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Supply Chain Risk Enablers


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This paper describes the financial challenges faced by a companies with global supply
chains and some suggested actions to realize and mitigate risks using among other
strategies understanding of options including joining the C-TPAT program.[2]

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Supply Chain Risk Enablers

  1. 1. Andrew M. Amalfitano "Impact of Risk Enablers and Realization on Supply Chain Disruptions" Andy Amalfitano MSBC Seminar #4 Risk Management Week 9, Essay 8 Aug. 7, 2010 Andrew M. Amalfitano 7- AUGUST 2010 Page 1 of 7
  2. 2. Andrew M. Amalfitano Thesis Supply chain disruptions can dramatically and permanently affect the success of a business. A shipment fails to arrive on time or is damaged enroute due to violent storms suffered by the transport barge; political unrest in developing nations changes the import/export policies; increasing piracy threatens to severely limit the source of parts and supplies being delivered to your overseas factories. More recently, the eruption of the Eyjafjallajokull volcano in Iceland demonstrated how vulnerable some industries are to air transport disruptions. “Nearly three-quarters of risk managers say their companies' supply chain risk levels have increased since 2005,” according to Marsh's survey of 110 corporate risk managers in January and February. [1] Supply chain insurance demand grows each year, yet the types of insurance coverage rarely account for more than physical damage. That's changing and businesses need to reevaluate their supply chain insurance coverage. This paper describes the financial challenges faced by a companies with global supply chains and some suggested actions to realize and mitigate risks using among other strategies understanding of options including joining the C-TPAT program.[2] The Unexpected: We May Not be Ready? Singhal and Hendricks in a study of 800 companies who incurred a supply chain disruption between 1989 and 2000 found that 33-40 percent experienced lower stock returns, share price volatility increased 13.5 percent, profits plummeted 7 percent, costs rose 11 percent and inventories increased 14 percent.[3] Andrew M. Amalfitano 7- AUGUST 2010 Page 2 of 7
  3. 3. Andrew M. Amalfitano Companies can hedge their investments by diversification which brings some comfort level to the executives and shareholders. However, very little can prepare a company for unforeseen and unexpected supply chain disruptions. The conflation or confluence of disruptions can further exacerbate the impact and significantly damage customer satisfaction. Conflation describes the sequential occurrence of risk events that disrupt the enterprise. For example, a first event (major earthquake) partially disables and weakens the supply chain; a second event (dock workers' strike) cripples the supply chain causing significant delays. Confluence describes the simultaneous occurrence of risk events that overwhelm the enterprise. In the previous example, both events occur at the same time resulting in completely undeliverable shipments.[4] Insurance typically only covers physical losses due to transit or other damage incurred from natural hazards. Conflation and confluence situations don't usually produce physical damage and therefore a company does not have risk mitigation in the form of financial reimbursement. In most cases, the risks caused by natural hazards, political unrest and other modern day threats is not covered by insurance. Some companies are now holding their subordinate supply chain and vendors accountable for implementing their own risk management plans.[5] Even if the company does have a way to cover financial losses, the impact on customer satisfaction will be dramatic. Understanding and realizing options for risk mitigation can have a profound effect on the how companies recover from such disruptions. Intangible Risk Another key issue is that beyond the physical and tangible risks are many more (and worse) intangible risks. Members of the supply chain including employees may hold attitudes and perceptions that undermine the process and inadvertently pose a risk. Andrew M. Amalfitano 7- AUGUST 2010 Page 3 of 7
  4. 4. Andrew M. Amalfitano The intangible lack of confidence in a supply chain leads to actions and interventions by supply chain members, which could increase the risk exposure. The bottom line is that the company experiences a higher level of uncertainty with lower confidence. Typical issues are no confidence in:  Order cycle time  Order current status  Demand forecasts given  Suppliers’ capability to deliver  Manufacturing capacity  Quality of the products  Services delivered[6] This lack of confidence can compound the external risks described earlier and lead to conflation and confluence. It's what Husdal (2009) calls a risk spiral which can lead to increased reliance on inventory buffers which may not hold up under protracted supply chain disruptions.[7] Realize the Risk and Take Action Two aspects of executive action may be simply the right and the wrong action. The former leading to positive consequences and latter leading to negative consequences. In either case, an altered state or risk is the result. To avoid the negative consequences a great deal of critical thinking needs to take place which challenges the current risk management plan and attempts to envision "Unexpected, Unanticipated, Unintended Consequences." [8] C-TPAT - Customs-Trade Partnership Against Terrorism Of the top 10 potential benefits companies considered for joining C-TPAT, reduction in insurance rates was only 10th with less than 4 percent indicating that as a motivator.[9] Andrew M. Amalfitano 7- AUGUST 2010 Page 4 of 7
  5. 5. Andrew M. Amalfitano Two key motivators for joining C-TPAT included:  reducing the time and cost of getting cargo released by Customs  reduced time and cost in CBP secondary cargo inspection lines. [10] The results seem beneficial as described by those companies responding to the survey:  "The vast majority (81.3%) of businesses that had a formal system in place for assessing and managing supply risk agreed or somewhat agreed that their businesses’ ability to assess and manage supply risk has been strengthened as a result of joining C-TPAT.  Three quarters (75.2%) of businesses that had formal supply continuity and contingency plans.[11] Other actions suggested by C-TPAT guidelines include how to manage the supply chain risk process in a way that ensures not only that the guidelines are met, but that immediate control steps are enabled that help to provide better security. 1. Mapping Cargo Flow and Identifying Business Partners (directly or indirectly contracted) 2. Conducting a Threat Assessment focusing on: Terrorism, Contraband Smuggling, Human Smuggling, Organized Crime, and conditions in a country/region which may foster such threats and rate threat – High, Medium, Low 3. Conducting a Vulnerability Assessment in accordance with C-TPAT Minimum Security Criteria and rate vulnerability – High, Medium, Low 4. Preparing an Action Plan 5. Documenting How Risk Assessments are Conducted" [12] Andrew M. Amalfitano 7- AUGUST 2010 Page 5 of 7
  6. 6. Andrew M. Amalfitano Contingency Planning Contingency planning is a strategic risk management tool. It allows for flexibility to use a generic set of plans to respond to unknown and unexpected events which pose a risk to the business. Success in managing unexpected events requires flexibility. These four contingency planning elements were found to be positively related to flexibility in managing risk in the supply chain: 1. "Top management support 2. Resource alignment 3. Level of IT usage 4. Inter-organizational collaboration" [13] Consideration of contingencies is still a worthwhile action for executives to include among their strategic mitigation choices. Conclusion Studies show that major disruptions to supply chains can dramatically impact the long- term survivability of businesses. Insurance plans typically cover physical damage and not the wide variety of modern world disruptive events like volcano eruptions, earthquakes, high-seas piracy, political unrest, and other unexpected events. Some companies have found value in joining C-TPAT to help ensure more security in their supply chain. Others realize that intangibles like the amount of confidence in supply chain capability can help strengthen or erode management of risks. Enterprise strategies should include multiple approaches and implement a process that addresses risk in a way that is flexible and can more aptly handle unexpected disruptions. Andrew M. Amalfitano 7- AUGUST 2010 Page 6 of 7
  7. 7. Andrew M. Amalfitano Citations [1] Byrt, Frank, (2008). "The Endless Quest for Indestructible Supply Chain". Financial, Aug 2010. Retrieved 8-5-10: [2] Department of Homeland Security, (2010). "C-TPAT: Customs-Trade Partnership Against Terrorism". Retrieved 8-4-10: [3] Bosman, Ruud, (2006). "The New Supply Chain Challenge: Risk Management in a Global Economy". Factory Mutual Insurance Company. Retrieve 8-5-10: [4] Sikich, Geary. (2008). "The World of Risks and Opportunities". Norwich University MSBC Seminar 4 Lecture Week 8, 2010 [5] Byrt, Ibid [6] Husdal, Jan, (2009). "Supply Chain Confidence". Retrieved 8-5-10: [7] Husdal, Jan, (2010). "Contingent Flexibility". Retrieved 8-5-10: [8] Sikich, Ibid [9] Diop, Abdoulaye; Hartman, David, and Resrode, Deborah, (2007). "Customs-Trade Partnership Against Terrorism: Cost/Benefit Survey". Retrieved 8-5-10: t/ctpat_cost_surve.pdf pg 35 [10] Ibid. [11] Diop, Ibid, 4 [12] Department of Homeland Security, (2010). "C-TPAT: 5 Step Risk Assessment Process Program Guide". Retrieved 8-4-10: tt/ctpat_assessment.pdf [13] Husdal, Jan, (2010). "Contingent Flexibility". Ibid Bibliography Continuity Insights, (2010). "Demand for supply chain insurance grows as a result of the volcanic ash crisis: Marsh".. Retrieved 8-5-10: Husal, Jan, (2010). "Risk Disablers". Retrieved 8-5-10: Andrew M. Amalfitano 7- AUGUST 2010 Page 7 of 7