Supply Chain Risk

Supply Chain Risk Guest lecture, LOG 711, 12.11.2008 Jan Husdal  jan.husdal@himolde.no  71214289

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

Supply chain risk? Loss of goods Insurance? Loss of vehicle Replacement? Delayed delivery Brand reputation? Injured personell Hiring and training? 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 .
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
An ill-handled supply chain disruption
>>> business dis-continuity
A well-handled supply chain disruption
>>> business 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 .
There are many definitions of risk, depending on their specific application and on their situational context .
Risk denotes the precise probability of specific 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 . This can be done qualitatively , where probabilities and impacts are subjective values (e.g. low/high and minor/major),or 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 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 Mitigative actions address risk sources. Contingent actions address risk consequences.

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

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

Supply chain risk sources 1/2
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.
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
Environment al risk

Supply chain risk sources 2/2
Sources of risk can be broadly categorized along three different levels:
Organization al risk
Network risk
Environment al 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 1/2
Network (Supply Chain) Risks
Supply Risks - disruption of supply, inventory and schedules, incoming delays
Operation al 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

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
Types of supply chain risk 2/2 Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management . Journal of Business Logistics, Vol. 29 , No. 1, pp. 133-155

Risk Management Strategies Avoid Transfer Reduce Retain Deloach, J (2000) Enterprise-Wide Risk Management: Strategies for Linking Risk & Opportunity. Financial Times Management/ Prentice Hall. Before we look at strategies for managing supply chain risk, let us look at general strategies for managing risk

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 . 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

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

Supply Chain Disruptions Sheffi, Y. (2005) The Resilient Enterprise - Overcoming Vulnerability for Competitive Advantage , MIT Press Warning? What happens to supply chain performance during an unforeseen event?

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

Supply Chain Disruptions 3/3
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 Resilient organizations

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

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

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

Selecting the right strategy Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46 , No. 1, pp. 53-61. Which strategy works best against which risk?

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.

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?

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 driver s, 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

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Supply Chain Risk

by Jan Husdal

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