Supply Chain Risk Management (guest lecture Tilburg University March 2010)

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  • 1. Supply chain risk management & resilience Guest lecture | Tilburg University | 31 March 2010 Robbert Janssen E-mail: [email_address]
  • 2. Outline
    • Short introduction
    • What is supply chain risk?
      • Why is it important?
      • Case: Nokia vs. Ericsson
      • Trends and developments in supply chain management
      • Supply chain risk and its sources
      • Risk perception
      • Supply chain disruptions
      • Supply chain vulnerability
    • Supply chain risk management & resilience
      • How to manage and mitigate risks?
    • Reconciling supply chain risk with supply chain management
    • Time for questions
  • 3. Introduction
    • Robbert Janssen
    • Logistics & Operations Management
    • Writing master thesis at TNO Mobility & Logistics, Delft
    • Topic: empirical investigation into supply chain risk management and the vulnerability of supply chains
    • Questionnaire with EVO and TLN, distributed to firms in the Netherlands
    • +/- 325 responses
    • Some results  in this presentation
  • 4. Recent years… Source: Yahoo Finance
  • 5. Recent years….
  • 6. Most important risks faced by multinational firms
    • Aon Global Risk Management Survey 2009
    • Survey among 550 multinational companies (> $ 1 billion revenue)
      • Economic slowdown
      • Regulatory / legislative change
      • Business interruption risks
      • Increasing competition
      • Raw materials / commodity prices
      • Damage to reputation
      • Cash flow / liquidity risk
      • Supply chain failure
      • Third party liability
      • Difficult to attract top talent
    Supply chain risks mentioned three times in Top 10!
  • 7. Risks in supply chains?
  • 8. Natural disasters reported 1900-2008 Source: EM-DAT (2010)
  • 9. “ It does not happen to our company”
  • 10. Risks in the supply chain – an example The Albuquerque accident
    • March 2000
    • Philips semi-conductor plant in Albuquerque, New Mexico, USA
      • Sole-supplier of radio-frequency chips to Nokia and Ericsson
    • Lightning strike lead to small fire in clean rooms at Philips plant
    • Sprinkler installation activated in clean rooms
    • It took 3 weeks before production was up and running again
    • After 6 months, production yields were only 50%
    • It took years before new equipment was delivered and installed
  • 11. 2 very different responses to the accident
    • Did not recognise threat for weeks
    • When they tried to recover: entire worldwide supply for RF-chips was committed to Nokia
    • Outcome
      • Missed critical product introduction
      • Business interruption costs: $ 200 million (insurance paid)
      • Annual P/L statement: $ 400 million loss
      • Ceased making cell phones under individual brand (  became Sony-Ericsson)
    • Immediately recognised threat
    • Actively responding, sending 30 engineers to restore supply from Philips-plant
    • Secured entire worldwide capacity of Philips-chips
    • Actively searching for other suppliers all over the world
    • Redesigning existing handsets to use different chips
    • Outcome
      • Achieved sales targets
      • Increased market share
    Source: Normann & Jansson (2003), Sheffi & Rice Jr. (2005)
  • 12. Some developments and trends in supply chain management
    • Globalisation and global sourcing
      • Longer, more complex supply chains
      • Volatile markets
    • Strong focus on achieving efficiency and economies of scale
      • Lean, JIT-processes
      • Centralised distribution and manufacturing
      • Single-sourcing / reduction number of suppliers
      • Shorter lead-times and delivery cycles
      • Working capital optimisation
    • Outsourcing and off-shoring non-core activities
      • Loss of control
    Source: Christopher (2005), Husdal (2009)
  • 13. What are the most important developments / trends that lead to increased risks in the Netherlands?
    • Reliance on IT-infrastructure
    • Increased dependency on customers
    • The economic downturn
    • Increased competition in the market place
    • Legislative changes (‘compliance’)
    • All these factors can have
    • consequences for the supply chain
    Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)
  • 14. 4 constructs that we need to deconstruct
    • Usually, research in the field of supply chain risk consists of 4 constructs
      • Supply chain risk
      • Supply chain disruption
      • Supply chain vulnerability
      • Supply chain risk management (and resilience)
    Source: Wagner and Bode (2008)
  • 15. Supply chain risk
    • Risk is a concept with a lot of different definitions
    • 2 main perspectives:
      • Exposure to uncertainty (everyday usage e.g. “it is risky to drink and drive”)
      • Outcome of an event (e.g. higher total costs and longer lead-times after a fire in a warehouse:
          • Risk = Probability * Consequences)
    • What can happen? ( risk sources )
    • How likely is it that it will happen? ( probability )
    • If it does happen, what are the consequences? ( consequences )
    Source: Jüttner et al. (2003); Zsidisin and Ritchie (2008)
  • 16. Analysing supply chain risks
    • Firms commonly visualise unforeseen and unwanted events by means of a risk-matrix
    • A risk-matrix has 2 dimensions: probability and consequences (impact)
    • Problem: it relies heavily on risk perception.
    Source: Sheffi & Rice Jr. (2005)
  • 17. Risk perception
    • Depends on:
      • Time/moment
      • Experience/knowledge
      • Place
      • Risk attitude / appetite
      • Position
      • Possibilities to decide
      • Big bang or small incidents
  • 18. Supply chain risk sources
    • Where can risks originate from?
    Source: Christopher & Peck (2004)
  • 19. Supply chain risk sources
    • Where can risks originate from?
    Source: Christopher & Peck (2004) Machine break-down Employee strike Order quantity policies Quality control Volatile customer-demand Wrong order-forecast Natural disasters Political instability Severe weather conditions Bankruptcy of supplier Quality problems at supplier Transportation failure
  • 20. Supply chain disruptions
    • “ Supply chain disruptions are unplanned and unanticipated events that disrupt the normal flow of goods and materials within a supply chain ”
    • Supply chain disruptions: the occurrence of risk
    • Consist of: a trigger and the situation that emerges afterwards.
    Source: Craighead et al. (2007), Wagner and Bode (2008)
  • 21. Iceberg of disruptions Worldwide known disruptions 9/11, novel influenza H1N1 Region / country Piracy, Foot and mouth disease, Q-fever Individual (chain) disruptions Fire, strikes Disruptions that took place but were not in the press ‘ almost-disruptions’ Big customer threatens to leave Insolvable supplier saved from bankruptcy Huge reservoir with potential disruptions
  • 22. Most frequently occurring disruptions in 2008-2009
    • Sudden drop in customer demand
    • Quality issues at the supplier
    • Poor logistics performance of suppliers (delivery dependability)
    • Severe weather conditions
    • IT-infrastructure problems (hardware, software)
    Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)
  • 23. Where did the disruptions come from? Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)
  • 24. The disruption profile Source: Sheffi & Rice Jr. (2005)
  • 25. What are the consequences of a disruption?
    • Higher cost
    • Bad performance
    • Lost sales
    • Lower profits
    • Bankruptcy
    • Fear, danger
    • Damage to reputation
    • For whom?
    • The company itself
    • Suppliers
    • Customers
    • Society
  • 26. Toyota
    • Toyota recall
      • Estimated costs US$ 2 billion
      • All cars checked and repaired if needed
      • Biggest challenge now: regaining confidence
        • Could also be an opportunity
    Source: Spitsnieuws 24 March (2010)
  • 27. Consequences of supply chain disruptions
    • 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 (1 day before actual disruption + day of the disruption)
      • 40% decrease in stock returns (observed 1 year before actual disruption until 2 years after disruption)
      • 107% drop in operation income
      • 114% decrease in return on sales
      • 93% drop in return on assets
    Source: Hendricks and Singhal (2003, 2005a, 2005b) , Wagner and Bode (2008)  The consequences of disruptions are severe but are they the same for all firms?
  • 28. Supply chain vulnerability
    • “ The susceptibility of a supply chain towards the harm of a particular supply chain disruption”
    • The vulnerability of the supply chain is a function of the characteristics of the supply chain. This means that the structure of the supply chain is an antecedent of supply chain vulnerability.
    Source: Wagner and Bode (2008)
  • 29. Drivers of supply chain vulnerability
    • The characteristics of the supply chain structure  Supply chain vulnerability drivers
    • Some examples:
      • Complexity of the supply chain (global sourcing)
      • Density (NL: dichtheid) of the supply chain
      • Single sourcing (Nokia, Ericsson example)
      • Lean and JIT production philosophies
      • Centralisation of warehouse/manufacturing locations
      • Dependency on suppliers / customers
      • Dependency on IT-infrastructure, electricity etc.
    • It is about ‘conscious’ decisions regarding how you design the supply chain
    Source: Craighead et al. (2007), Wagner and Bode (2008)
  • 30. Example: Density
    • Dutch Logistics Hotspots 2009
      • Main ports Amsterdam and Rotterdam
    • High density regions
      • Congestion (road, trains, waterways)
      • Proximity effect (power failure, flooding)
    • By using these high density regions  leads to higher vulnerability of supply chains
    Source: TNO - Quick scan: overzicht van netwerk logistieke hot spots in Nederland (2009). Falasca et al. (2009)
  • 31. Example: Lean and JIT production philosophies
    • ‘Leaning-down’ too far can cause higher costs for recovery of a disruption.
    • However, take care that Just-in-Time does not digresses to Just-in-Case management
    Source: Christopher and Rutherford (2004)
  • 32. One construct left
    • Supply chain risk
    • Supply chain disruption
    • Supply chain vulnerability
    •  Supply chains are becoming more vulnerable and increasingly at risk of disruption. How can we manage this?
    • Supply chain risk management (and resilience)
  • 33. Supply chain risk management (SCRM)
    • Activities that firms may engage in to mitigate (i.e. make less severe) the probability of occurrence or negative consequences of supply chain disruptions.
    • Lots of frameworks available, but usually risk management consists of 3 general steps (ISO 31000):
      • Risk identification
        • Identifying the risks and its characteristics
      • Risk assessment
        • Ranking risks in terms of probability and consequences (quantifying)
      • Risk management
        • Treating the risks and implementing the chosen solution, monitoring the impact of the risk management solution on the business performance
     Well that sounds pretty easy, doesn’t it? Source: ISO 31000
  • 34. The problem of risk management: It’s an ostrich business! Risk management is not sexy, no fun and it costs money. And the benefits are not even sure!
  • 35. 5 most important barriers towards implementing SCRM
    • The benefits of SCRM are difficult to monetise
    • Focussing on achieving efficiency prevents implementing SCRM
    • Fear of spreading important business information
    • Limited acceptance that risks go beyond company walls
    • Vulnerabilities of the business must remain secret
    Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)
  • 36. 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)
  • 37. 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
    • Eliminate
    • Recalculate RPN and make cost-benefit analysis
    Step 3 of risk management
  • 38. Film clip – example of creating awareness and focus
    • Trade and wholesale firm for electronics and technical installation material
    • Intermediary between 750 suppliers and 15,000 customers
    • 280,000 SKUs - 90,000 items in stock
    • Logistics structure: 2 distribution centres, 24 transhipment points
    • Daily: 60,000 order lines, 24hr delivery by 240 trucks to 9,000 delivery addresses
    • 11 February 2008 – 09.00 am: “normal bi-weekly logistics team meeting”
  • 39. 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 monitoring
    Source: DeLoach (2000), Husdal (2009)
  • 40. Cost-benefit analysis of risk management
  • 41.
    • “ 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
  • 42. Supply chain resilience
    • “ Buzzword” in the context of SCRM
    • Definition:
      • “ the supply chain’s ability to survive, adapt, recover and grow from a disruption in the face of turbulent change”
    • Dutch synonym: veerkrachtigheid
    • It is about: having the ability to survive a major disruption and subsequently recover, adapting to the changing environment.
    • Focusing on reducing the consequences of a major disruptions (instead of predicting/estimating probability of occurrence)
    • Resilience originally was aimed at disruptions that
      • You do not see coming
      • High impact, low probability (HiLo)
      • Affect several parts of the supply chain
    • Nowadays, an approach for
    • supply chain risk management
    Source: Fiksel (2006), Sheffi and Rice Jr. (2005), Husdal (2009) Resilience needed
  • 43. How to become more resilient?
    • 4 categories of measures to become more resilient
      • Redundancy – reserve resources (buffer inventories, slack in the process, insurance policies), comes at an undesirable premium
      • Flexibility – capabilities (shift production from one plant to the other, standardise processes, re-engineer products, product postponement)
      • Transparency – open communication with suppliers and customers, knowledge of the current status of operations (enablers: IT in the broadest sense, RFID, GPS, EDI etc.)
      • Collaboration – effectively working together, sharing (confidential) information (CPFR initiatives)
    Source: Sheffi and Rice Jr. (2005), Lammers, Ploos van Amstel en Eijkelenbergh (2009) redundancy transparency flexibility collaboration
  • 44. Reconciling supply chain risk with supply chain management
    • The supply chain of tomorrow must deliver varying degrees of six outcomes, depending on the customers’ needs:
      • Cost efficiency
      • Responsiveness
      • Security
      • Sustainability
      • Resilience
      • Innovation
    • There could be other outcomes
    • e.g. Reliability
    • “Adaptability, key to success”
    Source: Melnyk, Davis, Spekman and Sandor (2010)
  • 45. Summary
    • Supply chains are exposed to a wide range of risks that are distinctive for each and every supply chain
    • Disruptions can have severe consequences, both tangible (higher costs, lost sales etc.) and intangible (reputation, fear etc.)
    • Supply chain risk management seeks to identify risks, assess their impact and subsequently mitigate these risks
    • Resilience is another perspective for risk management, focusing on reducing the consequences of a major disruption
    • Supply chain resilience is one of six ‘outcomes’ that a modern supply chain should have
  • 46. Suggested further reading
    • Asbjørnslett, B. (2008). Assessing the vulnerability of supply chains, In: Zsidisin, G., Ritchie, B. (Eds.), Supply Chain Risk: A Handbook of Assessment, Management and Performance , New York: Springer, pp. 15-33
    • Chopra, S., Sodhi, M. (2004). Managing risks to avoid supply-chain breakdown, MIT Sloan Management Review , Vol. 46 No. 1, pp. 53-61
    • Christopher, M., Peck, H. (2004). Building the resilient supply chain, International Journal of Logistics Management , Vol. 15 No. 2, pp. 1-14
    • Craighead, C., Blackhurst, J., Rungtusanatham J., & Handfield, R. (2007). The severity of supply chain disruptions: design characteristics and mitigation capabilities, Decision Sciences, Vol. 38 No. l, pp. 131-156
    • Khemani, K. (2007) Bringing rigor to risk management. Supply Chain Management Review Vol. 11 No. 2, pp. 67-68.
    • Peck, H. (2006). Reconciling supply chain vulnerability, risk and supply chain management. International Journal of Logistics: Research and Applications, Vol. 9 No. 2, pp. 127-142.
    • Sheffi, Y., & Rice Jr., J.B. (2005). A supply chain view of the resilient enterprise, MIT Sloan Management Review , Vol. 47 No. 1, pp. 41-48
    • Vanany, I., Zailani, S., Pujawan, N. (2009). Supply Chain Risk Management: Literature Review and Future Research, International Journal of Information Systems and Supply Chain Management , Vol. 2 No. 1, pp. 16-33
  • 47. Thanks for your attention Any questions?