SCM Risk Management Methodology


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A proposed methodology on how to identify, evaluate and manage risk in your supply chains in a systematic and objective way.

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SCM Risk Management Methodology

  1. 1. Securing Supply Continuity: Dual Sourcing and Alternative Approaches Raffaele Muscetta
  2. 2. Steel shortage forces Nissan to halt production. Sept 2004 • An output loss of 10-15,000 units could dent profits by 6 billion yen ($58.46 million). The suspension at three of its four domestic plants on November 29 and 30 and December 6-8 was expected to result in lost production of about 25,000 vehicles to be made up early next year, the company had said. • 20% Cost reduction program, supply base reduction… punishment? • Keiretsu vs. Contract Managed Relationship.
  3. 3. Toyota to Resume Production Tuesday Despite Riken rings shortage, Japan’s auto-industry managers cling to JIT. One week after July earthquakes played havoc with its engine piston-ring facilities, Riken Corp. (Tokyo, Japan) managed to resume operations to turn out the key parts for the Japanese automotive industry, where it holds tremendous market share. This made it possible for 11 of Japan’s 12 vehicle manufacturers to start running their factories again at about the same time, except for Honda Motor’s two engine factories for subcompacts The suspension resulted from both the natural disaster and the fact that the vehicle makers use unique piston rings, which Riken’s and the clients’ engineers jointly design. As for the Just-in-Time system, Toyota Motors president Katsuaki Watanabe defended it, saying, "We shouldn’t be afraid of stopping production lines. We made the best use of the lessons we learned in the past." He appeared to have been referring to the great Kobe quake of 1995 and the fire in 1997 at Aisin Seiki Co. (Kariya, Aichi Prefecture), a major supplier to Toyota. None of the members at the Japan Automobile Manufacturers Assn. (JAMA; Tokyo) intends to amend their JIT procedures, as Fujio Cho, Toyota chairman, told the Japanese media at the trade group, where he concurrently serves as its chairman. JAMA, however, would sound out parts makers to see if they could diversify production sites for important products with high market shares. The ring problem affected the industry to the tune of some 124,000 units, including 55,000 cars at Toyota alone. It plans to make up for the lost production by the year’s end, with its employees asked to work over weekends. Other automakers are likely to follow suit. The so-called "Riken shock" caused piston-ring users in other industries like off-road and marine diesel to worry. But their fears turned out to have been largely unwarranted because of their refusal to adopt the JIT in favor of maintaining larger ring inventory volumes in their warehouses. Only Kubota Corp. (Osaka) seems to have been forced to suspend producing, with about 1,500 tractors, fewer than 300 construction machines, and some 9,000 engines affected. Unique Design… Like Kubota, Yanmar Co. (Osaka) is a diversified machine maker based traditionally on agricultural hardware. It counted on sizable parts inventories. Its emergency plans, which did not have to be implemented, called for temporarily amending the sequences of its engine-assembling steps. Similarly, Komatsu Ltd. (Tokyo), the world-class construction-machine Sole Suppliers… builder, and Mitsubishi Heavy Industries Ltd. (MHI; Tokyo), a leading shipbuilder, avoided plant shutdowns. MHI revealed its diesel-engine piston rings stock can withstand one-month of suspension at Riken or its subsidiary. Posted: Aug 6th, 2007 Natural Disasters… Lot of Revenue Loss!!! 3
  4. 4. Credit Crunch! R.Muscetta 4
  5. 5. November ‘08 R.Muscetta 5
  6. 6. P&G is Spending more on Transport and Storage than on running its factories Oil Prices and Logistic Costs Risk! R.Muscetta 6
  7. 7. Palm Pre Shortage: Supply Chain Slip-Up or Retail Fairy Tale? By Renay San Miguel E-Commerce Times Part of the ECT News Network 05/22/09 12:57 PM PT Sprint has publicly stated it anticipates shortages for the Pre, Palm's new smartphone set to go on sale June 6. If Palm is in such dire need of a hit, why did it go to market with a shortage rather than delay release? Or is talk of a shortage just a ruse to try and stir up buzz in what looks to be an extremely competitive summer for the smartphone sector? 7
  8. 8. Still Work to Do… and this is why we are here…! Latest news Supplier risk ‘not getting sufficient attention’ 21 April 2009 Procurement organizations are paying insufficient attention to the issue of supplier risk despite the threat of key partners going out of business, a global study suggests. A survey of purchasing functions in large organizations from the UK, US, Italy, Spain and France, commissioned by Bravo Solution, a supply management technology just 31 per cent had evaluated financial and fulfillment risk in provider, found that the past six months. This failure was common across the countries surveyed, ranging from 35 per cent of US businesses to 27 per cent of UK and French companies. “Perhaps distracted by the need for immediate cost savings, resources are being diverted elsewhere,” the report said. “Analyzing risk without sufficient spend visibility or supplier transparency is a very difficult and often inaccurate exercise. However, these challenges should not excuse this absence of risk evaluation and accountability.” Of those organizations that have evaluated the threats they face, 72 per cent had either introduced changes as a result or were intending to do so in the near future. “With such a high level of change resulting from risk evaluation, the implication is that those businesses yet to undertake risk evaluation are moving further away from an appropriate response to supplier and process instability,” the report said. Separate data released this month by the Hackett Group, a benchmarking and advisory firm, found that two-thirds of world-class performers managed supply risk as a consistent, enterprise-wide process. The figure for other companies was just 13 per cent, and almost half had not implemented it at all. The most important objective cited in the BravoSolution research over the next 12 months was identifying new areas of cost savings, with 77 per cent of all organizations saying this was the priority. Those in the US and Spain (both 87 per cent) gave this the most emphasis, while 65 per cent of French organizations agreed. The research also suggested the economic recession is enabling procurement departments to strengthen their internal standing. Forty-four per cent of those surveyed reported a wider mandate to control costs than they had 12 months ago, with 38 per cent experiencing a greater strategic input. Purchasing now enjoys a closer working relationship with other business units in 37 per cent of cases, the survey found, while 28 per cent reported greater board exposure. “Undoubtedly, purchasing professionals are enjoying greater responsibility, control and visibility than before but with this also comes significant risk,” the report said. “Purchasing objectives are becoming more extensive and challenging while pressure from the organization to find new areas of cost saving show no signs of abating.” UK organisations have been the main beneficiaries of the greater status, the research suggested, with 55 per cent seeing a greater input on company strategy and experiencing a closer working relationship with other functions and 37 per cent gaining greater board exposure. This compared to 39 per cent, 32 per cent and 28 per cent respectively for US companies. 8
  9. 9. Background THE WORLD RISK IS FLAT EnablerS 9
  10. 10. The World is Flat 3.0 In the book, Friedman recounts a journey to THE WORLD IS  Bangalore, India, when he realized globalization has changed RISK FLAT core economic concepts. He suggests the world is "flat" in the sense that globalization has leveled the competitive playing fields between industrial and emerging market countries. Globalization 1.0, which ran from 1492 until 1800 and was driven by countries … Globalization 2.0, in which "the key agent of change, the dynamic force driving global integration, was multinational companies" driven to look abroad for markets and labor, spurred by industrial-age "breakthroughs in hardware" such as steamships, trains, phones and computers. That epoch ended around 2000, replaced by one in which individuals are the main agents doing the globalizing, pushed by "not horsepower, and not hardware, but software" and a "global fiber-optic network that has made us all next-door neighbors." Globalization 3.0 10
  11. 11. Global Sourcing • Many companies have either made or are in the process of making the transition from a: • Build and Sell: Global local Business • Sell-Anywhere, Model • Build-Anywhere • Source- Anywhere Local • The transition includes both new global sources of supply and new global sources of demand. 11
  12. 12. Reaping the Benefits • Outsourcing has allowed companies to split service and manufacturing activities into components which can be subcontracted and performed Outsourcing in the most efficient, cost-effective way. • The internal relocation of a company's manufacturing or other processes to Offshoring & a foreign land in order to take advantage of less costly operations there. BCS/LCC China's entrance in the WTO allowed for greater competition in the playing field. More entrants: Malaysia, Thailand, Vietnam, Brazil, etc • Companies using technology to streamline item sales, distribution, and Supply- shipping. chaining • UPS as a prime example for insourcing, in which the company's employees perform services--beyond shipping--for another company. Insourcing For example, UPS repairs Toshiba computers on behalf of Toshiba. The work is done at the UPS hub, by UPS employees. 12
  13. 13. Driving Value with Global Sourcing Global sourcing is unavoidable in today's flat world, but it's a highly complex undertaking. THE WORLD IS  RISK FLAT Many companies with successful global sourcing objectives have not only lowered their overall supply costs, but also pioneered innovative supply partnerships enabling value-driven transformation Strategic sourcing demands that companies align what the customer wants, what's best for the business, and what's needed to get the supply. And they need to do this while dealing with the inherent intricacy of navigating global suppliers, inventory, cultural differences, currency, time zones, connectivity, language, and supply chain requirements. 13
  14. 14. 0 50 100 150 200 250 300 1992M2 1992M6 1992M10 1993M2 1993M6 1993M10 1994M2 1994M6 1994M10 1995M2 1995M6 1995M10 1996M2 1996M6 1996M10 1997M2 1997M6 1997M10 1998M2 1998M6 1998M10 1999M2 1999M6 1999M10 2000M2 2000M6 2000M10 2001M2 2001M6 2001M10 2002M2 2002M6 2002M10 2003M2 2003M6 2003M10 2004M2 2004M6 2004M10 2005M2 2005M6 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 0 2005M10 2006M2 2006M6 2001 2006M10 2007M2 2007M6 2007M10 2002 Background Factors for Risk 2008M2 2008M6 2008M10 2003 2009M2 2009M6 2009M10 2004 (USD) 2005 2006 Metals index Trade Balance US-China 2007 2008 Commodity Fuel (energy) Commodities (2005=100) Index of Non-Fuel Primary Gas, and Coal Price Indices Index, 2005 = 100, includes Crude oil (petroleum), Natural 14
  15. 15. EnablerS THE WORLD RISK IS FLAT EnablerS 900 800 700 600 500 400 300 200 100 0 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 15
  16. 16. Few Words about Risk Risk is characterize by both the probability of an event and its severity given that an even occurs. Impact RISK Probability 16
  17. 17. SC: Network of Nodes.. And its Disruptions 17
  18. 18. Supply Chain Risk Is a function of sum or probabilities of disruption at critical nodes in the network, multiply by the revenue impact of a disruption in revenue dollars on the end customer. Function of Global Nodes and Constrained (Amplifiers) = Dependencies - % Pr (D) Function of SC Planning and SC Redesign (Risk Reducers) = and Visibility Effectiveness x Function of Excess Resources and Visibility $ Risk (Revenue Loss) = effectiveness $ I (D) + Function of SC Redesign and excess $ I (D): Impact of Disruption (Cost to Stabilize) = Resources % Pr (D): Probability of disruption 18
  19. 19. Supply Chain Risk Management Process I II III Map the SC and Identify Risk a. Excess Resources Measure the Reduction b. SC Collaboration & Planning Risk of Critical Mechanism for c. Invest in visibility Nodes in the High Risk systems Network Nodes d. Major SC redesign 19
  20. 20. How to assess the SC Risk? 20
  21. 21. Environmental Shipping Political Riskv Wage Employment LevelsPort of Entry Route and Weather and Transportation Disaster Risk Methodology Rate Routes Weather and Transportation Routes Earthquake Risk Tornado Risk Hurricane Risk Within 60 miles of coast -5 60-100 miles of coast - 4
  22. 22. A Risk Assessment System in Use The primary reporting review: Risk Index Index next reporting review: Risk Probability Matrix Distribution A set of disruption predicators based on experience and research. • The Diagnostic • The Analytical or Risk • Is constructed by • Reflects the event mode plotting the revenue at comparative level of • The events are risk (Rev Impact) with risk in the supply assigned a probability a supplier vs. the chain. of occurrence. average Risk • The center of the • This is a relative Probability Index (RPI) circle is the Risk Index measure used to rank- of that supplier. of the demographic order the suppliers • It is used to view all (supplier, sub- according to the suppliers within a category, commodity, e potential of a supply commodity group tc). chain disruption according to their Risk and potential impact to your company. Risk Risk Probability Risk Index Distribution Index Matrix 22
  23. 23. Risk Index at Glance Bargain Power with RM Suppliers Forecast Frequency with Suppliers Employee Turnover Supplier Performance Review Freq Senior Staff Turnover Supplier SC Disruption Likelihood Labor Unionization / Pay Position Risk Management Approach Sole Sourced Material Accreditations Engineering Support VI. Human I. Supply Chain Capacity Utilization Resources Capacity Changes Disruption Profitability of Business Unit Upside Flexibility Customer Satisfaction of BU Manufacturing II. Financial Issues V. Performance Employees Response to Technical RI Health Supplier Risk Report Performance of Business Unit Performance vs Competition Time Since Last Supplier Audit A/R vs A/P Cycle Time Supplier Audit Results Delivery Results III. Business Quality Results IV. Relationship Environment Corrective Action Industry Focus Market Dynamics Customer Leverage Merger and Acquisitions Reputation Regulatory Issues Critical Info Sharing Disasters Transportation Disruption 23
  24. 24. Risk Probability Index at Glance Supplier Locked Union Strike Rapid technology changes Tier-2 Supplier Stoppage Material Tier-2 Supplier Stoppage Business Supplier Ownership changes Tier-2 Supplier Shutdown VI. Human I. Supply Chain Resources Disruption II. Financial Quality Problem Delivery Problem Service Problem V. Performance RPI Health Supplier Bankruptcy IV. Relationship III. Disasters Misalignment of Interest Delivery Problems due to Environment Service Problem due to Environment Force Majeure Location Risk 24
  25. 25. SC: a complex network consisting of supplier- customers-suppliers relationships.. 25
  26. 26. Supply Disruption Risk Analysis Risk Impact and Risk Probability Index Supplier Risk Assessment Questionnaire Risk Index Risk Probability Index 26
  27. 27. Supply Disruption Risk Analysis Risk Index (Diagnostic) and Risk Probability Index (Analytical) Risk Index Risk Probability Index 27
  28. 28. Risk Distribution Matrix • Used to view all  suppliers within  a commodity  S3 group plotted  according to  their risk and  S2 potential impact  on your  S1 company 28
  29. 29. Supply Disruption Risk Analysis Strategy Impact on Risk Mitigation Supplier Risk Index Supply Chain Disruption Environ- Financial mental Health HR Relation- ship S3 Performance S2 Supplier Supplier Locked Risk Probability Index Tier-2 Disruption S1 Supplier Supply Bankruptcy Chain Disruption Disasters Environ- Financial mental Health HR Relation- ship Misalignment of Interest Ownership Change Performance Service Quality S1 Problem Problem S2 Delivery Problem S3 29
  30. 30. Risk Distribution Matrix Commodity Strategy Impact on Risk Mitigation Risk Index (RI) Risk Probability Index (RPI) 5 900 4 800 3 3.06 2.97 2 2.22 2.06 700 1 0 600 S1 Aaseby S2 Kima S3 Rojax S4 Saivs S2 Kima Revenue Impact 500 400 S3 Rojax 300 S4 Saivs 200 S1 Aaseby 100 0 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 30
  31. 31. Double Sourcing the Panacea Risk Probability Index (RPI) 900 • Lowering the spend. 800 700 600 Revenue Impact • Logistics bottleneck S2 500 400 • Communication S3 300 S4 200 problems 100 0 S1 • Planning and 0.00 0.10 0.20 0.30 0.40 0.50 Risk Index (RI) forecasting 5 4 3 3.06 • Union trends and 2 2.97 2.22 2.06 1 0 issues Aaseby Kima Rojax Saivs S2 S2 S3 S4 • Etc… 31
  32. 32. Supply Chain Risk Management Process I II III Map the SC and Identify Risk a. Excess Resources Measure the Reduction b. SC Collaboration & Planning Risk of Critical Mechanism for c. Invest in visibility Nodes in the High Risk systems Network Nodes d. Major SC redesign 32
  33. 33. Risk Mitigation Mechanisms Disruption Discovery Visibility  Strategically Positioned Excess  Supply Chain Planning and  Systems Supply Chain Redesign • Risk monitoring systems • Network redesign Resources Collaboration • Expediting • Supplier qual/ assessment tools • Safety Stock • Inventory visibility systems • Relationship management and  • Product or process  joint planning redesign • Event management  • Demand/Supply forecast reviews  systems across entire SC • Deploy RFID at strategic  • Daily status meetings nodes in supply chain • Defined communications network  • Predictive analysis  protocols and mechanism modeling tools • Defined contingency plan  responsibilities with decision‐ • Task forces to analyze end‐ making authority for critical  to‐end supply chain  events at all nodes operations 33
  34. 34. Service Providers
  35. 35. BEFORE.. Concerns High Cost Higher CO2 footprint. High dependency on internal capability High volume been transported intercontinental High transport risk YOUR Plant Global Supplier LCC Supplier Inter‐Regional Supply Intra‐Regional (JIT) Supply 35
  36. 36. … and AFTER Benefits Increasing Low Cost Country manufacturing capability 25-55% immediate saving through reduced transportation and duty charges Reduce lead times through avoidance of Intercontinental transport Improved communication YOUR Plant through local supply Global Supplier LCC Supplier Inter‐Regional Supply Intra‐Regional (JIT) Supply 36
  37. 37. Conclusions Global Sourcing will continue to be a driver of value creation while adding complexity to the Supply Chain. Assessing and managing Risk will be a “must-have” in all SCM/CPO/Procurement professionals Using objective, multidimensional and visible tools will drive better and founded decisions to mitigate, reduce or avoid risk. 37
  38. 38. Thanks… Q&A? 38