Supply Chain RiskThe dark side of supply chain mangement

Guest lecture, LOG 711, 12.11.2008

Jan Husdal

� jan.husdal@himolde.no � 71214289

Outline

• What is (supply

chain) riskrisk?

• What are typical

supplysupply chainchain risksrisks?

• How to managemanage

supply chain risks?

Supply chain risk?

Loss of goodsInsurance?

Loss of vehicleReplacement?

Delayed deliveryBrand reputation?

Injured personellHiring and training?

Weather conditionsDetour?

SupplySupply ChainChain TrendsTrends >>>>>> ConsequencesConsequences

• The trend towards just-in-time and lean practices

>>> efficiency rather than effectiveness.

• The trend towards reducing costs (at almost any cost)

>>> globalization of supply chains, more complex and vulnerable.

• The trend towards economies of scale>>> centralized distribution and manufacturing

>>> lower costs but at the same time less flexibility.

• The trend towards outsourcing non-core business activities

>>> loss of control of the supply chain when it is most needed.

• The trend towards consolidation of suppliers

(intentional and incidental mergers and acquisitions)

>>> increased potential for supply failure.

Christopher, M. (2005) Managing risk in the supply chain. In: Christopher, M. (Ed.) Logistics and Supply

Chain Management. 3rd ed., Prentice Hall, pp. 231-258.

Supply Chain Risk - Piracy

http://www.icc-ccs.org/

Why is supply chain risk important?

• Even a relatively small supply chain disruption caused by a

localized eventlocalized event may have consequences across the global consequences across the global

economic systemeconomic system.

• Globalization, offshoring and outsourcing leads to

>> “no” control over causes causes

to events in the supply chain.to events in the supply chain.

>> >> “only” control over consequences consequences

of events in the supply chain.of events in the supply chain.

World Economic Forum (2008) Hyper-optimization and supply chain vulnerability: an invisible

global risk? In: Global Risks 2008 – A Global Risk Network Report, REF: 090108, World Economic

Forum, Switzerland.

http://www.weforum.org/pdf/globalrisk/report2008.pdf

Supply Chain Risk – an example

An illill--handledhandled

supply chain disruption

>>>>>> business business disdis--continuitycontinuity

A wellwell--handledhandled

supply chain disruption

>>> business continuitybusiness continuity

Norrman and Janson (2004) Ericsson’s proactive supply chain risk management after a serious sub-supplier

accident. International Journal of Physical Distribution and Logistics Management, Vol 34, No 5, pp. 434-456

What is risk?

Risk :

- exposureexposure to the chance of injury or loss

- hazardhazard or dangerous chancechance

- chance of lossloss

- degree of probabilityprobability of such a loss

Aven, T. (2002) Foundations of Risk Analysis: A Knowledge and Decision-Oriented

Perspective, John Wiley & Sons.

The risk concept

• Risk is an ambiguous conceptconcept.

• There are many definitions of risk, depending on their specific specific

application application and on their situational contextsituational context.

• Risk denotes the precise probability probability of specific eventualitieseventualities.

• Technically, risk has no value, so these eventualities can be

beneficial beneficial or adverse adverse (i.e. financial risk).

RISK = Probability * Consequences

Risk analysis

A commonly used method for risk

analysis is by plotting unforeseen or

unwanted events in a risk risk matrixmatrix.

This can be done qualitativelyqualitatively, where

probabilities and impacts are

subjective values (e.g. low/high and

minor/major),or quantitativelyquantitatively,

where probablities and impacts are

objective values (e.g. frequency and

cost in $$$).

Norman, A. and Lindroth, R. (2004) Categorization of Supply Chain Risk and Risk

Management. In: Brindley, C. (Ed.) Supply Chain Risk. Ashgate, pp. 14-27.

Proactive versus Reactive

Asbjørnslett, B E and Rausand, M (1997) Assess the vulnerability of your production system. Report

NTNU 97018. Norwegian University of Science and Technology NTNU, Department of Production

and Quality Engineering, Trondheim, Norway.

Tomlin, B. (2006) On the Value of Mitigation and Contingency Strategies for Managing Supply

Chain Disruption Risks. Management Science, Vol. 52, No. 5, pp. 639-657

Ritchie, B. and Brindley, C. (2004) Risk Characteristics of the Supply Chain – A Contingency

Framework. In: Supply Chain Risk. Ed. Brindley, C. , Ashgate Publishing, pp. 28-42,197-202

Mitigative actions address risk sources.

Contingent actions address risk consequences.

Business risks

•• ExternallyExternally--drivendriven or environmental risk- external factors, competitors, customers, regulations

•• InternallyInternally--driven driven or process risk- operations and processing

•• DecisionDecision--drivendriven or information risk- insufficient or erroneous decision support

De Loach, J. W. (2000) Enterprise-wide Risk Management: Strategies for linking risk and opportunity,

Financial Times/Prentice Hall

In order to understand suply chain risk it is useful to first look at business risks in general.

Supply Chain Risk

Jütner, U., Peck, H. and Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for

Future Research. International Journal of Logistics: Research and Applications, Vol. 6, No. 4, pp. 197-210.

Supply Chain Risk can be viewed as a 4-fold construct:

Risk Risk sourcessources.

ConsequencesConsequences of the risk sources.

Risk driversRisk drivers that turn risks into consequences.

StrategiesStrategies to address the risks.

Supply chain risk sources 1/2

InternalInternal to to thethe focalfocal firmfirm

ExternalExternal to to thethe focalfocal firmfirm

InternalInternal to to thethe supplysupply chainchain

ExternalExternal to to thethe supplysupply chainchain

Peck, H. (2003) Supply Chain Resilience. UK Department of Transport/ Cranfield University, Carnfield, UK.

Risks can be seen as

internal or external to

the focal firm,

and be seen as internal

or external to the supply

chain:

••ProcessProcess risk

••ControlControl risk

••SupplySupply risk

••DemandDemand risk

••EnvironmentEnvironmental risk

Supply chain risk sources 2/2

Sources of risk can be broadly

categorized along three

different levels:

1)1)OrganizationOrganizational risk

2)2)NetworkNetwork risk

3)3)EnvironmentEnvironmental risk

Jütner, U., Peck, H. and Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for

Future Research. International Journal of Logistics: Research and Applications, Vol. 6, No. 4, pp. 197-210.

Types of supply chain risk 1/3

Organizational RisksOrganizational Risks

•• Procedure Procedure Risks- lack of formal procedures, lack of quality control system

•• DecisionDecision Risks

- bureaucracy (red tape), lack of authority, lack of decision support

•• CommunicationCommunication Risks- cultural differences, language barriers, misunderstanding

•• KnowledgeKnowledge Risks- lack of formal education, lack of training, unskilled labor

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,

Vol. 29, No. 1, pp. 133-155

Types of supply chain risk 2/3

Network (Supply Chain) RisksNetwork (Supply Chain) Risks

•• SupplySupply Risks- disruption of supply, inventory and schedules, incoming delays

•• OperationOperational Risks- failure or breakdown of operations, changes in technology

•• DemandDemand Risks- variations in demand

•• SecuritySecurity Risks- theft, counterfeiting, terrorism, piracy, infrastructure breakdown

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,

Vol. 29, No. 1, pp. 133-155

Environment RisksEnvironment Risks

•• MacroMacro Risks- economic shifts, recession, labour costs, exchange rates, customs

•• Policy Policy Risks- actions and sanctions of governments, shifts in legislation

•• CompetitionCompetition Risks- uncertainty about competitors’ moves and actions

•• ResourceResource Risks- lack of human resources, capital or technology

Types of supply chain risk 3/3

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,

Vol. 29, No. 1, pp. 133-155

Supply Chain Risks and Drivers 1/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan

Management Review, Vol. 46, No. 1, pp. 53-61.

Supply Chain Risks and Drivers 2/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan

Management Review, Vol. 46, No. 1, pp. 53-61.

Risk Management Strategies

Avoid Transfer Reduce Retain

Deloach, J (2000) Enterprise-Wide Risk Management: Strategies for Linking Risk & Opportunity.

Financial Times Management/ Prentice Hall.

Before we look at strategies for managing supply chain risk,

let us look at general strategies for managing risk

Supply Chain Risk Management

Supply chain risk management can be described as the

intersectionintersection of supply chain management and risk

management. 1 It has a collaborativecollaborative and structuredstructured

approach, and is included in the planningplanning and control control

processes of the supply chain, to handle risks handle risks which might

affect the achievementachievement of the supply chain goalsgoals. 2

1 Paulsson, U. (2004) Supply Chain Risk Management. In: Brindley, C. (ed): Supply Chain Risk. Ashgate

Publishing Limited, pp.79-99.2 Kajüter, P. (2003) Risk Management in Supply Chains. In: Seuring, S Müller, M., Goldbach, M.,

Schneidewind, U. (eds.) Strategy and Organization in Supply Chains, Physica, Heidelberg, pp. 321-336.

Supply Chain Risk Management

Strategies

•• AvoidanceAvoidance- exiting a market (or product) or delay entering a market (or product)

•• PostponementPostponement- delay commitment of resources to maintain utmost flexibility

•• SpeculationSpeculation- assuming risk to gain competitive advantage

•• HedgingHedging- globally dispersing your portfolio of suppliers, customers and facilities

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,

Vol. 29, No. 1, pp. 133-155

Supply Chain Risk Management

Strategies

•• ControlControl- vertical and lateral integration of suppliers and business partners

•• Transferring/sharing riskTransferring/sharing risk- outsourcing, offshoring, contracting

•• SecuritySecurity- identifying and protecting against unwanted penetration

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,

Vol. 29, No. 1, pp. 133-155

Supply Chain Disruptions

Sheffi, Y. (2005) The Resilient Enterprise - Overcoming Vulnerability for Competitive Advantage, MIT Press

Warning?

What happens to supply chain performance during an

unforeseen event?

• Different supply chain

characteristics will result in

different ways a suply chain

disruption is handled.

• A resilient supply chain is

impacted, but it is able to come

back to a stable state, although

not necessarily to where it was

before the disruption.

• In business setting the ability to

survive (resilience) is more

important than regaining stability

(robustness)

The difference between Robustness, Flexibility and Resilience

Supply Chain Disruptions

Supply Chain Disruptions 3/3

Resilient organisationsorganisations

Resilient supplysupply chainschains

Mc Manus, S. et al (2007) Resilience Management – A Framework for Assessing and Improving the

Resilience of Organisations. Research Report 2007/01, Resilient Organisations, New Zealand.

www.resorgs.org.nz

Resilient organizations

Supply Chain DesignSupply Chain Design

A supply chain is more likely to be severely impacted if there is

supply chain density

supply chain complexity

node criticality

Supply Chain Mitigation CapabilitySupply Chain Mitigation CapabilityA supply chain is less likely to be severely impacted if there is

adaptive capacity (recovery capability)

information sharing/ visibility (warning capability)

Supply Chain Design vis-a-vis supply chain disruptions

Craighead, C. W., Blackhurst, J., Rungtusanatham, M. J. & Handfield, R. B. (2007) The Severity of

Supply Chain Disruptions: Design Characteristics and Mitigation Capabilities. Decision Sciences,

Vol. 38, No. 1, pp. 131-156.

Factors (risk drivers) that can aggravate or lessen

supply chain disruptions:

Supply Chain Vulnerability 1/2

• Which parts of the supply chain are most important? (”Criticality”)

• What can we do if something happens? (”Preparedness”)

• Not being prepared is the biggest risk (”Passive Acceptance”).

Supply Chain Vulnerability 2/2

• Prioritize earnings driversearnings drivers

• Identify critical infrastructurecritical infrastructure that affect the earnings drivers

• Locate vulnerabilitiesvulnerabilities in the critical infrastructure

• Model scenariosscenarios for the vulnerabilities

• Develop responsesresponses to the scenarios

•• Monitor, detect and respondMonitor, detect and respond to potential disruptions as soon

as possible

Preparing for Evil, Harvard Business Review, April 2003, pp. 109-115

Selecting the right strategy

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan

Management Review, Vol. 46, No. 1, pp. 53-61.

Which

strategy works

best against

which risk?

Tailored Risk Mitigation 1/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan

Management Review, Vol. 46, No. 1, pp. 53-61.

Tailored Risk Mitigation 2/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan

Management Review, Vol. 46, No. 1, pp. 53-61.

Manage supply chain risk 1/2

•• UnderstandUnderstand the supply chain

– view it from end to end, from supplier to end customer.

•• ImproveImprove the supply chain

– can you simplify and reduce complexity and variability?

•• IdentifyIdentify critical paths

– what are the bottlenecks and key nodes/links?

•• ManageManage the critical paths

– make contingency plans.

Christopher, M. (2005) Managing risk in the supply chain. In: Christopher, M. (Ed.) Logistics and Supply

Chain Management. 3rd ed., Prentice Hall, pp. 231-258.

Manage supply chain risk 2/2

•• AllowAllow network visibility

– don't be afraid to share information.

•• EstablishEstablish a supply chain continuity team

– make it cross-functional

•• Work withWork with suppliers and customers

– are your suppliers and customers aware of their

own vulnerabilities?

Christopher, M. (2005) Managing risk in the supply chain. In: Christopher, M. (Ed.) Logistics and Supply

Chain Management. 3rd ed., Prentice Hall, pp. 231-258.

Summary

• Supply Chains are exposed to a a varietyvariety ofof risksrisks that are

unique to each supply chain.

• These risks are related to actionsactions and eventsevents that are insideinside

and outsideoutside of the supply chain.

• Supply Chain Risk Analysis seeks to identifyidentify these risks, their

sourcessources and driverdrivers, and their impactimpact on the supply chain.

• Supply Chain Risk Management seeks to establish mitigativemitigative

and contingentcontingent strategies for how to deal with the identified

risks and their potential impact on the supply chain.

Thank you