SETLabs Briefings
                                               VOL 5 NO 3
of risks in global supply, (ii) applying a                      supplied radio frequency chips (RFCs)
comprehensive framew...
Profile                         Prioritize &                 Implement &               Innovate &
            Supply Risk  ...
Risk Product (RP)

                                                              Severity Impact

    Likelihood         ...
RP                      Risk                                    Action                              Control

For more critical parts with low financial          be applied appropriately in the context of the
impact, risks can be cou...
Categories                        Rating           Comment
                                   Business competency
 Rate from
                                Material              Production                         Shipment...
work-in-progress, finished product, and                 partners is critical to a successful product
Risk appetite baseline – Senior management of              considered prior to embarking on a supply
manufacturers need to...
Tools                  Processes

                                                       Risk              S.
CONCLUSION                                                          3. American Metals Market Index, www.
Business disrupt...
Author profile

V. S. Srividhya is a Project Manager with the High Risk Projects Group at the Corporate Pr...
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Management of Supplier Risks in Global Supply Chains


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Management of Supplier Risks in Global Supply Chains

  1. 1. SETLabs Briefings VOL 5 NO 3 Jul-Sept 2007 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 [4]. Spend total US exports [1]. 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- [2], 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 [3]. 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 1
  2. 2. 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 [7]. 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 [5]. 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 [6]. 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 2
  3. 3. 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 3
  4. 4. Risk Product (RP) Severity Impact Likelihood Negligible Marginal Serious Critical Catastrophic 1x5= 2x5= 3x5= 4x5= 5x5= Highly Probable 5 10 15 20 25 1x4= 2x4= 3x4= 4x4= 5x4= Probable 4 8 12 16 20 1x3= 2x3= 3x3= 4x3= 5x3= Occasional 3 6 9 12 15 1x2= 2x2= 3x2= 4x2= 5x2= Remote 2 4 6 8 10 1x1= 2x1= 3x1= 4x1= 5x1= Improbable 1 2 3 4 5 Figure 1: Sample Profiling of Risk Source: Infosys Research is to review the processes within a given High supply chain and segregate the risk based on likelihood of occurrence and severity of impact. The steps to profile supply risk are outlined below [8]: Plan Partner i) Prepare a process map of the overall Final Imapact supply chain and sub processes with the Leverage Manage help of key stakeholders, critical supply chain system, process and production activities; ii) Determine likelihood of unwanted variation (risk events); Low High iii) Identify which sources of variation Supply Criticality represents higher severity; Figure 2: Risk-Response Matrix iv) Determine risk product profile. Source: Infosys Experience 4
  5. 5. RP Risk Action Control R1 – Sole source vendor A1 – Determine vendor C1 – Independent in tornado alley recoverability validation of recovery 20 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 16 certification bi-annually 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 12 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: 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. 5
  6. 6. 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 [9]. 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 6
  7. 7. Categories Rating Comment Business competency Technical competency Competitive Price Competitive Service Schedule Supplier Score Card Quality Scope 5 Excellent Cost Communications 4 Above Average Issue/Risk 3 Average Collaboration 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: 7
  8. 8. OEM Delivery Rate from Material Production Shipment Powertrain Usage Rate Rate Rate Parts Inventory Work-in-Progress Finished Product Produc-in-Transit Manufacturing Delivery Management Go To Powertrain Production Scheduling Order Rate to Powertrain Material Order Management Scheduling Dealer Orders (External to model) Figure 4: Screen Shot from GoldSim Supply Chain Model. Source: 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 [10]. 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, 8
  9. 9. 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. problems [11]. 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 [12]. 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. 9
  10. 10. Risk appetite baseline – Senior management of considered prior to embarking on a supply manufacturers need to document their appetite risk management program [13]. 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 10
  11. 11. Tools Processes Risk S. Database Profiling Demand/ Risk Supply Visibility Profiling Simulation & Scorecard Modeling Site Audits Trend Collaboration Monitoring Global Supply Forecasting Data Mining Risk Management Network R. Reporting Model Design Monitoring Senior Mgmt Mechanisms Review People Operations Purchasing Process Risk Analysts 3PL Managers Managers Managers Consultants Governance Contract Disaster Knowledge Innovation Quality Process Management Management Management Management Management Management Figure 5: Components of the Global Supply Risk Source: Infosys Research Management Model • 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 management 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. 11
  12. 12. CONCLUSION 3. American Metals Market Index, www. Business disruptions in global and complex supply chains have tested the manufacturer’s resilience 4. Harold L. Sirkin, What is due to global sourcing and lean manufacturing. Globalization doing to your Business? Manufacturers can benefit from increased Boston Consulting Group , Feb 2004. transparency and communication, business Available at continuity, performance-based contracts and publications/filesWhat_Is_ reduced risk exposure by adopting this model. Globalization_Doing_to_Your_Business_ Manufacturers need to encompass first-tier, Ops_Feb04.pdf. second-tier suppliers and understand source- 5. Tentative deal reached after strike at parts to-destination issues in global supply chains. supplier idles pair of GM plants, CBC There is a need to closely work with suppliers Canada , July 2004. and vendors and develop business continuity 6. Supply Chains in Katrina’s wake, CFO plans. The risk management model is a reference Magazine, September 2005. for transforming the supply risk management 7. Flexibility in the Face of Disaster: process from a reactive exercise to a proactive Managing the Risk of Supply Chain practice. A robust, systematic and multi Disruption, Knowledge@Wharton, enterprise-wide approach to risk management Sept 06, 2006. is essential to meet business objectives in a 8. flat world. Early and continuous focus on Applying Risk Management to the Supply risk management will be critical for operational Chain - WESTEC.RM. Applying RM to SC- success and predictable continuity of a Stan.2”, Apr 2005 -Stan Smith - Risk supply chain. Collaboration and increasing Assessment Consultant, Quality Plus information transparency reflect the collective Engineering, LLC. resolution of the supply chain industry to resolve 9. David Simchi-Levi et. al., Designing its problems. The GSC Risk Management model and Managing the Supply Chain, McGraw offers a pro-active and pragmatic approach to Hill, International Edition, 2003. mitigate risks in Global Supply Chains. 10. Dynamic simulation and supply chain management, GoldSim Technology Group REFERENCES Report, April 2005, 1. David Huether, The State of 11. Manufacturing: A review of the major 12. indicators, National Association of 13. V S Srividhya and Ananth Subramanian, Manufacturers, March 2007. 360 Degree RISK Management 2. Erin Lett and Judith Barrister, Labor Model – A new model to Rate, Mitigate costs of manufacturing employees in and Exploit Opportunities, QAI PML China : An update to 2003-2004, 2004. Conference Proceedings, 2007. 12
  13. 13. Author profile V. S. SRIVIDHYA V. S. Srividhya is a Project Manager with the High Risk Projects Group at the Corporate Practice of Infosys. She can be contacted at RAJ JAYARAMAN Raj Jayaraman is a Principal with Infosys High Tech & Discrete Manufacturing Business Unit. He has led several transformational supply chain engagements. He can be reached at For information on obtaining additional copies, reprinting or translating articles, and all other correspondence, please contact: Telephone : 91-20-39167531 Email: © SETLabs 2007, Infosys Technologies Limited. Infosys acknowledges the proprietary rights of the trademarks and product names of the other companies mentioned in this issue of SETLabs Briefings. The information provided in this document is intended for the sole use of the recipient and for educational purposes only. Infosys makes no express or implied warranties relating to the information contained in this document or to any derived results obtained by the recipient from the use of the information in the document. Infosys further does not guarantee the sequence, timeliness, accuracy or completeness of the information and will not be liable in any way to the recipient for any delays, inaccuracies, errors in, or omissions of, any of the information or in the transmission thereof, or for any damages arising there from. Opinions and forecasts constitute our judgment at the time of release and are subject to change without notice. This document does not contain information provided to us in confidence by our clients.