Management of Supplier Risks in Global Supply Chains
VOL 5 NO 3
Management of Supplier Risks
in Global Supply Chains
By V. S. Srividhya and Raj Jayaraman
Improve predictability and business
continuity in global supply chains using
the SRM framework
T he US manufacturing sector contributes Group mentions that LCC imports are growing
over 12% of total US GDP and two-thirds of at over 20% in certain categories . Spend
total US exports . In recent times, companies aggregation, leveraged sourcing and modular
in this sector are faced with signiﬁcant sourcing - where vendors source not just parts
operational pressures. With hourly labor costs but entire modules including accompanying
in China estimated to be 3-4% that of the US services (design, inventory management, after-
, US manufacturers are ﬁnding themselves sales service), is also a growing trend.
getting priced out of the market by lower cost While these strategies have yielded
manufacturers. In addition to the pricing pressure signiﬁcant operational beneﬁts, recent events
from overseas, the industry has witnessed an have proved that there are also inherent risks
inﬂationary trend in raw material and energy that could signiﬁcantly impact beneﬁts. As
prices. In the last 5 years, for instance, the base manufacturers source globally, they increase
steel prices have almost doubled . Energy their lead-time and vulnerability for supply
prices, which cause a direct increase to overhead chain failures.
costs, have also increased. Risks impact total cost of ownership
With all the core inputs to through their effect on quality, delivery and
manufacturing (labor, material, overhead) seeing end customer satisfaction. There is a need to
tremendous price hikes, manufacturers have effectively assess these risks and develop a
expectedly responded with a relentless focus on comprehensive mitigation approach to ensure
operational cost reduction. The trend towards supply chain continuity.
low cost country sourcing has been rapidly This paper is focused on providing
growing. A recent study by Boston Consulting a framework to: (i) assess the negative impact
of risks in global supply, (ii) applying a supplied radio frequency chips (RFCs)
comprehensive framework to identify and to Ericsson. The company was not
mitigate the supply risks, and (iii) highlighting aware of the supply problems for weeks,
critical success factors and beneﬁts of the by which time its ability to meet
framework. customer demand had been seriously
compromised. And because Ericsson
THE RATIONALE FOR SUPPLY RISK relied exclusively on the Albuquerque
MANAGEMENT plant for the RFCs, they had
In the context of global supply, there are a nowhere else to turn for these
variety of factors that can contribute to supply vital components. Ericsson posted a nearly
disruptions ranging from geo-political instability $1.7 billion loss for the year, and
in the supply region to more localized factors ultimately had to outsource its cellular
such as strikes at the source of supply. The handset manufacturing business to
following high proﬁle events provide an insight another ﬁrm .
Globally, billions of dollars have sunk in
supply chain disruptions due to lack of or weak
supply risk mitigation strategies
into severe supply disruption losses due to As can be gauged from the above
supply chain risk: examples, a series of events produce a domino
effect and cause disruptions to supply. There are
• In 2004, a strike by 500 workers at an auto several risk categories which have to be analyzed
parts supplier forced General Motors for potential impact - in isolation, as well as in
to idle two of its Canadian factories which combination, with other contributing factors.
employed about 6000 workers, costing Supplier risk is one category that is localized
millions of dollars in losses . within the source of supply and can include
• About 37 percent of Dow’s North supply delays due to strikes, non-performance
American production capacity, which of products/components against speciﬁcations
totals 1.35 billion pounds of polypropylene and non-compliance to contracts. A second risk
annually, was affected by Hurricane category is related to logistics from the supply
Katrina in 2005 . source to destination including factors such
• In March 2000, a Philips manufacturing as distribution infrastructure breakdowns,
facility in Albuquerque, New Mexico, communication breakdowns with logistics
was destroyed by ﬁre; the facility and supply partners due to hardware or
Proﬁle Prioritize & Implement & Innovate &
Supply Risk Plan Monitor Improve
Exhibit 1: Supply Risk Management Framework Source: Infosys Experience
software issues and cross-border shipment delays various business objectives are working at
due to changes in customs and other statutory cross purposes. In order to be more responsive
regulations. The third, and most unpredictable to market, companies have invested in
risk category is related to macro-factors product diversiﬁcation and to minimize time
such as sudden geo-political instability or to market they match product delivery rate
natural disasters such as hurricanes or to demand. However, with a view to cut cost,
earthquakes. companies have outsourced business operations,
Supply risk factors are further minimized inventories, and made operations
ampliﬁed when considered in the context of cost very lean. The challenge is in maintaining cost
efﬁciency strategies that have been adopted by efﬁciency without compromising on schedules,
several manufacturing companies. Strategies quality and market response rates.
such as consolidation of supplier base, lean One way to align both objectives
manufacturing and JIT pose serious threats is to have a consistent and reliable source of
in case of disruption to normal routine. To supply. This essentially means identifying and
add to this, legislation compliance has added resolving supply issues as early as possible.
a complexity factor due to international labor While this is conceivably easier if supply
laws, environmental regulations and volatility sources are very close to the destination,
in global trading. the complexity increases in a global supply
Clearly, global sourcing decisions chain. Global corporates need to develop and
cannot be made purely on a total cost basis alone. follow an all-encompassing and holistic risk
Risk analysis needs to be an inherent part of any management model - one that looks at all the
global supply scenario analysis. uncertainties and their degrees of inﬂuence on
the various segments of the global supply chain.
FRAMEWORK FOR ENTERPRISE SUPPLY
RISK MANAGEMENT The following exhibit provides a proposed
Supply risk management is a systematic process framework for supply risk management:
of managing unwanted events or unwanted
change in the supply chain and developing more Proﬁle Supply Risk
predictability in supply. In order to understand and mitigate risks,
The challenge in supply risk corporates need to generate supplier risk
management is that the strategies taken for proﬁles. An intuitive and effective way
Risk Product (RP)
Likelihood Negligible Marginal Serious Critical Catastrophic
1x5= 2x5= 3x5= 4x5= 5x5=
5 10 15 20 25
1x4= 2x4= 3x4= 4x4= 5x4=
4 8 12 16 20
1x3= 2x3= 3x3= 4x3= 5x3=
3 6 9 12 15
1x2= 2x2= 3x2= 4x2= 5x2=
2 4 6 8 10
1x1= 2x1= 3x1= 4x1= 5x1=
1 2 3 4 5
Figure 1: Sample Profiling of Risk Source: Infosys Research
is to review the processes within a given
supply chain and segregate the risk based on
likelihood of occurrence and severity of impact.
The steps to proﬁle supply risk are outlined
below : Plan Partner
i) Prepare a process map of the overall Final
supply chain and sub processes with the
help of key stakeholders, critical supply
chain system, process and production
ii) Determine likelihood of unwanted
variation (risk events); Low
iii) Identify which sources of variation Supply Criticality
represents higher severity;
Figure 2: Risk-Response Matrix
iv) Determine risk product proﬁle.
Source: Infosys Experience
RP Risk Action Control
R1 – Sole source vendor A1 – Determine vendor C1 – Independent
in tornado alley recoverability validation of recovery
A2 – Find second source capability. Reevaluate
R2 – Non-ISO certiﬁed A1 – Re-negotiate C1 – Require proof of
vendors contracts requiring ISO certiﬁcation by 3rd party
R3 – Pending legislation A1 – Require vendor/ C1 – Monitor delivery
15 adds 2 days on-dock shipper to meet earlier times and on-dock wait
time for key components shipping schedule
R4 – Critical component A1 – Increase insurance to C1 – Monitor insurance payout
lost shipments offset lost revenue vs lost revenue
A2 – Work with vendor/shipper C2 – Implement vendor controls
processes to improve tracking to monitor processes and data
Figure 3: Prioritize Risks – Identify Controls Source: www.QualityPlusEngineering.com
Manufacturers need to repeat the entire switching costs and/or does not have many
proﬁling process regularly in order to have alternative sources of supply.
a realistic picture of risks in the supplier base. Risks for suppliers falling under low
Figure 1 shows a sample proﬁling of risks based material criticality and low ﬁnancial impact can
on likelihood of occurrence and severity of be countered by leveraging the organization pull
impact. for better contracts and by demanding a higher
level of risk insurance from the supplier. For
Prioritize and Plan example, if the supply is an MRO component
Based on the risk proﬁles that have been such as a standard fastener, the onus of managing
generated, risk managers can assess, prioritize the supply and inventory can be passed on to
and plan the risk response and update them to the supplier.
the corporate risk database. Risks on low criticality parts with
Developing a risk response plan can higher ﬁnancial impact can be countered
be challenging and the approach would vary through traditional planning and forecasting
from supplier to supplier based on criticality of cycles. An example of this would be AC motors
the supply and the ﬁnancial impact as shown used in various consumer goods where there are
in Figure 2. A part with high supply criticality numerous sources of supply but costs are not
in this case is deﬁned as one which has high necessarily low.
For more critical parts with low ﬁnancial be applied appropriately in the context of the
impact, risks can be countered by managing speciﬁc risk control plan, in order to maximize
inventory effectively. Creating extra buffer their effectiveness. Following are some best-in-
inventory for these parts can typically insure class implementation tools and practices:
against any disruptions. Custom molded rubber
parts used in specialized packaging systems, for Risk management data base -This is a collation of
instance, may not be expensive on a unit cost statistics and data from each project to be stored
basis but it may be difﬁcult to retool an alternative in an organizational risk database. Value-added
supplier under short notice. This would make it information such as choices or options that were
critical from a supply perspective. available and decisions taken that were taken
Critical parts with high ﬁnancial to mitigate the risk and their success could be
impact require the closest amount of planning documented. This historic information is made
and monitoring. Establishing strategic supplier available for future projects to help make right
partnerships to collaboratively manage risks is decisions at the right time.
the most effective approach in such situations.
This scenario would apply, for example, in Global supplier directory: This is a large
the case of industrial electronic manufacturers compendium or reference document of latest
who buy specialized processors which are both information spanning suppliers of components,
expensive and have a very limited source of features, costs, performance and contact
alternative supply. information across different geographies. This is
Figure 3 shows sample risks along useful in supplier selection and audit phases.
with a number representing the risk product
(RP), potential actions and controls. Action Designing redundant systems: While creating
denotes the steps recommended by the risk the supply chain master plan, designing
experts to respond to the risk and control redundant systems will allow ﬂexibility of
denotes the checks and balances placed in the operations by allowing for alternate supply
supply chain to ensure the effectiveness of the sources . Making systems lean is a risk due to
risk response plan. the fact that a local disruption or event can cause
the entire supply chain to be at risk. In case of
Implement and Monitor labor strike, acts of God or political unrest this
The success of the risk management program redundancy helps in re-conﬁguring the supply
lies in the effectiveness of execution. Tools chain in response by taking an alternate supplier.
and techniques that can be utilized to aid in This approach would be recommended in case
implementation and monitoring are key to of highly critical components where the impact
effective execution. of any supply failure would be catastrophic.
Given a speciﬁc approach, a number of
tools and techniques can be utilized depending Susceptibility of network calculator is a tool to
on the speciﬁc situation. Many of the available determine the impact of a natural or man-made
tools are fairly intuitive and are used in some disaster on the individual locations of a supply
form or the other by most organizations. Tools chain and also the combination of them. This
by themselves are just enablers, and need to helps in gauging extent of damage to take risk
Categories Rating Comment
Supplier Score Card Quality
5 Excellent Cost
4 Above Average
2 Below Average
Disaster recovery & BCP
1 Poor Overall
Exhibit 2: Supplier Scorecard Source: Infosys Research
avoidance or transfer options or steps to limit be removed from the list of suppliers. In cases
the risk exposure. For e.g., to open a plant in an where 80% of high quality products come from
earth-quake prone area, one may need to know 20% suppliers, rewards to such suppliers could
the amount of insurance cover to be taken or the help keeping their motivation levels high.
size of the plant to be built given the likelihood
of the inherent risk. It will also aid in planning Supplier scorecard is a tool to rate performance
the contingency fund that the management can of suppliers. Additionally supply chain would
budget for, in case of an emergency occurrence. be at risk if a supplier goes bankrupt or has cash
ﬂow problems. So, it would help to monitor the
Supplier quality audits are performed by the ﬁnancial health of the supplier since this could
procurement managers to see if quality and result in potential supply risk. The parameters
performance requirements will be met. During that indicate the quality of service and products
the planning phase, the schedule for audit, could be measured as in the sample indicated
purpose of audit, persons to be audited, samples in Exhibit B and corrective action can be taken
to be inspected could be decided. The timing of as needed.
the audit should be such that there is a possibility Once the audit results are published,
of corrective and preventive action being taken if certain corrective action needs to be taken. Based
audits bring out high risks. on the risks that occurred and the supplier’s
performance, manufacturers could re-negotiate
Pareto analysis to weed out ineffective global contracts to include clauses to ensure business
players. 80 % of problems may be caused by 20 % continuity planning and penalties for non-
of suppliers. The analysis would help in isolating conformance or poor performance.
these trouble points, providing opportunities to Software tools – Use of Information
improve by giving time. If these suppliers do Technology in GSC risk management is
not perform to the expected level then they can three tiered:
Material Production Shipment
Usage Rate Rate Rate
Parts Inventory Work-in-Progress Finished Product Produc-in-Transit
Go To Powertrain
Order Rate to
Dealer Orders (External to
Figure 4: Screen Shot from GoldSim Supply Chain Model. Source: www.goldsim.com
Tier 1 - Tools for operational efﬁciency: softwares help diagnose problems, evaluate
These are tools that deal with ﬂow options, optimize operations, and mitigate
of data and information at the operational risk factors. The objective is to interpret
level. Examples are tools to handle inventory the inﬂuencers and interrelationships of
management, network design, product the system with respect to time and use it
life cycle management, demand visibility, to predict the future behavior of the system
supply visibility, demand planning, sales and or determine what factors to vary to achieve
operations planning. a desired result state. One such example
is the GoldSim simulation software package
Tier 2 - Analytic tools: These are decision that uses time-dependent simulation to
support tools used for proactive analysis predict the full range of possible futures,
conducted by analyzing and mining analyze results and communicate the
information obtained from operational level. ﬁndings to stakeholders and decision-
makers . The screen [Fig. 4] depicts
Tier 3 - Strategic tools: Modeling and the conceptual model for an OEM.
simulation packages would be the prime tools Quantities that are tracked within the
in this category. Dynamic simulation model include: parts inventories, backlog,
work-in-progress, ﬁnished product, and partners is critical to a successful product
product-in-transit. introduction and management.
The other emerging trend in this
category is predictive analytics – Open Ratings Forecasting of aggregates - Another risk
(a Dun & Bradstreet Subsidiary) mines supplier reduction example in the supply chain planning
data from a variety of sources and runs statistical cycle is the use of aggregates or sub-assemblies
analysis which can predict the risk of supplier instead of raw materials to reduce forecasting
failure. It looks beyond ﬁnancials into factors risk. The principle behind this is forecasting
such as on time delivery and product quality of aggregates is more reliable than forecasting
to predict the suppliers most likely to have single products.
Supplier self-assessment - A third example of
Innovate and Improve collaborative risk reduction is the process of
The above tools and techniques if implemented self assessment by suppliers on their internal
effectively and in a structured manner should constraints. Suppliers can complete this and
be fairly effective in insuring against supply share the information with their immediate next
risks. The next stage in the evolution of supply set of suppliers and customers. This ensures a
risk management goes beyond the ﬁrst tier to minimal level of awareness of performance risks
subsequent tiers in the supply chain and involves within segments of the supply chain. If there are
an increased level of collaboration with suppliers. no plans for contingencies, then manufacturers
The key to innovation and improvement need to work with the suppliers to come with a
lies in knowledge and experience sharing with business continuity plan.
speciﬁc suppliers and about those suppliers’
suppliers. Use of SCOR - Supply Chain Operations
Reference Model as a process reference model
Information tracking and collaboration portals is a standard and effective way of sharing
move beyond immediate suppliers to the next supply chain information among partners .
tiers down the chain. Information workﬂow SCOR is an industry standard for management
and shared knowledge portals help in reducing focus across inter-company supply chains.
uncertainty. Manufacturers could get visibility SCOR is used to describe measure and evaluate
into status of parts and material shipments GSC conﬁgurations.
and also view legal documentation related
to the supply from the portal. Notiﬁcation of Describe – Standard SCOR process
service interruptions can be posted to help deﬁnitions allow virtually any supply-chain
indirect suppliers and customers be aware to be conﬁgured.
of the event and also understand the business Measure – Standard SCOR metrics enable
impact on them. Supply chain managers from measurement and benchmarking of supply-
leading electronics companies conﬁrm that chain performance.
globalization is affecting everyone in the Evaluate – Supply-chain conﬁgurations may
electronics industry and that collaboration be evaluated to support continuous
across organizational silos and supply chain improvement and strategic planning.
Risk appetite baseline – Senior management of considered prior to embarking on a supply
manufacturers need to document their appetite risk management program . Figure 5 below
for risk and risk tolerance limits. This would depicts the components of the Global Supply
outline guidance for downstream operational Risk Management model.
managers to take decisions and also bear in mind
the revenue that the management is willing People - At each node or entity of the supply
to risk. This is particularly useful in deciding chain there are set of key stakeholders including
on introduction of new suppliers, products operational managers, third party logistics
and services and also in sourcing from new providers, purchasing analysts and risk experts.
geographic locations. The roles and responsibilities of each of these
stakeholders within the risk management
Disruption drill is the mock disruption of program need to be clearly deﬁned. For example,
supply in the supply chain to test the redundancy does purchasing own the supplier risk proﬁling
of network, process capability and supplier or is it the operational managers? What is the
capability. A supply interruption of a critical role of business continuity managers in ongoing
component is mimicked to appraise the supply risk management? All these need to be clearly
chain and also gauge the time taken to recover mapped out upfront to prevent confusion.
from a disaster as well as the cost taken to ensure
business continuity. The disaster recovery and Process – The success of a program lies
business continuity plans may be revised based in the effectiveness of execution – process
on the outcome of the simulation. The learning standardization is critical especially in large,
from the exercise could be shared through the global enterprises. Ideally, supply risk
collaboration portals. management processes are streamlined across
Innovation lies in the understanding the entire global supply chain but are agile
that the success of the manufacturer lies in the enough to adapt to speciﬁc supply situations
success of the suppliers. Supplier base could be
reviewed to decide on sole-sourcing versus Tools and technology – Tools and technology
multi-vendor sourcing strategy. For example, if act as enablers of any people and process based
a local supplier’s performance is better, but initiative. Many of these have been discussed
costs more than a global supplier’s, the supply under the ‘Implement & Monitor’ section earlier.
chain strategy could be to avoid global
outsourcing of critical components and source Governance is achieved through a central body
them locally to mitigate risk. The framework that stresses compliance to a set of performance
provides an innovative paradigm shift from and quality standards. Metrics for monitoring
cost reduction to supply chain continuity. supply risk are often very similar to regular
operational metrics (price, quality, delivery).
COMPONENTS OF THE GLOBAL SUPPLY However, the metrics for measuring the
RISK MANAGEMENT MODEL effectiveness of a risk management program
Just like in any enterprise initiative, people, would be unique. Some metrics include:
process and technology components of risk • Ratio of actual ﬁnancial impact to
management need to be clearly identiﬁed and potential impact of disruption
Supply Visibility Proﬁling
Simulation & Scorecard
Modeling Site Audits
Global Supply Forecasting
Risk Management Network
Monitoring Senior Mgmt
People Operations Purchasing Process
Risk Analysts 3PL Managers
Managers Managers Consultants
Contract Disaster Knowledge Innovation Quality Process
Management Management Management Management Management Management
Figure 5: Components of the Global Supply Risk Source: Infosys Research
• Ratio of risk redundancy cost to potential the right balance between operational
impact of disruption efﬁciency and risk
• Lead time to contain disruption. • Senior management commitment to risk
PRE-REQUISITES FOR AN EFFECTIVE • Customize and SCRM strategy speciﬁc
IMPLEMENTATION to your organization - change it based on
Changes to organization or operations are the business environment
difﬁcult to implement as they require a change • Analyzing and learning from supply
in the mind-set of the persons affected. The disruptions to increase supply chain
framework provided here attempts to change continuity
several aspects not only in a single organization • High level of trust and conﬁdence in
but spanning across organizations. For a change sharing information and co-operation
of this magnitude to be accepted and embraced between business entities. This can be
by all, it is essential to identify certain key factors. very difﬁcult to achieve if the customer
The critical success factors for the model are: supplier relationship is competitive and
• Continuous and concerted effort in based on price alone. But once they
identifying and managing risks and see their relationship as a long term
ensuring business continuity win-win partnership possibilities for
• Constantly measure and strive to attempt collaboration automatically open up.
CONCLUSION 3. American Metals Market Index, www.
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