1 SAS Supply Risk Management Workshop 2007 Rob Handfield, PhD Bank of America University Distinguished Professor of Supply Chain Management North Carolina State University Director, Supply Chain Resource Consortium Consulting Editor, Journal of Operations Management Robert_Handfi[email protected]
1. SAS Supply Risk Management Workshop 2007 Rob Handfield, PhD
Bank of America University Distinguished Professor of Supply Chain
Management North Carolina State University Director, Supply Chain
Resource Consortium Consulting Editor, Journal of Operations
Management [email_address]
2. Who we are.
Rob Handfield, PhD
Bank of America University Distinguished Professor of Supply
Chain Management, NC State University
Director, Supply Chain Resource Cooperative top 3 MBA SCM
programs in the US
Adjunct Professor, Manchester Business School
Kevin McCormack, DBA
CEO, DRK Research
Adjunct Professor, NC State University
Research and consulting supply risk projects with multiple
companies incl:
What is the true impact of supply risk and the implications for
the field of supply management?
What are the core elements associated with managing supply
chain disruptions?
6. Impact of Major Supply Chain Disruption on Stock Price
Hendricks and Singhal, 2005
7. Reasons for glitches
8. Fact: Vertical & Horizontal Disconnection of SC
Organizations Customer Supplier SC Organization Marketing &
Sales Manufacturing Disconnection of Internal Business Intelligence
Disconnection of External Market Intelligence -> Loss of
Innovation and Efficiency Improvement Possibilities ->
Connection of BI & MI has to be a Supply Chain Management
Driven Approach: CUSTOMER AND SUPPLY MARKET FACING
9. Customers Suppliers Suppliers Environment Customers
Environment Company Companys Environment Customer and Market
Intelligence Supplier and Market Intelligence Business Intelligence
BI/MI is the convergence of all three information gathering,
analysis, dissemination and response) activities. TRADITIONAL FOCUS
IS HERE A GUESSING GAME
What type of detection and intelligence does a firm need to
detect disruptions?
Disruption Recovery
Once the disruption is discovered, how does a firm effectively
recover from a disruption?
Supply Chain Redesign
How can a company strategically re-design its supply chain over
time to become more resilient and avoid or easily mitigate future
disruptions?
Three key elements of supply chain disruption management Disruption
Discovery Disruption Recovery Supply Chain Redesign
11. Insights: Disruptions
General Characteristics of Severe Failures:
Consequences of the disruption captures the public eye
Disruption catches company by surprise no foresight
Disruption cause related to a single source/single
location
Disruption affects availability of a hard to re-source
part
Be on the look out for choke points or bottlenecks:
Center of the hourglass
12. Disruption Discovery and Recovery Time Impact of Disruption
($, Customer Account, Market share) DISRUPTION Discovery(A)
Recovery (A) Impact(A) Discovery(B) Recovery (B) Impact (B)
Disruption Discovery and Recovery time (B) Disruption Discovery and
Recovery time (A) Disruption Amplifiers (Globalization and
Complexity) Visibility Systems Excess Resources The key is
prediction. This could eliminate the possible disruption or allow
planning that minimizes discovery and recovery time.
13. Risk Management Framework Global Sourcing Leadership Team
(Governance) Macro-Econ. Trends Technology Trends Public Policy
Commodity prices
Commodity trends
Currency
Government stability
Material changes
Process changes
Medical device liabilities
Quality requirements
Key Risk Indicators (Drivers) Low Low High High Impact (1)
Frequency of Occurence (2) Risk Mitigation Strategies
(Capabilities) Known Risks Contingency Planning/Risk Decisions
Mitigation Strategies / Real Options (1) Revenue implications (2)
As measured by Key Risk Indicators Supplier Performance
14. Structuring Supply Chain Risk Performance CAUSES
(Categories of Predictive Measures) Disruption EVENTS CONSEQUENCES
(Impacts) Human Resources Supply Chain Disruption Financial Health
Environmental Relationship Quality, Delivery, Service Problems
Supplier Union Strike, Ownership Change, Workforce Disruption
Supplier Locked Tier II Stoppage Supplier Bankruptcy (or financial
distress) Disasters (Weather, Earthquake, Terrorists) Misalignment
of Interests Finished Goods Shipments Stopped Locate and Ramp Up
Back up Supplier Emergency Buy and Shipments Reputation Market
Share Loss EFFECTS Revenue Losses and Recovery Expenses OTHER
IMPACTS Forgone Income Emergency Rework and Rushed FG Shipments
Recall for Quality Issues Sudden Loss of Supplier Copyright 2006
Supply Chain Redesign, LLC Supplier Attributes Situational
Factors
15. Lessons Learned
Need to focus on the critical few the key areas of the supply
chain that are most exposed and vulnerable, and focus your efforts
on these areas.
Metrics should drive action they are only useful in that they
direct attention to a problem, and drive mitigation and/or
contingency planning that either reduces the risk, or buffers
it.
Risk can only be minimized through direct human intervention.
Sitting down with suppliers to discuss the risk, its nature, and
how it is handled is the preferential method.
Risk CANNOT be eliminated through stronger contractual
language.if bad things happen, will the total cost of disruption
equal the reparations recovered through litigation?
16. Questions Senior Executives Want Answers to:
What are my biggest risks?
What measures can I can use if I need answers quickly?
What are the potential impacts?
What are contingency plans?
If no plans exist, what actions do I need to approve and how
much will it cost?
What elements in the contract can help to drive mitigation
planning?
Why are you bothering me is this important?
17. Caveats
We cannot ELIMINATE risk but we can predict where we are most
vulnerable if we establish a process to engage key stakeholders and
our supply chain partners engage in discussions and information
collection (compliance is assumed)
There are limited resources available to address supply chain
risk we can completely eliminate risk, but at a very high cost
(tolerance level defined)
Risk cannot be eliminated through stronger contractual language
but risk CAN be reduced through improved planning and coordination
around mitigation planning included in contract management!
Therefore, senior executives must be able to allocate resources
to those areas of the chain that are predicted to be the most
vulnerable, based on a distribution of risk with contractual
elements associated with prevention of disruptions from
occurring!
18. When Faced with a Significant Risk, What Actions Are
Available?
Invest in extra capacity (Materials management or service level
manager decision)
Dual source (Director-level decision)
Visibility
On-line inventory visibility (requires investment by SCM
Directors and VP, with significant investment in IT resources)
Increased quality audits, dedicated supplier development
engineers, working in the field, daily communications (requires SCM
Director)
Relationship manager at site-level, requiring formal weekly or
bi-weekly communication
Product or supply chain redesign to minimize risk
amplifiers
Consider length of supply chain
Consider sourcing and distribution network design and
associated contractual requirements around leadtime and
response.
Reconsider Low Cost Country sourcing???
$ $$$ $$$$$
19. Risk Escalation Process LOW REV IMPACT, LOW P(RISK)
CONTINGENCY PLAN REQUIRED Buyer-Planner team visits supplier,
validates risk level, and discusses contingency plan with Supplier
and Manager, and escalates to next level if required HIGH REV
IMPACT, LOW P(RISK) Annual or quarterly Update using Risk Survey
Tool LOW REV IMPACT, HIGH P(RISK) CODE BLUE Engage senior
management in bi-weekly review meeting or ASAP if required,
establish strategic action plans to lower risk score if possible.
HIGH REV IMPACT, HIGH P(RISK)
20. Figure 4 Supply Chain Risk Management Process
Measure the Risk
of Critical Nodes in
the Supply Chain
Network
2. Identify Risk Reduction Mechanisms for High-Risk Nodes GOAL:
Resilient Supply Chain With On-going Knowledge and Risk Mitigation
3b. Supply Chain Contracting & Joint Planning 3c. Invest in
Visibility systems 3a. Excess Resources
21. Impact of Executive Decisions on Code Blue Supply
Situations Today 1 2 3 4 5 6 7 8 9 10 11 12 > 1 year SRIM No
Impact - Uncontrollable Factors (without major product redesign)
Immediate Impact Quick Fix (deploy resources immediately) Long-term
Solution Significant Investment Required (if enough of these occur,
worth looking at the investment)
22. Examples
Quick Fix ($100K corrective action, > 1 year)
May require a major process redesign at suppliers location
Persistent quality problem with no quick solutions in sight
requires in-depth FEMA study, with inspection of all units coming
off the line in the mean-time
Uncontrollable Factors (no solution)
Sole source supplier is not willing to respond to changes or
work with BS, as they are a small part of their business.
23. Expected Outcome and Benefits of Risk Assessment and
Implementation
Supplier porfolio is defined in terms of risk probablity and
impact on revenue providing an opportunity to shift production from
high-risk suppliers to suppliers with lower risks
Roadmaps to manage risks for strategically important suppliers
are defined and implemented
Depending on supplier, management of implementation at supplier
sites can result into:
Improved parts quality
Reduced Shortages
Improved on-time Delivery
Lead Time Reduction
Reduced Inventory Levels
Reduced Invoice Discrepancies
Reduced Time to Connect a New Supplier
Reduced Transportation Costs
Progress of supplier risk management is measured and corrective
actions are defined
Lessons Learned are captured providing input for expansion of
approach to remaining suppliers
Risk assessment can be reused during evaluation and
integration/development of new suppliers