
Distribution planning

Strategic Alignment
Clear SC goals and objectives driven by business strategy
Business strategy exploits SC capabilities and constraints
Strategies communicated to all employees
Better Flexibility
Order fulfillment lead time
Supply chain response time
Production flexibility
Relationship Management Technology
CPFR
CRM
SRM
Supplier Performance

Customer Integration
Relationships beyond sales transactions
Planning for individual customer requirements
Synchronising activities with customers
Better Cost Performance
Supply chain cost
COGS
Warranty & returns processing cost
X-functional awareness of responsibilities
Execution Systems Technology
WMS
TMS
ERP
eProcurement
JIT/Kanban

Risk Framework

Strategic Approach – Resilient SC Resilient Supply Chain Supply Chain (Re)Engineering Supply Chain Design Supply Chain Understanding Supply Base Strategy Supply Chain Collaboration Collaborative Planning Supply Chain Intelligence SC Risk Mngt Culture Agility Visibility Velocity Supply Chain Continuity Teams Board level responsibility Risk in decision making

Risk Framework Strategy Execution Tactical Iterate & Improve

Risk - Strategy
Input
Business Strategy
Value Drivers
Organisation Process
Define Risk Management Objectives
Determine Risk Appetite / Tolerance
Define Risk Organisation
Perform SWOT Analysis
Design supply chain to match Risk Profile
Map & Evaluate Current Network
Analysis – Cost, Inventory
Identify & Evaluate Alternative Structures
Techniques
Interviews
Questionnaires
Checklist
Assumption Analysis
SWOT template
Output
Risk Profile
Risk Organisation Chart
Roles & Responsibilities
SWOT Analysis
Optimal Network Structure
Risk Strategy
Risk Register
Risk Policies
Risk Governance Process

Risk - Tactical
Input
Risk Profile
Risk Organisation Chart
Roles & Responsibilities
SWOT Analysis
Optimal Network Structure
Risk Strategy
Risk Register
Select Optimal Network Structure
Identify Failure Points in the Supply Chain
Prioritise the Failure Points
Identify Alternatives
Define the Alert Criteria
Techniques
Qualitative Assessment - Probability / Impact Matrix, Brainstorming, Cause & Effect Diagrams
Quantitative Assessment - FMEA, Simulation, Modelling, Diagramming Techniques
Strategies for Negative and Positive Risks
Strategies for Opportunities & Threats
Contingency Response Strategies
Risk Management Information Systems
Output
Rank Alternatives
Risks Related to Contractual Agreements
Risk Categorisation
Ranking of Failure Points
Risk Database Populated with Alert Criteria
Alert Process Defined

Risk - Execution
Input
Risk Strategy
Risk Policies
Risk Governance
Risk Register
Rank Alternatives
Risks Related to Contractual Agreements
Risk Categorisation
Ranking of Failure Points
Risk Database With Alert Criteria / Process
Performance Reports
Collaborate on Risk Response Plan
Continuously Monitor
Techniques
Status Meeting
Risk Reassessments
Risk Audits
Variance / Trend Analysis
Performance Measures
Reserve Analysis
Alert Mechanisms
Risk Management Knowledgebase
Output
Risk Registers
Recommendation –Preventive, Awareness, Remediation
Monitor Inherent, Residual & Secondary Risks
Evaluate Effectiveness

Knowledge - Iteration & Improvement Lessons Learnt Capture Communicate Collaborate Continuously Improve

Stakeholder / Change - Management
Capture
Input
Detect disruptions and estimate impact on supply chain performance
Process
Identify & categorise disruptions
Record risk in risk database
Output
Disruption list
Risk database
Follow-up
Communicate
Input
Communicate impact of disruptions
Process
Risk responsible identifies disruption & leads meeting with participants
Distribute reports and documents from ‘capture’ to ‘closure’
Output
Review action points & follow up
Collaborate
Input
Review immediate action and identify causes
Process
Identify alternative solutions
Select best alternative
Delegate assignment
Output
Project closure report
Improve
Input
Review action plan from project closure phase
Process
Review success / failure of solutions implemented
Re-group if mitigation is unsuccessful
Record / update the solutions
Output
Updated risk database

Risk – Tools, Techniques, Checklists

Risk Categories Relationship Relationship Supply Chain Disruption Human Resources Performance Supply Chain Performance Financial Health Environment SC Risk Category Quality, Delivery, Capability, Service Influence, Alignment, Information, Sharing Turnover, Union issues, Pay Position Market Power, Information Visibility, Concentration, Disruption Potential Size, Asset Utilisation, Capitalisation, Profitability 1 2 3 4 5 6 Market Dynamics, Mergers, Regulatory, Disasters, Transportation

Questionnaire on SC Risk Issues

Supply Chain Risk Barriers

Supply Chain Description

Risks - Demand, Supply, Control Etc.

Risk - Scoring Results

Risk – Scoring System Consequences 1. No direct effect on operating service level 2. Minor deterioration in operating service level 3. Definite reduction in operating service level 4. Serious deterioration in operating service level 5. Operating service level approaches zero Likelihood of occurrence E. Probability of once in many years D. Probability of once in many operating months C. Probability of once in some operating weeks B. Probability of weekly occurrence A. Probability of daily occurrence Likelihood of detection A. Detectability is very high B. C onsiderable warning of failure before occurrence C. Some warning of failure before occurrence D. Little warning of failure before occurrence E. Detectability is effectively zero

Risk - Quantification / Qualification Valuation (factors to consider) Quantitative factors Revenue value Asset value Cash flow value Qualitative factors Brand Compliance Strategy Uninsurable Risks
Supplier non-performance
Customer demand volatility
Partner work stoppages
Product defects/recalls
Emerging risks (pandemic)
Others
Insurable Risks
Catastrophic disaster
Property damage/loss
Product liability
Business interruption
Others

Risk – Prioritised Consequence Likelihood 0 Tolerate Terminate Treat Transfer

Risk Classification

Cause & Effect Analysis Failure to Deliver on Time No Stock Available Lead-Time Too Short Carrier Performance Quality Problems Capacity Constraint Inflexible Systems Inadequate Communications Poor Scheduling Inadequate Supplier Management Materials Supply Problem Failure to Achieve Plan Forecasting Problems Poor Process Control

Risk Control Matrix Key Process Number Process Risk Number Risk Control Objective Control Number Control Description Control Owner Process Narrative Control Category Control Type Primary/ Secondary Control Frequency Design Assessment

Example – Contingency Risks How Long Can You Do Without? Impact of Doing Without? Vulnerabilities? Contingency in case of a disaster? Equipment (IT only) 5 days After five days no way to schedule production or track orders No UPS/generator, MD hardware, SPOF SME Use paper reports for 5 days then go manual for as many members as possible Facility 0 days No production, potential for bankruptcy, IT non-existent Metal building, flood zone, poor maintenance, no perimeter security, door lock broken Look for warehouse space, attempt to salvage equipment and restart operation, file bankruptcy Personnel 0 days Degraded operations, low service levels Too many SPOF Best effort shifting of available staff, temps Raw Materials 30 days before new deliveries None until on hand exhausted Single supplier relationship Search for alternative supplier Transportation System 30 days in 2 days out No supplies No deliveries Location, design of entrance None Utilities 0 hours/power 0 hours/water Extrusion shuts down, lines cleaned, waste collected and prepared for grinder, IT non-existent Single power feed, no generator or backup water supply None Vendors (Sourcing) 4 hours No call center Mercy of vendor Bring in-house

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Supply Chain Risk Management

by Anand Subramaniam on Jun 06, 2009

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Supply Chain Risk Management — Presentation Transcript