Source: www.cargolaw.com The lecture is meant to highlight some of the current literature on supply chain risk and to suggest further reading materials. You will not know everything there is to know about supply chain risk after the lecture, but you will know where to find it.
Supply chain risk? Loss of goods Insurance? Loss of vehicle Replacement? Delayed delivery Brand reputation? Injured personell Hiring and training? Weather conditions Detour?
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
Local event – Global consequences (1) www.autonews.com
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 Local event – Global consequences (2)
The Ericsson/Nokia fire Mukherjee, A. (2009). The Fire That Changed an Industry. In The Spider's Strategy: Creating Networks to Avert Crisis, Create Change, and Really Get Ahead (pp. 3-15). Upper Sadle River: FT Press. Eglin, R. (2003). Can suppliers bring down you firm ? Times Online, November 23, 2003. http://www.ftpress.com/articles/article.aspx?p=1244469 http://business.timesonline.co.uk/tol/business/career_and_jobs/senior_executive/article1022636.ece
Why Supply Chain Risk? Supply chain risk research has grown in importance in the last 10 years and has resulted in many frameworks and concepts of risk categories and risk mitigation measures, but there is yet to be a consensus on which framework that best captures different types of supply chain risks. Oke, A., & Gopalakrishnan, M. (2009). Managing disruptions in supply chains: A case study of a retail supply chain . International Journal of Production Economics, 118 (1), 168-174 .
One commonly used risk definitions is the one found in Kaplan and Garrick (1981, 1997), later in Paulsson (2007).
This definition splits the concept of risk into three different elements , together called a triplet .
Each triplet identifies a risk scenario , involving a source , a likelihood and an impact .
What can happen and what is the cause?
How likely is it that it will happen?
If it does happen , what are the consequences?
Kaplan, S., Garrick, B.J. (1981). On the quantitative definition of risk . Risk Analysis, 1 (1), 11-27. Kaplan, S. (1997). The words of risk analysis . Risk Analysis, 17 (4), 407-417. Paulsson, U. (2007). On Managing Disruption Risks in the Supply Chain – the DRISC Model . Unpublished PhD, Lund University, Lund.
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.
HI-LL-events are rare, sudden and often totally unpredicted and unprecedented, and are also called “ Black Swan ” Events.
Difficult to predict (proactive) but possible to prepare for (reactive)?
A common problem with quantified risk management: We overestimate our abilities and underestimate what can go wrong.
Taleb, N M, Goldstein D G & Spitznagel, M W (2009) The Six Mistakes Executives Make in Risk Management. Harvard Business Review 87(10), 78-81 Cohen, Morris A, & Kunreuther, Howard (2007). Operations Risk Management: Overview of Paul Kleindorfer’s Contributions Production and Operations Management, 16(5), 525-541
Sources of risk can be broadly categorized along three different levels:
Organization al 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.
Supply chain risk can be regarded as a multi-dimensional construct, working on many levels .
All organizations depend upon others to enable the delivery of their products and services to customers and clients.
Supply chains serve a purpose that extends far beyond the functional concerns and stated aims of SCM. SC R M must, too.
Peck, H. (2005). Drivers of supply chain vulnerability : an integrated framework. International Journal of Physical Distribution & Logistics Management, 35(3/4), 210-229. Peck, H. (2006). Reconciling supply chain vulnerability, risk and supply chain management . International Journal of Logistics: Research and Applications, 9(2), 127-142.
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 (impacts) of the risk sources. Risk drivers that turn risks into consequences. Strategies to address the risks.
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.
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.
Risk Management Strategies (1) Avoid Transfer Reduce Retain Exploit DeLoach, J (2000) Enterprise-Wide Risk Management: Strategies for Linking Risk & Opportunity. Financial Times Management/ Prentice Hall. The classic Four (Five) Exploit
Different supply chain characteristics will result in different ways a supply 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 , Agility and Resilience (1) Frequently used terms (1) Figure in: Husdal, J. (2010) A Conceptual Framework for Risk and Vulnerability in Virtual Enterprise Networks . In: S. Ponis (Ed.) Managing Risk in Virtual Enterprise Networks. Hershey: IGI. In Press.
Flexibility is scheduled or planned adaption to unforeseen yet expected external circumstances. Goranson (2002)
Agility is unplanned and unscheduled adaption to unforeseen and unexpected external circumstances. Goranson (2002)
Robustness is the ability to endure changes in the environment without adapting . Asbjørnslett (2008)
Resilience is the ability to survive despite withstanding a severe and enduring impact . Asbjørnslett (2008)
The difference between Robustness , Flexibility , Agility and Resilience (2) Frequently used terms (2) Goranson, T. (1999). The Agile Virtual Enterprise . Westport, CT: Quorum Books. Asbjørnslett, B. (2008). Assessing the Vulnerability of Supply Chains . In G. A. Zsidisin & B. Ritchie (Eds.), Supply Chain Risk: A Handbook of Assessment, Management and Performance . New York: Springer.
Estimate Probabilities and Potential Loss for each Key Supply Chain Location
Evaluate alternative Countermeasures for each Key Supply Chain Location
Select Countermeasures for each Key Supply Chain Location
The Potential Loss: PL k =P k * L k where Pk is the probability estimate of a catastrophic event impacting key location k, and Lk is the estimated loss that is incurred if an catastrophic event occurs at key location k.
Knemeyer, A., Zinn, W., & Eroglu, C. (2009). Proactive planning for catastrophic events in supply chains . Journal of Operations Management, 27 (2), 141-153
Should every risk be mitigated? In some cases, the costs of mitigation will be greater than the cost of the catastrophic event.
A = the cost (loss) of a supply chain disruption without mitigation.
C = the cost (loss) of a supply chain disruption without mitigation.
B = the cost of mitigation when the cost of disruption is almost zero
Neither B nor C are optimal, although C is better than B.
The optimum is reached where the cost of disruption intersects with the cost of mitigation.
Figure in: Husdal, J. (2005) The vulnerability of road networks in a cost-benefit perspective . Paper presented at TRB2005, the Transportation Research Board Annual Meeting 2005, Washington DC, USA, 9-13 January 2005.
Supply Chain Disruptions (1) Sheffi, Y. (2005) The Resilient Enterprise - Overcoming Vulnerability for Competitive Advantage , Cambridge: MIT Press Warning? What happens to supply chain performance during an unforeseen event?
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
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:
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”).
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
Six steps for mapping the risk profile and developing strategies:
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 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.