Supply Chain Risk Management

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Discusses the nature of risks faced by supply chain of global organisations

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Supply Chain Risk Management

  1. 1. Supply Chain RiskManagement [11/20/2012] DEBMALYA DUTTA
  2. 2. Supply Chain Risk Management1.SUPPLY CHAIN RISKS – RELEVANCE IN TODAY’S WORLD.............................................................................22.UNDERSTANDING RISK............................................................................................................................... 33.SUPPLY CHAIN RISK – EXAMPLES................................................................................................................ 34.SUPPLY CHAIN RISK MANAGEMENT FRAMEWORK .....................................................................................55.UNDERSTANDING THE VARIOUS SCM RISK CATEGORIES AND DRIVERS.......................................................76.SUPPLY CHAIN RISK PRIORITISATION.......................................................................................................... 77.SUPPLY CHAIN RISK MITIGATION................................................................................................................ 81. Supply Chain Risks – Relevance in Today’s worldRisk management in today’s business environment has become the biggest contributor tomost fields of management. Supply chain management, as part of management study,cannot avoid those risks which are inherent. It is common today in supply chainmanagement to adopt a risk concept and apply this concept as the key role in the supplychain management. Therefore, it is necessary to develop risk management and riskmitigation in the supply chain context.Risk management in today’s business environment has become the biggest contributor tomost fields of management. Supply chain management, as part of management study,2|Page
  3. 3. Supply Chain Risk Managementcannot avoid those risks which are inherent. It is common today in supply chainmanagement to adopt a risk concept and apply this concept as the key role in the supplychain management. Therefore, it is necessary to develop risk management and riskmitigation in the supply chain context. The term supply chain is defined in many ways; onesuch definition is that it is a network of organisations, which are involved through upstreamand downstream linkages, in different processes and activities that create value in the formproducts and services in the hands of customers.Nowadays, managing supply chains in a competitive, high uncertainty and turbulent marketis very challenging. The frequent occurrence of natural disasters, labour disputes, uncertainsupply and demand, supplier bankruptcy, political changes, war and terrorism have led todeeper concerns about risk management for the supply chain. Hence, the biggest challengein supply chains today is managing and mitigating the risks that are inherent in everybusiness situation. Company needs to know and understand the category of the risks as wellas the condition that drives the risks.2. Understanding RiskCompanies are waking up to the need for risk management implementation for somesignificant time. Some academicians have defined risk as “the extent to which there ishesitation whether potentially desired or insignificant/unwanted outcomes of decision will berealised.” implication of that loss for the individual or organisation.Moreover, Ritchie and Brindley (2007) cited that there are three dimensions of risk: i. Likelihood/probability of occurrence of certain outcomes; ii. Consequences/severity from the occurrence of particular events; iii. Causal pathways leading to the events.Risk = Likelihood X severity X DetectionThis leads to a logical framework which involves analysing the sources of risk, leading to abetter detection of risks, then understanding the forces which might create the occurrence ofundesired event, leading to correctly estimating the likelihood of risk and lastly managingthese dimensions to enhance the possibility of positive outcomes and avoid negativeoutcomes, leading to tackling the inherent or external risks.3. Supply Chain Risk – ExamplesWhen lightning hit a power line in Albuquerque, New Mexico (March 17, 2000), the strikecaused a massive surge in the surrounding electrical grid, which in turn started a fire at aRoyal Philips Electronics plant in the Nevada region. This damaged millions of microchips.Scandinavian mobile-phone manufacturer Nokia Corp., a major customer of the plant,almost immediately began switching its chip orders to other Philips plants, as well as to otherJapanese and American suppliers. Because Nokia had an appropriate multiple-supplierstrategy and responsiveness, its production suffered little during the crisis.In contrast, Telefon AB L.M. Ericsson, another mobile-phone customer of the Philips plant,employed a single-sourcing policy. As a result, when the Philips plant shut down after thefire, Ericsson had no other source of microchips, which disrupted production for months.Ultimately, Ericsson lost $400 million in sales. These two dramatically different outcomes from one event demonstrate the importance ofproactively managing supply-chain risk. Supply-chain problems result from natural disasters,labor disputes, supplier bankruptcy, acts of war and terrorism, and other causes. They canseriously disrupt or delay material, information and cash flows, any of which can damage3|Page
  4. 4. Supply Chain Risk Managementsales, increase costs — or both. Broadly categorized, potential supply-chain risks includedelays, disruptions, forecast inaccuracies, systems breakdowns, intellectual propertybreaches, procurement failures, inventory problems and capacity issues. Each category hasits own drivers and mitigation strategies.Coming up with the right strategy to counter risks inherent to the business’ supply chainstarts with an understanding the holistic risk categories that exist and the potential drivers.Another recent example would be the effects of recent earthquake, tsunami and the nuclearcrisis in Japan on global supply chains of automobile companies. It was reported that GMhad to halt production of vehicles at several plants, due to parts shortages from Japanesesuppliers. Toyota has suspended production of parts in the mother country that wereintended to be shipped overseas. Finally, most Japanese automotive assembly plantsremain closed.The automotive supply chain is complex. There are approximately 20,000 parts in a car, andif only one of those parts is unavailable, then the finished product cannot be shipped. At thetop of the pyramid are Tier 1 suppliers that furnish major components, such as engines, thatgo into a vehicle platform. The Tier 2 suppliers furnish the parts that the Tier 1 suppliersrequire, such as the piston rod assembly that is part of the engine. There are typically 3-5levels in the automotive supply chain, which is comprised by 1,000s of suppliers.Japanese companies produce many of the components that all OEMs require. For example,the transmissions for the new Chevrolet Volt plug-in-hybrid are sourced from the Land of theRising Sun. In addition, Japan is a major source of electronic components, furnishing manyof the over 30 microprocessors that are found in a typical car. But the Tsunami’s externalshocks to the global supply chain tested the mettle of even the strongest producers. Forexample, supply chain management at Honda was being stress tested during the calamity.Honda had at least 113 of its suppliers are located in the affected areas. During the tsunami,it had been unable to establish contact with more than 40 of them.But when a critical supplier is unable to produce material, the entire system breaks down.For example, several years ago a fire broke out in Aisin Seiki, a supplier that produced morethan 99% of Toyota’s brake valves. Most of the 506 machines used to produce the valvewere inoperable. Toyota maintained only a 4-hour supply of the valve, so, the world’s #1 carmaker’s production lines quickly shut down. This resulted in Toyota losing production of70,000 cars. But Saturday after the fire, Toyota and Asin officials summoned many ofToyota’s other suppliers, gave them blue prints, and assigned them the task of making thecritical valves. Toyota was able to survive.4|Page
  5. 5. Supply Chain Risk Management4. Supply Chain Risk Management Framework Value Value Monitoring Monitoring mapping the mappingthe and control andcontrol supply chain supply chain 5 1 4 2 Risk Risk Identification Identification Action Action Planning Planning 3 Risk Risk Assessment Assessment Exhibit 11. Value mapping the supply chain: The extended supply chain elements aremapped out to build an understanding of the key dependencies. This includes a criticalityassessment to prioritise key internal and external elements of the chain.2. Identification of relevant risks is carried out on the prioritised elements of thesupply chain. The identification is carried out against five elements of risk: demand, supply,environment, process and control. This is achieved through facilitated workshops with keymanagers, the outcome of which is recorded on a risk identification template. Exploring‘What-if’ scenarios like the ones below can help businesses identify, understand andprioritize risks, a prerequisite to tailoring effective risk mitigation strategies3. Risk assessment is a comprehensive assessment and quantification of the risks. Riskscores are determined collectively based on risk descriptions and pre-defined impact criteriato produce a risk score. The information is consolidated in a risk assessment scorecardwhich clearly defines the risks, the findings of the assessment including the respectivecriticality and the associated cost. The outcome is an evaluated and prioritised list of supplychain risks.4. Action planning helps the organisation develop an optimal ‘future state’ risk profile.This involves determining an organisations risk appetite and agreeing the level of acceptablerisk. Following a review of existing mitigation plans, an action plan needs to be defined toreach the future state risk state, resulting in a costed set of mitigation actions. This kind ofexercise is important for the management in the investment decision making process.Monitoring and control Risk assessment must be a core process rather than a one-offactivity. Risk standards, on-going audit process and a measurement and reporting process -all help with the controlling measuring and monitoring process of the supply chain risks.5|Page
  6. 6. Supply Chain Risk Management Exhibit 26|Page
  7. 7. Supply Chain Risk Management 5. Understanding the various SCM risk categories and drivers Exhibit 3 6. Supply Chain Risk Prioritisation Failure Modes and Effects Analysis (FMEA) is methodology for analysing potential reliability problems or unwanted events early in the development cycle where it is easier to take actions to overcome the problems, thereby enhancing reliability through design. FMEA is implemented to identify potential failure forms, determine their impact on production, and identify actions to mitigate the failures. Failure Modes and Effects Analysis is a planning tool on developing the process, products, or the services. The use of FMEA has been developed in the deployment of products or services for troubleshooting and counteractive action. The standard of FMEA evaluation is based on the occurrence, severity, and detection for each risk event. Risk Priority Number (RPN) = RPN = Occurrence x Severity x Detection The FMEA has been developed not merely for designing services, products, and so on. Recently, FMEA is being used for analysing potential risk in project management, marketing, operations, etc. This tool is very useful because it provides a simple method for analysing crucial steps to anticipate what might go wrong with products/services. If there is a case where anticipating every failure mode is impossible, the development team should invent as extensive a list of potential failure modes as possible. This research implements the RFMEA’s framework in order to achieve the main objective of this research which is assessment and mitigation of risk in the supply chain. Using the RPN for each risk, we can weigh the significance of supply chain risks and its mitigation will be developed. 7|PageValue Chartexample of for a plant a Risk Score An Exhibit 4
  8. 8. Supply Chain Risk Management7. Supply Chain Risk MitigationMitigation Disruptions Delays Forecast Procurem Receivable Capacity Inventory Risks ent Risk Risk Risk RiskStrategyAdd capacityAdd inventoryHave redundantsuppliersIncreaseresponsivenessIncreaseFlexibilityAggregate or pooldemandIncreasecapabilityHave morecustomeraccounts Greatly increases risk Decreases risk Increases risk Greatly decreases riskReferences:Exhibits 2, 3 and 4 are from the following paper ‘Managing Risks to avoid supply chain breakdown’by Sunil Chopra and ManMohan S. Sodhi8|Page

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