2-Supply Risk Management Fundementals RC

7/29/2019 2-Supply Risk Management Fundementals RC

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Supply Risk Management

FundamentalsWhat, why and how?


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Risk in general can be defined as a collection of pairs oflikelihood (L) and outcomes (O):

Risk = {(L1, O1), (L2, O2),, (Ln, On)}

where Oiand Lidenote outcome iand its related likelihood.

The distribution pattern of the (likelihood; outcome) pairs iscalled a risk profile(Ayyub, 2003).

Definitions of risk must also have a time dimension or aspecific time horizon (day, month, year, etc.) and a specific

perspective or view that defines the unit of analysis(boundaries, whats not included, etc.).

Risk Defined


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Risk Defined

The International Organization for Standardization (ISO, 2002)defines two of the essential components of risk:

1. losses (along with related amounts) and

2. uncertainty of their occurrence.

In the financial industry, operational risk is defined as the risk ofloss resulting from inadequate or failed internal processes, peopleand systems or from external events (New Basel Capital Accord,2006).


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What is Supply Chain Risk Management? Business Continuity Management (BCM), defined by the Business Continuity

Institute as an holistic management process that identifies potential impacts thatthreaten an organization and provides a framework for building resilience and the

capability for an effective response that safeguards the interests of its keystakeholders, reputation, brand and value creating activities (BCI, 2005).

Business Vulnerability, defined as an exposure to serious disturbances, arisingfrom risks within the supply chain as well as risks external to the supply chain(Christopher, 2003). Vulnerability is a result of any weakness within a complexsystem that can seriously jeopardize its activities (Ayyub, 2003).

Enterprise Risk Management (ERM) as a set of coordinated actions aboutprotecting and enhancing share value to satisfy the primary business objective ofshareholder wealth maximization (Chapman, 2006).

Resilient enterprise meaning the ability of the company to recover quickly from adisruption (Sheffi, 2005).

Deloitte and Touche (2004) and Tang (2006) define supply chain risk (SCR) as theuncertainty of the occurrence of an event that could affect one (or more) partner orlink within the supply chain and that could influence (generally in a negative sense)the achievement of companys business objectives.

They define supply chain risk management (SCRM) as having the objective tocontrol, monitor and evaluate supply chain risk, optimizing actions in order to prevent

disruptions (that is, the occurrence of an event that causes a business interruption) orto quickly recover from them.


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SCRM Defined

Supply chain risk management is the systematic identification,assessment, and quantification of potential supply chain disruptionswith the objective to control exposure to risk or reduce its negativeimpact on supply chain performance.

Potential disruptions can either occur within the supply chain (e.g.insufficient quality, unreliable suppliers, machine break-down,uncertain demand, etc.) or outside the supply chain (e.g. flooding,terrorism, labor strikes, natural disasters, large variability in demand,etc.).

Management of risk includes the development of continuousstrategies designed to control, mitigate, reduce, or eliminate risk.


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Time

Supply BasePerformance/Capability

Higher

TOTALQUALITY

MANAGEMENT

SUPPLY BASE

ASSESSMENT

SUPPLY BASEREDUCTION

REACTIVESUPPLIER

DEVELOPMENT

STRATEGICSUPPLIER

DEVELOPMENT

Lower

Evolutionary Strategies

Evolution of Supplier Development

7700 suppliers /$bil spendto 1700


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-25

-20

-15

-10

-5

0

-61 -49 -37 -25 -13 -1 11 23 35 47 59

Trading day relative to announcement date

Averageshareholderreturns

(%

Hendricks and Singhal,2005

Impact of Major Supply ChainDisruption on Stock Price


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8

Reasons for glitches

22.54

13.48

10.219.24

6.93

4.43

15.61

0

5

10

15

20

25

30

PartSh

orta

ges

Chan

gesb

yCu

stomers

Prod

uctio

nproblems

Ramp/roll-

outp

robl

ems

Quality

Probl

ems

Develop

mentp

roble

ms

None

Provided

Numberoffirms(%)


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VerbalReport

To CPSC

"We heard in early July that we had a possible issue," said Mr. Walter, who added thecompany stopped production in the Chinese factory around July 7. After furtherinvestigation, Mattel approached the Consumer Product Safety Commission with a verbalreport July 20. A written report was filed July 26. The product is being recalled under the"fast-track" recall program whereby Mattel has admitted to the contamination and the

CPSC hasn't done additional testing.

Mattel Toys to Be Pulled Amid Lead Fears

18.5%Decline

On a $10 BilMarket CapOr 1.9 Bil loss


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Why Focus on Supply Risk Management?

Meet demand at higher service level = Top Line Growth!

When Conventional

Wisdom Isnt.

After applying a holistic

risk model to severalcompanies, we haveseen something that

contradicts theconventional wisdom that

there is a trade-offbetween risk and

supplier performance

(total cost of ownership).

Dr. Kevin McCormack

DRK, LLC


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Years of Research, Publicationand Experience in Supply Risk

Supply Chain Risk Management: MinimizingDisruptions in Global Sourcing (ResourceManagement) (Hardcover)by Robert Handfield (Author), Kevin P. McCormack(Author)List Price:$79.95 Price:$68.13 & this item ships forFREE with Super Saver Shipping. DetailsYouSave:$11.82 (15%)
http://www.amazon.com/exec/obidos/search-handle-url/002-7366555-8045614?%5Fencoding=UTF8&search-type=ss&index=books&field-author=Robert%20Handfieldhttp://www.amazon.com/exec/obidos/search-handle-url/002-7366555-8045614?%5Fencoding=UTF8&search-type=ss&index=books&field-author=Kevin%20P.%20McCormackhttp://www.amazon.com/exec/obidos/subst/misc/super-saver-shipping-pop-up.html/ref=mk_gship_dp/002-7366555-8045614http://www.amazon.com/exec/obidos/subst/misc/super-saver-shipping-pop-up.html/ref=mk_gship_dp/002-7366555-8045614http://www.amazon.com/exec/obidos/search-handle-url/002-7366555-8045614?%5Fencoding=UTF8&search-type=ss&index=books&field-author=Kevin%20P.%20McCormackhttp://www.amazon.com/exec/obidos/search-handle-url/002-7366555-8045614?%5Fencoding=UTF8&search-type=ss&index=books&field-author=Robert%20Handfield


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Searched for SC Disruption Patterns

Research questions for 2003, 4 and 5: What are the event patterns is supply chain disruption events?

How are companies addressing them?

What are the impacts?

Participated in 2003-4 Research:Dr. Jennifer Blackhurst, NC State,Dr. Christopher W. Craighead, Auburn UniversityDebra Elkins, Enterprise Risk Modeling General Motors R&D Center,Dr. Robert B. Handfield, NC State.


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CustomersSuppliers

Suppliers Environment Customers Environment

Company

Companys Environment

Customer andMarket Intelligence

Supplier andMarket Intelligence

Business Intelligence

A Perspective

Sourcing (CPO)


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What we saw: Three key elements of supply chain disruption

management.

DisruptionDiscovery

DisruptionRecovery

SupplyChain

Redesign

Disruption Discovery

What type of detection andintelligence does a firm needto detect disruptions?

Disruption Recovery

Once the disruption is

discovered, how does a firmeffectively recover from adisruption?

Supply Chain Redesign

How can a companystrategically re-design its

supply chain over time tobecome more resilient andavoid or easily mitigate futuredisruptions?


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Time

ImpactofDisruption($,

Custome

rAccount,Marketshare

)

Discovery (A) Recovery (A)

Impact (A)

Discovery (B) Recovery (B)

Impact (B)

Disruption Discovery

and Recovery time (B)

Disruption Discoveryand Recovery time (A)

Disru

ptionAmplifiers

(Globaliza

tionandComplexity)

Visibility Systems

Excess Resources

The key is prediction. This could eliminate thepossible disruption or allow planning that minimizes

discovery and recovery time.

Disruption Discovery and Recovery


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Perform

ance

Time

Preparation

Initial Impact

Recovery

SustainingImpact >0

DisruptionEvent

Full Impact

Supply Risk Disruption Profiles

At presentAve: $120,000,000

Preparation

Initial Impact

DetectionandResponse

Recovery - minimizedSustainingImpact = 0

Full Impact Avoided!

In the futureEstimated Ave: $1,200,000

Detectionandresponse


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Research Conclusions

Visibility is a core element of supply chain riskmitigation.

Predictive measures are the key to early

discovery. SC Risk Management is needed but difficult toperform (manpower, data collection, clarity ofcause and effect, etc.)

It must be technology enabled but cant be fullyautomated must have people interpreting thedata.


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Analytics Drive the Power ofInformation

ROI

Rawdata

DataCleansing &Classification

Reports& OLAP

Descriptivemodeling

Predictivemodeling

Data Information Knowledge Intelligence

Optimization

Insight Vs. Hindsight

What will happen ?

What is the bestthat could happen ?

EnterprisePerfo

rmance

Why did it happen ?

Scenario modeling &root cause analysis

What happened (hindsight)?

How can I act onthis insight?

RROI

Our Risk ModelAnd Approach


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Searched for Predictive Models

Research questions for 2005-7: What are the precursors (predictors?) of these events?

What are the mitigation actions?

Participated in 2005-7 Research:Dr. Kevin McCormackDr. Robert B. Handfield, NC State.Sherry Yu ZhaoJing Goa and several master student research teams from NC State


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Supply Risk Model

Using the Model Boston Scientific Freightliner Chrysler Shell

Sample of Companies that participated in the base research: GM Boston Scientific Bechtel Halliburton Bank of America

Chevron Texaco John Deere Progress Energy Engelhard


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CustomersSuppliers

Suppliers Environment Customers Environment

Company

Companys Environment

Customer FacingSupplier Facing

Internal Facing

Supply Chain Risk Perspectives

Market RiskBrand / Reputation Risk

Product Liability RiskEnvironmental RiskOperational RiskTechnical RiskFinancial RiskLegal RiskEnvironmental RiskHR / Health andSafety Risk

Relationship RiskSupplier Performance RiskHuman Resource Risk

Supply chain disruption riskSupplier Environment RiskDisaster RiskSupplier Financial RiskRegulatory Risk


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SC Risk AssessmentUnits of Analysis

s

s

s

s

s

s

s

SCNetwork

Organizer

Commodity Category

Interactions and Relationship

Supplier Attributes

Supplier Environment

Supply Chain Network:A complex adaptive supply network is a collection offirms that seek to maximize their individual profitand livelihood by exchanging information, products,and services with one another (Choi et al., 2001).Choi, T.Y., Dooley, K.J., Rungtusanatham, M., 2001. Supplynetworks and complex adaptive systems: Control versusemergence. Journal of Operations Management 19 (3), 351

SC Ri k A t


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SC Risk AssessmentEvent Probability

s

s

s

s

s

s

s

SCNetwork

Organizer

Event Probability What is

The likely hood of a SCDisruption event in thisSpecific network? (experts)

Supplier Attributes and EnvironmentRisk Index (RI) What are the behaviorsand attributes of the supplier, the interactions

and the relationship that increase or decreasethe event risk index (survey and analysts review)


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s

s

s

s

s

s

s

SCNetwork

Organizer

Interactions and Relationship

Supplier Attributes

Supplier Environment

Supply Chain Network/Categories to be measured

Predictive Supply Risk Assessment

Copyright 2007 DRK Research, a partner with SAS

Performance

Human Resources

Supply ChainDisruption

Financial Health

Relationship

Environmental

The customers reputationwith suppliers is also acritical factor.

Geographic, market,transportation, etc.


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Performance

CAUSES(Categories of

Predictive Measures)DISRUPTION

EVENTSCONSEQUENCES

(Impacts)

Human Resources

Supply ChainDisruption

Financial Health

Environmental

Relationship

Quality, Delivery,Service Problems

Supplier Union Strike,Ownership Change,Workforce Disruption

Supplier LockedTier II Stoppage

Supplier Bankruptcy(or financial distress)

Disasters (Weather,Earthquake, Terrorists)

Misalignment ofInterests

Finished GoodsShipments Stopped

Locate and Ramp UpBack up Supplier

Emergency Buyand Shipments

Reputation

Market Share Loss

EFFECTSRevenueLosses

andRecoveryExpenses

OTHERIMPACTSForegoneIncome

Emergency Reworkand

Rushed FG Shipments

Recall forQuality Issues

Sudden Loss ofSupplier

Copyright 2007 DRK Research, a partner with SAS

SupplierAttributes

Situational

Factors

Structuring the Relationships of Supply Risk


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Statistical Indicator : thequestion selected for use in thesurvey. It represents the entireGroup of factors.

Associated Factors(survey questions)

that track with the indictor

Why are there so few questions inthe survey?

Statistical or logical Relationshipto the question selected for usein the survey.

R

R

R

R

R

R

R


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Statistical Indicator : scored 1-5. The score is higher or lower

depending on how manyrelationships are perceived (bythe participant) as being in placeor not. Also, how institutionalizedthey are.

Associated Factors(survey questions)

that track with the indictor

How do all the factors influence thescore in the survey?

4/5

Statistical or logical Relationshipto the question selected for usein the survey.

R

R

R

R

R

R

R

Statistical or logical Relationshipperceived as not in place or notinstitutionalized.


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RelationshipCo. spend/ Supplier

revenueCritical Info SharingSupplier ReputationCo spend leverage

Information Types

Performance

Accreditation

Technical support

Responsiveness

Upside Flexibility

Quality

Delivery

Financial Health

Financial data sharing

Business performanceFinancial Indicators

External Financial data

Supply Chain DisruptionTier 2 suppliersMaterial availabilityMiscommunicationProcess changeSC disruption historyInsurance data

Environmental RiskMarket DynamicsTransportation RiskMerger & acquisitionLocation RiskRegulatory change

Human ResourcesEmployee turnover

Senior position turnoverLabor unionizationPay Position

Risk Analysts ReviewSupplier Survey ResultsInternal Co. InformationThird Party Information

Supply Risk - Information Sources


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SCRM Process

0010.8aMonitor and Manage Program

Technology

Supply Risk Management

Risk

Program

MGMNT

VPSCM

0010.1Develop

Program andPlan

Risk

Analyst

BI/MI

Commodity

Manager

Supplier

Assign Risk

ManagementStrategy and

Guidelines

0010.3Define Target

Value Chain

Plan Assessment

0010.5a

Set up andDistributeSurvey

0010.6 a

InterviewSuppliers andID Part No.

0010.7

Gather Spend,Perf Data andRev impact

0010.9

AnalyzeResults,Validate,

0010.10bDevelopRisk Mitigation

Actions

0010.11b

ProposeRisk Mitigation

Actions

0010.6 b

CompleteInterview

Data Collection

Implement

&Sustain

0010.13bReview,

ReviseReassess

Planning

0010.2Set Priorities

AssignResources

0010.4aGather contact

Info and pre-survey

Feedback

0010.4b

Provide pre-surveyFeedback

Preparation

0010.5b

CompleteSurvey

0010.4bProvide pre-surveyFeedback

0010.3DefineValue Chain

Plan Assessment

0010.7Gather SpendData and

Rev impact

0010.8b

Review and Adjust Strategy and Program

SAP SASSAS SAS

0010.9ReviewValidate

Results

0010.10aDevelopRisk Mitigation

Actions

Sas

Phase III

0010.11dReview/Approve

Risk MitigationActions

0010.11c

Review/AdjustRisk Mitigation

Actions

0010.11aPropose

Risk MitigationActions

Mitigation Planning

0010.12aRollout,Implement &

Sustain

0010.12cMonitor

Rollout,Adjust

0010.11a

ProposeRisk Mitigation

Actions

SAS

0010.13a

Review,Revise

Reassess

SAS

0010.12a

ImplementAndSustain

Analysis and Reporting


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No.ofSuppliers

/Bil.

$Spend

0

5000

10000

5000 10000

No. of Supply SKUs or parts /Bil. $ Spend

Highly Competitive(High Buyer Power)

Concentrated(High Supplier Power)

Highly Complex / Competitive(High Buyer Leverage)

Concentrated / Invested(High Supplier Power)

High SupplierPerformance Risk

High SupplierEconomic Risk

High Price/AvailabilityRisk

High Price/PerformanceRisk


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Single Category- Pilot

Definition, assessment, basicprediction and key supplierfocused redesign -improvement actions.

Multiple Category Expansion

Definition, assessment, basic predictionand category and cross categoryredesign - improvement actions.

Supply Network Expansion

Definition, assessment, advancedprediction, network monitoring and

network redesign - improvementactions.

No of Suppliers under SRM

RiskMana

gedRevenuea

ndImprovemen

ts

Supply Network Optimization

Definition, assessment, advanced

prediction, advanced (multi-tier) networkmonitoring and advanced (multi-tier)network redesign - improvementactions.

L

L

H

H

Supply Risk Management Road Map

Documents

2-Supply Risk Management Fundementals RC