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


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

  1. 1. Supply chain risk management & resilience Guest lecture | Tilburg University | 31 March 2010 Robbert Janssen E-mail: [email_address]
  2. 2. Outline <ul><li>Short introduction </li></ul><ul><li>What is supply chain risk? </li></ul><ul><ul><li>Why is it important? </li></ul></ul><ul><ul><li>Case: Nokia vs. Ericsson </li></ul></ul><ul><ul><li>Trends and developments in supply chain management </li></ul></ul><ul><ul><li>Supply chain risk and its sources </li></ul></ul><ul><ul><li>Risk perception </li></ul></ul><ul><ul><li>Supply chain disruptions </li></ul></ul><ul><ul><li>Supply chain vulnerability </li></ul></ul><ul><li>Supply chain risk management & resilience </li></ul><ul><ul><li>How to manage and mitigate risks? </li></ul></ul><ul><li>Reconciling supply chain risk with supply chain management </li></ul><ul><li>Time for questions </li></ul>
  3. 3. Introduction <ul><li>Robbert Janssen </li></ul><ul><li>Logistics & Operations Management </li></ul><ul><li>Writing master thesis at TNO Mobility & Logistics, Delft </li></ul><ul><li>Topic: empirical investigation into supply chain risk management and the vulnerability of supply chains </li></ul><ul><li>Questionnaire with EVO and TLN, distributed to firms in the Netherlands </li></ul><ul><li>+/- 325 responses </li></ul><ul><li>Some results  in this presentation </li></ul>
  4. 4. Recent years… Source: Yahoo Finance
  5. 5. Recent years….
  6. 6. Most important risks faced by multinational firms <ul><li>Aon Global Risk Management Survey 2009 </li></ul><ul><li>Survey among 550 multinational companies (> $ 1 billion revenue) </li></ul><ul><ul><li>Economic slowdown </li></ul></ul><ul><ul><li>Regulatory / legislative change </li></ul></ul><ul><ul><li>Business interruption risks </li></ul></ul><ul><ul><li>Increasing competition </li></ul></ul><ul><ul><li>Raw materials / commodity prices </li></ul></ul><ul><ul><li>Damage to reputation </li></ul></ul><ul><ul><li>Cash flow / liquidity risk </li></ul></ul><ul><ul><li>Supply chain failure </li></ul></ul><ul><ul><li>Third party liability </li></ul></ul><ul><ul><li>Difficult to attract top talent </li></ul></ul>Supply chain risks mentioned three times in Top 10!
  7. 7. Risks in supply chains?
  8. 8. Natural disasters reported 1900-2008 Source: EM-DAT (2010)
  9. 9. “ It does not happen to our company”
  10. 10. Risks in the supply chain – an example The Albuquerque accident <ul><li>March 2000 </li></ul><ul><li>Philips semi-conductor plant in Albuquerque, New Mexico, USA </li></ul><ul><ul><li>Sole-supplier of radio-frequency chips to Nokia and Ericsson </li></ul></ul><ul><li>Lightning strike lead to small fire in clean rooms at Philips plant </li></ul><ul><li>Sprinkler installation activated in clean rooms </li></ul><ul><li>It took 3 weeks before production was up and running again </li></ul><ul><li>After 6 months, production yields were only 50% </li></ul><ul><li>It took years before new equipment was delivered and installed </li></ul>
  11. 11. 2 very different responses to the accident <ul><li>Did not recognise threat for weeks </li></ul><ul><li>When they tried to recover: entire worldwide supply for RF-chips was committed to Nokia </li></ul><ul><li>Outcome </li></ul><ul><ul><li>Missed critical product introduction </li></ul></ul><ul><ul><li>Business interruption costs: $ 200 million (insurance paid) </li></ul></ul><ul><ul><li>Annual P/L statement: $ 400 million loss </li></ul></ul><ul><ul><li>Ceased making cell phones under individual brand (  became Sony-Ericsson) </li></ul></ul><ul><li>Immediately recognised threat </li></ul><ul><li>Actively responding, sending 30 engineers to restore supply from Philips-plant </li></ul><ul><li>Secured entire worldwide capacity of Philips-chips </li></ul><ul><li>Actively searching for other suppliers all over the world </li></ul><ul><li>Redesigning existing handsets to use different chips </li></ul><ul><li>Outcome </li></ul><ul><ul><li>Achieved sales targets </li></ul></ul><ul><ul><li>Increased market share </li></ul></ul>Source: Normann & Jansson (2003), Sheffi & Rice Jr. (2005)
  12. 12. Some developments and trends in supply chain management <ul><li>Globalisation and global sourcing </li></ul><ul><ul><li>Longer, more complex supply chains </li></ul></ul><ul><ul><li>Volatile markets </li></ul></ul><ul><li>Strong focus on achieving efficiency and economies of scale </li></ul><ul><ul><li>Lean, JIT-processes </li></ul></ul><ul><ul><li>Centralised distribution and manufacturing </li></ul></ul><ul><ul><li>Single-sourcing / reduction number of suppliers </li></ul></ul><ul><ul><li>Shorter lead-times and delivery cycles </li></ul></ul><ul><ul><li>Working capital optimisation </li></ul></ul><ul><li>Outsourcing and off-shoring non-core activities </li></ul><ul><ul><li>Loss of control </li></ul></ul>Source: Christopher (2005), Husdal (2009)
  13. 13. What are the most important developments / trends that lead to increased risks in the Netherlands? <ul><li>Reliance on IT-infrastructure </li></ul><ul><li>Increased dependency on customers </li></ul><ul><li>The economic downturn </li></ul><ul><li>Increased competition in the market place </li></ul><ul><li>Legislative changes (‘compliance’) </li></ul><ul><li>All these factors can have </li></ul><ul><li>consequences for the supply chain </li></ul>Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)
  14. 14. 4 constructs that we need to deconstruct <ul><li>Usually, research in the field of supply chain risk consists of 4 constructs </li></ul><ul><ul><li>Supply chain risk </li></ul></ul><ul><ul><li>Supply chain disruption </li></ul></ul><ul><ul><li>Supply chain vulnerability </li></ul></ul><ul><ul><li>Supply chain risk management (and resilience) </li></ul></ul>Source: Wagner and Bode (2008)
  15. 15. Supply chain risk <ul><li>Risk is a concept with a lot of different definitions </li></ul><ul><li>2 main perspectives: </li></ul><ul><ul><li>Exposure to uncertainty (everyday usage e.g. “it is risky to drink and drive”) </li></ul></ul><ul><ul><li>Outcome of an event (e.g. higher total costs and longer lead-times after a fire in a warehouse: </li></ul></ul><ul><ul><ul><ul><li>Risk = Probability * Consequences) </li></ul></ul></ul></ul><ul><li>What can happen? ( risk sources ) </li></ul><ul><li>How likely is it that it will happen? ( probability ) </li></ul><ul><li>If it does happen, what are the consequences? ( consequences ) </li></ul>Source: Jüttner et al. (2003); Zsidisin and Ritchie (2008)
  16. 16. Analysing supply chain risks <ul><li>Firms commonly visualise unforeseen and unwanted events by means of a risk-matrix </li></ul><ul><li>A risk-matrix has 2 dimensions: probability and consequences (impact) </li></ul><ul><li>Problem: it relies heavily on risk perception. </li></ul>Source: Sheffi & Rice Jr. (2005)
  17. 17. Risk perception <ul><li>Depends on: </li></ul><ul><ul><li>Time/moment </li></ul></ul><ul><ul><li>Experience/knowledge </li></ul></ul><ul><ul><li>Place </li></ul></ul><ul><ul><li>Risk attitude / appetite </li></ul></ul><ul><ul><li>Position </li></ul></ul><ul><ul><li>Possibilities to decide </li></ul></ul><ul><ul><li>Big bang or small incidents </li></ul></ul>
  18. 18. Supply chain risk sources <ul><li>Where can risks originate from? </li></ul>Source: Christopher & Peck (2004)
  19. 19. Supply chain risk sources <ul><li>Where can risks originate from? </li></ul>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. 20. Supply chain disruptions <ul><li>“ Supply chain disruptions are unplanned and unanticipated events that disrupt the normal flow of goods and materials within a supply chain ” </li></ul><ul><li>Supply chain disruptions: the occurrence of risk </li></ul><ul><li>Consist of: a trigger and the situation that emerges afterwards. </li></ul>Source: Craighead et al. (2007), Wagner and Bode (2008)
  21. 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. 22. Most frequently occurring disruptions in 2008-2009 <ul><li>Sudden drop in customer demand </li></ul><ul><li>Quality issues at the supplier </li></ul><ul><li>Poor logistics performance of suppliers (delivery dependability) </li></ul><ul><li>Severe weather conditions </li></ul><ul><li>IT-infrastructure problems (hardware, software) </li></ul>Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)
  23. 23. Where did the disruptions come from? Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)
  24. 24. The disruption profile Source: Sheffi & Rice Jr. (2005)
  25. 25. What are the consequences of a disruption? <ul><li>Higher cost </li></ul><ul><li>Bad performance </li></ul><ul><li>Lost sales </li></ul><ul><li>Lower profits </li></ul><ul><li>Bankruptcy </li></ul><ul><li>Fear, danger </li></ul><ul><li>Damage to reputation </li></ul><ul><li>For whom? </li></ul><ul><li>The company itself </li></ul><ul><li>Suppliers </li></ul><ul><li>Customers </li></ul><ul><li>Society </li></ul>
  26. 26. Toyota <ul><li>Toyota recall </li></ul><ul><ul><li>Estimated costs US$ 2 billion </li></ul></ul><ul><ul><li>All cars checked and repaired if needed </li></ul></ul><ul><ul><li>Biggest challenge now: regaining confidence </li></ul></ul><ul><ul><ul><li>Could also be an opportunity </li></ul></ul></ul>Source: Spitsnieuws 24 March (2010)
  27. 27. Consequences of supply chain disruptions <ul><li>Impact of disruptions on supply chain performance : </li></ul><ul><ul><li>Disruptions in the supply chain  supply chain performance decreases </li></ul></ul><ul><ul><li>Higher costs, lower delivery dependability, lower service level etc. </li></ul></ul><ul><li>Impact of disruptions on stock-related metrics and financial-statement metrics: </li></ul><ul><ul><li>10% decrease in shareholder wealth (1 day before actual disruption + day of the disruption) </li></ul></ul><ul><ul><li>40% decrease in stock returns (observed 1 year before actual disruption until 2 years after disruption) </li></ul></ul><ul><ul><li>107% drop in operation income </li></ul></ul><ul><ul><li>114% decrease in return on sales </li></ul></ul><ul><ul><li>93% drop in return on assets </li></ul></ul>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. 28. Supply chain vulnerability <ul><li>“ The susceptibility of a supply chain towards the harm of a particular supply chain disruption” </li></ul><ul><li>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. </li></ul>Source: Wagner and Bode (2008)
  29. 29. Drivers of supply chain vulnerability <ul><li>The characteristics of the supply chain structure  Supply chain vulnerability drivers </li></ul><ul><li>Some examples: </li></ul><ul><ul><li>Complexity of the supply chain (global sourcing) </li></ul></ul><ul><ul><li>Density (NL: dichtheid) of the supply chain </li></ul></ul><ul><ul><li>Single sourcing (Nokia, Ericsson example) </li></ul></ul><ul><ul><li>Lean and JIT production philosophies </li></ul></ul><ul><ul><li>Centralisation of warehouse/manufacturing locations </li></ul></ul><ul><ul><li>Dependency on suppliers / customers </li></ul></ul><ul><ul><li>Dependency on IT-infrastructure, electricity etc. </li></ul></ul><ul><li>It is about ‘conscious’ decisions regarding how you design the supply chain </li></ul>Source: Craighead et al. (2007), Wagner and Bode (2008)
  30. 30. Example: Density <ul><li>Dutch Logistics Hotspots 2009 </li></ul><ul><ul><li>Main ports Amsterdam and Rotterdam </li></ul></ul><ul><li>High density regions </li></ul><ul><ul><li>Congestion (road, trains, waterways) </li></ul></ul><ul><ul><li>Proximity effect (power failure, flooding) </li></ul></ul><ul><li>By using these high density regions  leads to higher vulnerability of supply chains </li></ul>Source: TNO - Quick scan: overzicht van netwerk logistieke hot spots in Nederland (2009). Falasca et al. (2009)
  31. 31. Example: Lean and JIT production philosophies <ul><li>‘Leaning-down’ too far can cause higher costs for recovery of a disruption. </li></ul><ul><li>However, take care that Just-in-Time does not digresses to Just-in-Case management </li></ul>Source: Christopher and Rutherford (2004)
  32. 32. One construct left <ul><li>Supply chain risk </li></ul><ul><li>Supply chain disruption </li></ul><ul><li>Supply chain vulnerability </li></ul><ul><li> Supply chains are becoming more vulnerable and increasingly at risk of disruption. How can we manage this? </li></ul><ul><li>Supply chain risk management (and resilience) </li></ul>
  33. 33. Supply chain risk management (SCRM) <ul><li>Activities that firms may engage in to mitigate (i.e. make less severe) the probability of occurrence or negative consequences of supply chain disruptions. </li></ul><ul><li>Lots of frameworks available, but usually risk management consists of 3 general steps (ISO 31000): </li></ul><ul><ul><li>Risk identification </li></ul></ul><ul><ul><ul><li>Identifying the risks and its characteristics </li></ul></ul></ul><ul><ul><li>Risk assessment </li></ul></ul><ul><ul><ul><li>Ranking risks in terms of probability and consequences (quantifying) </li></ul></ul></ul><ul><ul><li>Risk management </li></ul></ul><ul><ul><ul><li>Treating the risks and implementing the chosen solution, monitoring the impact of the risk management solution on the business performance </li></ul></ul></ul> Well that sounds pretty easy, doesn’t it? Source: ISO 31000
  34. 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. 35. 5 most important barriers towards implementing SCRM <ul><li>The benefits of SCRM are difficult to monetise </li></ul><ul><li>Focussing on achieving efficiency prevents implementing SCRM </li></ul><ul><li>Fear of spreading important business information </li></ul><ul><li>Limited acceptance that risks go beyond company walls </li></ul><ul><li>Vulnerabilities of the business must remain secret </li></ul>Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)
  36. 36. Step 1+2: Risk identification and assessment <ul><li>Focus and create awareness </li></ul><ul><li>Create a cross-functional risk team </li></ul><ul><li>Determine potential risks (also unobservable risks) </li></ul><ul><li>Assess (quantify) risks and rank </li></ul><ul><li>Methods </li></ul><ul><ul><li>Brainstorming, elevator pitches </li></ul></ul><ul><ul><li>Risk-matrix </li></ul></ul><ul><ul><li>Failure Mode & Effect Analysis </li></ul></ul><ul><ul><li>(FMEA) </li></ul></ul>Source: Lammers, Ploos van Amstel and Eijkelenbergh (2009)
  37. 37. Failure Mode and Effect Analysis (FMEA) <ul><li>Method for looking at potential ‘failure modes’ and its effects developed in the 1940s by the U.S. Army </li></ul><ul><li>Determine scope of analysis </li></ul><ul><li>Create a multi-disciplinary team </li></ul><ul><li>Describe processes </li></ul><ul><li>Describe potential failures (risks) </li></ul><ul><li>Determine the expected Effects of these failures (scale 1-10) </li></ul><ul><li>Determine the Probability of the failure (scale 1-10) </li></ul><ul><li>Determine the ability of Detection of the failure (scale 1-10) </li></ul><ul><li>Calculate Risk Priority Number (RPN = 5*6*7) </li></ul><ul><li>Choose target value RPN </li></ul><ul><li>Eliminate </li></ul><ul><li>Recalculate RPN and make cost-benefit analysis </li></ul>Step 3 of risk management
  38. 38. Film clip – example of creating awareness and focus <ul><li>Trade and wholesale firm for electronics and technical installation material </li></ul><ul><li>Intermediary between 750 suppliers and 15,000 customers </li></ul><ul><li>280,000 SKUs - 90,000 items in stock </li></ul><ul><li>Logistics structure: 2 distribution centres, 24 transhipment points </li></ul><ul><li>Daily: 60,000 order lines, 24hr delivery by 240 trucks to 9,000 delivery addresses </li></ul><ul><li>11 February 2008 – 09.00 am: “normal bi-weekly logistics team meeting” </li></ul>
  39. 39. Step 3: Risk management <ul><li>Treating the risks by means of a ‘strategy’ </li></ul><ul><li>Five classic strategies (but there are others) </li></ul><ul><ul><li>Avoid – eliminate possibility of event </li></ul></ul><ul><ul><li>Reduce – minimise probability of occurrence </li></ul></ul><ul><ul><li>Transfer – shift risk to third party (e.g. insurance) </li></ul></ul><ul><ul><li>Retain – bear risk and do nothing </li></ul></ul><ul><ul><li>Exploit – reduce the impact </li></ul></ul><ul><li>Subsequently, perform cost-benefit analysis </li></ul><ul><li>of risk treatment and keep monitoring </li></ul>Source: DeLoach (2000), Husdal (2009)
  40. 40. Cost-benefit analysis of risk management
  41. 41. <ul><li>“ The only constant is change .” </li></ul><ul><li>– Heraclitus, 600 BC, Greek philosopher </li></ul><ul><li>“ It is not the strongest of the species that survive , not the most intelligent, but the ones most responsive to change .” </li></ul><ul><li>– Charles Darwin </li></ul>
  42. 42. Supply chain resilience <ul><li>“ Buzzword” in the context of SCRM </li></ul><ul><li>Definition: </li></ul><ul><ul><li>“ the supply chain’s ability to survive, adapt, recover and grow from a disruption in the face of turbulent change” </li></ul></ul><ul><li>Dutch synonym: veerkrachtigheid </li></ul><ul><li>It is about: having the ability to survive a major disruption and subsequently recover, adapting to the changing environment. </li></ul><ul><li>Focusing on reducing the consequences of a major disruptions (instead of predicting/estimating probability of occurrence) </li></ul><ul><li>Resilience originally was aimed at disruptions that </li></ul><ul><ul><li>You do not see coming </li></ul></ul><ul><ul><li>High impact, low probability (HiLo) </li></ul></ul><ul><ul><li>Affect several parts of the supply chain </li></ul></ul><ul><li>Nowadays, an approach for </li></ul><ul><li>supply chain risk management </li></ul>Source: Fiksel (2006), Sheffi and Rice Jr. (2005), Husdal (2009) Resilience needed
  43. 43. How to become more resilient? <ul><li>4 categories of measures to become more resilient </li></ul><ul><ul><li>Redundancy – reserve resources (buffer inventories, slack in the process, insurance policies), comes at an undesirable premium </li></ul></ul><ul><ul><li>Flexibility – capabilities (shift production from one plant to the other, standardise processes, re-engineer products, product postponement) </li></ul></ul><ul><ul><li>Transparency – open communication with suppliers and customers, knowledge of the current status of operations (enablers: IT in the broadest sense, RFID, GPS, EDI etc.) </li></ul></ul><ul><ul><li>Collaboration – effectively working together, sharing (confidential) information (CPFR initiatives) </li></ul></ul>Source: Sheffi and Rice Jr. (2005), Lammers, Ploos van Amstel en Eijkelenbergh (2009) redundancy transparency flexibility collaboration
  44. 44. Reconciling supply chain risk with supply chain management <ul><li>The supply chain of tomorrow must deliver varying degrees of six outcomes, depending on the customers’ needs: </li></ul><ul><ul><li>Cost efficiency </li></ul></ul><ul><ul><li>Responsiveness </li></ul></ul><ul><ul><li>Security </li></ul></ul><ul><ul><li>Sustainability </li></ul></ul><ul><ul><li>Resilience </li></ul></ul><ul><ul><li>Innovation </li></ul></ul><ul><li>There could be other outcomes </li></ul><ul><li> e.g. Reliability </li></ul><ul><li>“Adaptability, key to success” </li></ul>Source: Melnyk, Davis, Spekman and Sandor (2010)
  45. 45. Summary <ul><li>Supply chains are exposed to a wide range of risks that are distinctive for each and every supply chain </li></ul><ul><li>Disruptions can have severe consequences, both tangible (higher costs, lost sales etc.) and intangible (reputation, fear etc.) </li></ul><ul><li>Supply chain risk management seeks to identify risks, assess their impact and subsequently mitigate these risks </li></ul><ul><li>Resilience is another perspective for risk management, focusing on reducing the consequences of a major disruption </li></ul><ul><li>Supply chain resilience is one of six ‘outcomes’ that a modern supply chain should have </li></ul>
  46. 46. Suggested further reading <ul><li>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 </li></ul><ul><li>Chopra, S., Sodhi, M. (2004). Managing risks to avoid supply-chain breakdown, MIT Sloan Management Review , Vol. 46 No. 1, pp. 53-61 </li></ul><ul><li>Christopher, M., Peck, H. (2004). Building the resilient supply chain, International Journal of Logistics Management , Vol. 15 No. 2, pp. 1-14 </li></ul><ul><li>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 </li></ul><ul><li>Khemani, K. (2007) Bringing rigor to risk management. Supply Chain Management Review Vol. 11 No. 2, pp. 67-68. </li></ul><ul><li>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. </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>
  47. 47. Thanks for your attention Any questions?