Understanding and Managing Risk in Complex Supply Chain Projects

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Presentation given at CILT Supply Chain Network, London - 15th June 2009

Text of Understanding and Managing Risk in Complex Supply Chain Projects

  • 1.Understanding and Managing Risk within Complex Supply Chain ProjectsCILT Supply Chain Network London, UK Monday 15th June 2009

2. Duracell and Corus suffer due to steel conflict (Source: headlines from national newspapers) 3. Car transporter vesselsinks after collision (Source: headlines from national newspapers) 4. Recall of Mercedes ML Models (Source: headlines from national newspapers) 5. More takeovers and mergers in the transport sector (Source: headlines from national newspapers) 6. Strikes in Austria, Franceand Italy (Source: headlines from national newspapers) 7. Distribution halted by IT system fault (Source: headlines from national newspapers) 8. EC requires traceability of food, feed and ingredientsthroughout supply chain(Source: headlines from national newspapers) 9. Research center studies terrorism's impact on supply chain(Source: headlines from national newspapers) 10. Risk is unavoidable 11. Derek Hillw A rrocyg enntin Co 12. Life before Logistex 13. Interesting projects 14. Risk Not a ment M an ageExp ert 15. Agenda 16. Understanding different types of risks Identifying and evaluating risks FKI Logistex risk processes and governance 17. Objective of RiskManagement 18. Not to remove risk To raise awareness and visibility of risks To manage risks by mitigation actions to prevent major impact To prepare for contingency 19. Improve the predictability of a project! 20. Project Predictability250%200% Planned Cost (%)150% Project Cost100% Project End50% 0% 0 1 2 3 4 56 78 910 11 12 13 14 15 16Time (months) Planned 21. Project Predictability250%200% Planned Cost (%)150% Project Cost100%Project End50% 0% 0 1 2 3 4 56 78 91011 12 13 14 15 16Time (months)Planned Risk Managed 22. Project Predictability250%Project Cost200% Planned Cost (%)150%Project EndProject Cost100%Project End50% 0% 0 1 23 45 6 78 910 11 12 13 14 15 16 Time (months)PlannedRisk Managed Freestyle 23. 1. Understanding different types of risks 24. What Is A Risk? A potential event with negative consequences that has not happened yet However a risk could also be defined as the event with unforeseenpositive consequences; an Opportunity A possibility of loss not the loss itself! A source of problem during a project Avoid labeling the cost of a risk as a risk (e.g. Schedule slippage). Findthe sources! Strike at the root of the problem, not the leaves! Something that makes the project special In the widest sense everything is a risk There are better ways of handling recurrent problems! 25. Two Basic Classifications Known unknowns Things that we know we dont know Unknown unknowns Risks that surface despite our best efforts 26. Types of Risk Financial (e.g. gearing/interest rates, liquidity, foreign exchange, commodity prices, systemic risks etc) Credit(e.g. customer default, failure of key partner/supplier) Operational (e.g. business continuity, service quality) Strategic (e.g. changes in markets, customers, products, M&A, major capital investments/projects) Legislative (e.g. HSE, anti-competitive practices, stock market rules) Political (e.g. Country risk, civil commotions, nationalisation) Environment (e.g. natural disasters, pollution, global warming impacts, diseases/pandemics) 3rd Party (e.g. risks of being let down by partners, key suppliers, outsource providers etc) 27. Logistex Corporate Risk Register BusinessProjects M&A Technology Capital expenditures New roles Factory moves/closures Ill defined specifications New product development Sourcing and supply chain Supply chain development Terms and Conditions Organizational restructuring People Corporate Social Responsibility Organisational HSE Estimation Environment Currency Competencies 28. 2. Identifying and evaluating risks 29. Context Project objectives Scope, terms costs conditions, an guarantees Schedule, location, and plan of project Assumptions Interfaces and stakeholders Definitions 30. ExpectationsGAP= Difference in expectations End-User = Increased riskProvider 31. Influences External End-User Provider Complexity 32. Project Risk Profile Profiling output determines weight of Bid Approval and Project Execution Process 33. Risk Mapping Hold a Risk Workshop for key members of project, stakeholder, suppliers etc.HGIH Brainstorm types of risk andPROBABILITY categorise in terms of sizeMEDIUM of impact. Then assess probability of occurrence and populate LOW Prioritising Risk Matrix opposite. LOW MEDIUM HGIH Risks should be owned and tracked.IMPACT 34. NASA's illustration showing high impact risk areas for the International Space Station 35. Method Describe the Risks Brainstorming potential risks Walkthrough of the risk identification checklist 36. Method Common language Clear and accurate description Formulated as an IF..THEN statement Example 1 The equipment will arrive late and we will incur liquidated damages. Example 2 IF customs requires additional paperwork and this delays the release of the equipment, which delays the installation, THEN we will incur liquidated damages. 37. Method Analyze and Prioritize Risks Walkthrough risk sheet and estimate the probability and cost impact of each risk Calculate risk rating of each risk (e.g. probability * impact) Concentrate on Key Risks 38. Probability What Is the Probability the Risk Will Happen?Level Your Approach and Processes...1 Not Likely: will effectively avoid or mitigate this risk based on standard practices. 2 Low Likelihood: have usually mitigated this type of risk with minimal oversight in similar cases. 3 Likely: may mitigate this risk, but workarounds will be required. 4 Highly Likely:...cannot mitigate this risk, but a different approach might 5 Near Certainty: ...cannot mitigate this type of risk; no known processes or workarounds are available 39. Impact Given the risk is realised, what would be the magnitude of the Impact?LevelTechnical ScheduleCost1Minimal or no impactMinimal or no impactMinimal or no impact2Minor pert shortfall, Additional activitiesBudget increase of lesssame approach retainedrequired; able to meet than 1%key dates 3Mod pert shortfall, but Minor schedule slip;Budget increase of lessworkarounds available will miss need date than 5% 4Unacceptable; but Program critical path Budget increase of lessworkarounds available affectedthan 10% 5Unacceptable; noCannot achieve keyBudget increase of lessalternatives existprogram milestone than 10% 40. RISK Reject / Transfer / ReduceReduce Accept Eliminate Insure Probability ImpactActions 41. Mitigation and Contingency Planning List Mitigation Actions Start with most severe risks List possible actions to reduce probability and/or cost Some risks can be avoided Contingency Planning Only for the most severe risks that cannot be mitigated List actions to take should the risk mature 42. Risk Provisions Provision = (Probability x Impact) + Mitigation cost Mitigation cost may out way the Impact cost Manage to the Risk 43. Project Risk Register 44. Key Risk A Key Risk Overview (KRO) is required Detailed plan of mitigation actions Embed responsiveness 45. Key Risk Overview 46. Risks require active management 47. Eliminate the risk NOW - scope, terms & conditions, reject. Do something NOW to transfer the risks - Insurer, customer, supplier. Do something NOW to reduce the probability of the risks occurring. Plan contingency actions NOW to reduce the impact if the risk occurs. Set up fallback plans NOW to limit the impact for implementation before the risk occurs. Get everybodys agreement if you will just accept the risk. 48. 3. Processes and governance 49. Probability Impact Grid (PIG) 1 2HGIH 83PROBABILITY 12 5 11 4MEDIUM 10 14 6 139 10 OTHER157LOW RISKSLOWMEDIUMHGIHIMPACT 50. Monitor Re-Assess Risks regularly Has probability and damage of controlled risks changed? New risks identified? Analyse them 51. Stage-Gate Process 52. Continuity and Consistency Monthly and Gate Based Reviews 12 HGIH8 3 PROBABILITY12 511 4 MEDIUM1014 613910OTHER15 7 LOWRISKS LOWMEDIUMHGIH IMPACT 53. Who is involved in Risk Management? Customer End-user Project Team Management Product Management Related Projects Subcontractors and Suppliers 54. Roles in Risk Management Business Unit Project Team Risk Action Owner Risk Coordinator Steering Group 55. Risk Roll up & Action Flow-down Corporate Risk Action Risk Roll-up Flow-down Business UnitBusiness ProjectTask Risk Escalation Risks outside the control of the area or affecting next levels objectives Risk Action Flow-down Actions to ensure business objectives are met (Business PlanDeployment) 56. (Near the end.) 57. Risk management should be an integral part of organisational processes be systematic and structured be based on the best available information take into account human factors be transparent and inclusive be dynamic, and responsive to change be tailored deliver better projects 58. derek.hill@fkilogistex.com 07940 764844 59. Discussion What risks does your business or team face? How do you deal with them? What lessons (good or bad) can you share?