Discusses the nature of risks faced by supply chain of global organisations

1. Supply Chain Risk
Management
[11/20/2012] DEBMALYA DUTTA

2. Supply Chain Risk Management
1.SUPPLY CHAIN RISKS – RELEVANCE IN TODAY’S WORLD.............................................................................2
2.UNDERSTANDING RISK............................................................................................................................... 3
3.SUPPLY CHAIN RISK – EXAMPLES................................................................................................................ 3
4.SUPPLY CHAIN RISK MANAGEMENT FRAMEWORK .....................................................................................5
5.UNDERSTANDING THE VARIOUS SCM RISK CATEGORIES AND DRIVERS.......................................................7
6.SUPPLY CHAIN RISK PRIORITISATION.......................................................................................................... 7
7.SUPPLY CHAIN RISK MITIGATION................................................................................................................ 8
1. Supply Chain Risks – Relevance in Today’s world
Risk management in today’s business environment has become the biggest contributor to
most fields of management. Supply chain management, as part of management study,
cannot avoid those risks which are inherent. It is common today in supply chain
management to adopt a risk concept and apply this concept as the key role in the supply
chain management. Therefore, it is necessary to develop risk management and risk
mitigation in the supply chain context.
Risk management in today’s business environment has become the biggest contributor to
most fields of management. Supply chain management, as part of management study,
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3. Supply Chain Risk Management
cannot avoid those risks which are inherent. It is common today in supply chain
management to adopt a risk concept and apply this concept as the key role in the supply
chain management. Therefore, it is necessary to develop risk management and risk
mitigation in the supply chain context. The term supply chain is defined in many ways; one
such definition is that it is a network of organisations, which are involved through upstream
and downstream linkages, in different processes and activities that create value in the form
products and services in the hands of customers.
Nowadays, managing supply chains in a competitive, high uncertainty and turbulent market
is very challenging. The frequent occurrence of natural disasters, labour disputes, uncertain
supply and demand, supplier bankruptcy, political changes, war and terrorism have led to
deeper concerns about risk management for the supply chain. Hence, the biggest challenge
in supply chains today is managing and mitigating the risks that are inherent in every
business situation. Company needs to know and understand the category of the risks as well
as the condition that drives the risks.
2. Understanding Risk
Companies are waking up to the need for risk management implementation for some
significant time. Some academicians have defined risk as “the extent to which there is
hesitation whether potentially desired or insignificant/unwanted outcomes of decision will be
realised.” implication of that loss for the individual or organisation.
Moreover, Ritchie and Brindley (2007) cited that there are three dimensions of risk:
i. Likelihood/probability of occurrence of certain outcomes;
ii. Consequences/severity from the occurrence of particular events;
iii. Causal pathways leading to the events.
Risk = Likelihood X severity X Detection
This leads to a logical framework which involves analysing the sources of risk, leading to a
better detection of risks, then understanding the forces which might create the occurrence of
undesired event, leading to correctly estimating the likelihood of risk and lastly managing
these dimensions to enhance the possibility of positive outcomes and avoid negative
outcomes, leading to tackling the inherent or external risks.
3. Supply Chain Risk – Examples
When lightning hit a power line in Albuquerque, New Mexico (March 17, 2000), the strike
caused a massive surge in the surrounding electrical grid, which in turn started a fire at a
Royal Philips Electronics plant in the Nevada region. This damaged millions of microchips.
Scandinavian mobile-phone manufacturer Nokia Corp., a major customer of the plant,
almost immediately began switching its chip orders to other Philips plants, as well as to other
Japanese and American suppliers. Because Nokia had an appropriate multiple-supplier
strategy and responsiveness, its production suffered little during the crisis.
In contrast, Telefon AB L.M. Ericsson, another mobile-phone customer of the Philips plant,
employed a single-sourcing policy. As a result, when the Philips plant shut down after the
fire, Ericsson had no other source of microchips, which disrupted production for months.
Ultimately, Ericsson lost $400 million in sales.
These two dramatically different outcomes from one event demonstrate the importance of
proactively managing supply-chain risk. Supply-chain problems result from natural disasters,
labor disputes, supplier bankruptcy, acts of war and terrorism, and other causes. They can
seriously disrupt or delay material, information and cash flows, any of which can damage
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4. Supply Chain Risk Management
sales, increase costs — or both. Broadly categorized, potential supply-chain risks include
delays, disruptions, forecast inaccuracies, systems breakdowns, intellectual property
breaches, procurement failures, inventory problems and capacity issues. Each category has
its own drivers and mitigation strategies.
Coming up with the right strategy to counter risks inherent to the business’ supply chain
starts with an understanding the holistic risk categories that exist and the potential drivers.
Another recent example would be the effects of recent earthquake, tsunami and the nuclear
crisis in Japan on global supply chains of automobile companies. It was reported that GM
had to halt production of vehicles at several plants, due to parts shortages from Japanese
suppliers. Toyota has suspended production of parts in the mother country that were
intended to be shipped overseas. Finally, most Japanese automotive assembly plants
remain closed.
The automotive supply chain is complex. There are approximately 20,000 parts in a car, and
if only one of those parts is unavailable, then the finished product cannot be shipped. At the
top of the pyramid are Tier 1 suppliers that furnish major components, such as engines, that
go into a vehicle platform. The Tier 2 suppliers furnish the parts that the Tier 1 suppliers
require, such as the piston rod assembly that is part of the engine. There are typically 3-5
levels in the automotive supply chain, which is comprised by 1,000s of suppliers.
Japanese companies produce many of the components that all OEMs require. For example,
the transmissions for the new Chevrolet Volt plug-in-hybrid are sourced from the Land of the
Rising Sun. In addition, Japan is a major source of electronic components, furnishing many
of the over 30 microprocessors that are found in a typical car. But the Tsunami’s external
shocks to the global supply chain tested the mettle of even the strongest producers. For
example, supply chain management at Honda was being stress tested during the calamity.
Honda had at least 113 of its suppliers are located in the affected areas. During the tsunami,
it had been unable to establish contact with more than 40 of them.
But when a critical supplier is unable to produce material, the entire system breaks down.
For example, several years ago a fire broke out in Aisin Seiki, a supplier that produced more
than 99% of Toyota’s brake valves. Most of the 506 machines used to produce the valve
were inoperable. Toyota maintained only a 4-hour supply of the valve, so, the world’s #1 car
maker’s production lines quickly shut down. This resulted in Toyota losing production of
70,000 cars. But Saturday after the fire, Toyota and Asin officials summoned many of
Toyota’s other suppliers, gave them blue prints, and assigned them the task of making the
critical valves. Toyota was able to survive.
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5. Supply Chain Risk Management
4. Supply Chain Risk Management Framework
Value
Value
Monitoring
Monitoring
mapping the
mappingthe
and control
andcontrol
supply chain
supply chain
5 1
4 2 Risk
Risk
Identification
Identification
Action
Action
Planning
Planning
3
Risk
Risk
Assessment
Assessment Exhibit 1
1. Value mapping the supply chain: The extended supply chain elements are
mapped out to build an understanding of the key dependencies. This includes a criticality
assessment to prioritise key internal and external elements of the chain.
2. Identification of relevant risks is carried out on the prioritised elements of the
supply chain. The identification is carried out against five elements of risk: demand, supply,
environment, process and control. This is achieved through facilitated workshops with key
managers, the outcome of which is recorded on a risk identification template. Exploring
‘What-if’ scenarios like the ones below can help businesses identify, understand and
prioritize risks, a prerequisite to tailoring effective risk mitigation strategies
3. Risk assessment is a comprehensive assessment and quantification of the risks. Risk
scores are determined collectively based on risk descriptions and pre-defined impact criteria
to produce a risk score. The information is consolidated in a risk assessment scorecard
which clearly defines the risks, the findings of the assessment including the respective
criticality and the associated cost. The outcome is an evaluated and prioritised list of supply
chain risks.
4. Action planning helps the organisation develop an optimal ‘future state’ risk profile.
This involves determining an organisations risk appetite and agreeing the level of acceptable
risk. Following a review of existing mitigation plans, an action plan needs to be defined to
reach the future state risk state, resulting in a costed set of mitigation actions. This kind of
exercise is important for the management in the investment decision making process.
Monitoring and control Risk assessment must be a core process rather than a one-off
activity. Risk standards, on-going audit process and a measurement and reporting process -
all help with the controlling measuring and monitoring process of the supply chain risks.
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6. Supply Chain Risk Management
Exhibit 2
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7. Supply Chain Risk Management
5. Understanding the various SCM risk categories and drivers
Exhibit 3
6. Supply Chain Risk Prioritisation
Failure Modes and Effects Analysis (FMEA) is methodology for analysing potential reliability
problems or unwanted events early in the development cycle where it is easier to take
actions to overcome the problems, thereby enhancing reliability through design. FMEA is
implemented to identify potential failure forms, determine their impact on production, and
identify actions to mitigate the failures. Failure Modes and Effects Analysis is a planning tool
on developing the process, products, or the services. The use of FMEA has been developed
in the deployment of products or services for troubleshooting and counteractive action. The
standard of FMEA evaluation is based on the occurrence, severity, and detection for each
risk event.
Risk Priority Number (RPN) = RPN = Occurrence x Severity x Detection
The FMEA has been developed not merely for designing services, products, and so on.
Recently, FMEA is being used for analysing potential risk in project management, marketing,
operations, etc. This tool is very useful because it provides a simple method for analysing
crucial steps to anticipate what might go wrong with products/services. If there is a case
where anticipating every failure mode is impossible, the development team should invent as
extensive a list of potential failure modes as possible. This research implements the
RFMEA’s framework in order to achieve the main objective of this research which is
assessment and mitigation of risk in the supply chain. Using the RPN for each risk, we can
weigh the significance of supply chain risks and its mitigation will be developed.
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Value Chart
example of
for a plant
a Risk
Score
An
Exhibit 4

8. Supply Chain Risk Management
7. Supply Chain Risk Mitigation
Mitigation Disruptions Delays Forecast Procurem Receivable Capacity Inventory
Risks ent Risk Risk Risk Risk
Strategy
Add capacity
Add inventory
Have redundant
suppliers
Increase
responsiveness
Increase
Flexibility
Aggregate or pool
demand
Increase
capability
Have more
customer
accounts
Greatly increases risk Decreases risk
Increases risk Greatly decreases risk
References:
Exhibits 2, 3 and 4 are from the following paper ‘Managing Risks to avoid supply chain breakdown’
by Sunil Chopra and ManMohan S. Sodhi
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