Managing Supply Chain Risks

Mohammed Abdul Awal

Agenda
oSupply chain risk and vulnerability
oThe impact of global sourcing
oSupply chain risk management
oAgility holds the key to resilience
oCreating the resilient supply chain
 What does Risk Mean?

Endangers
Uncertainty & accomplishment
Non-
Discontinuity of business Compliance/
objectives Violation or
Breach

Possibility of
loss, Seen/
misfortune or Unforeseen Vulnerabilities &
Adverse Event Security Threats
injury

Fluctuations Hazard/
Instability &
Source of
Complexity
Danger
Common Supply Chain Risks
Unreliable
Equipment
Suppliers &
Poor Quality Breakdowns &
Supply
Plant Shutdowns
Shortages

Poor Forecasting
& Demand Service Failures Natural Disasters
Volatility

Frequent Delivery &

Labor Disputes Schedule Transportation
Changes Delays

The risks are indicative only and

Currency not an exhaustive list. These can
Legal/ be categorized as Internal and
Fluctuations, IT & Cyber
Regulatory/ External to Supply Chain
Customs, Security
Compliance
Taxation
 Common Supply Chain Risk Drivers

Geo-political
External

Demand Environmental Supply

Vulnerability/
Exposure

Mitigation
People Process
Approach
Internal

Governance/
Control
Why are today’s supply chains so vulnerable?

oWidespread adoption of ‘lean’ practices

oThe move to off-shore manufacturing and sourcing
oOut-sourcing and reduction in the supplier base
oGlobal consolidation of suppliers
oCentralized production and distribution

All of which combine to make supply chains

vulnerable to disruption
Supply chain risk
(1)
The entire Japanese vehicle industry ground to a halt following
an earthquake that stopped production of piston rings for engines
provided by Riken, the industry leader in the domestic market.
Toyota, in particular, was forced to stop operations at all 12 of
its domestic plants.

Financial Times, 24 July 2007

Supply chain risk
(2)
A fire at a key Philips semiconductor factory in 2000 caused a
worldwide shortage of the radio frequency chips used by both Nokia and
Ericsson.
Nokia immediately lined up another source and redesigned other
chips so they could be produced elsewhere. However, Ericsson
responded more slowly and lost an estimated $400 million in mobile
phone handsets.

MIT Sloan Management Review

Summer 2006
Supply chain risk is systemic

oThe biggest risk to business continuity may lie outside the

company in the wider supply chain
oThe complexity and inter-connectedness of modern supply chains
increases their vulnerability to disruption
oEnvironmental risks are outside our control, but systemic risk is
created through our own decisions

Systematic risk refers to the risk inherent to the entire market or market segment
There are two generic categories of supply
chain risk
oSupply chains comprise nodes and links

oNodes – organisational risk

oLinks – network risk
Supply Chain Risk Management

“The identification and management of risks within the supply chain and risks
external to it through a coordinated approach amongst supply chain members
to reduce supply chain vulnerability as a whole”.

“Avoiding the loss of customer confidence and the erosion of shareholder value
resulting from supply chain disruption.”
What is risk?

Risk = probability of occurrence x consequences

The risk management challenge

High
Consequence/
Impact

Low

Low High

Probability of Occurrence

o Where can we reduce the probability?

o How can we reduce the consequence?
The five sources of risk
oSupply risk

oDemand risk

oProcess risk

oControl risk

oEnvironmental risk
Location of risk in the supply chain

SUPPLY PROCESS DEMAND

RISK RISK RISK

NETWORK/
CONTROL
RISK

Environmental Risk
The five sources of supply chain
risk
Demand Risk Supply Risk Process Risk
o Loss of major accounts o Dependency on key suppliers o Manufacturing yield variability
o Volatility of demand o Consolidation in supply markets o Lengthy set-up times and
o Concentration of customer o Quality and management issues inflexible processes
base arising from off-shore sourcing o Equipment reliability
o Short life cycles o Potential disruption at 2nd tier level o Limited capacity/bottlenecks
o Innovative competitors o Length and variability of o Outsourcing key business
replenishment lead-times processes

Network/Control Risk Environment Risk

o Asymmetric power relationships o Natural disasters
o Poor visibility along the pipeline o Terrorism and war
o Inappropriate rules that distort demand o Regulatory changes
o Lack of collaborative planning and forecasts o Tax, duties and quotas
o Bullwhip effects due to multiple echelons o Strikes
The challenge of global logistics
Global business : Singer Sewing Machines

oBody shells from USA

oMotors from Brazil

oDrive Shafts from Italy

oAssembled in Taiwan

oSold around the world

 How many countries does it take to make a
coat

To make this jacket for the UK

market, Hong Kong garment
producer Li & Fung ordered
materials from factories in five
Countries and had them
delivered to Thailand, where the
jacket was stitched together.
Using a network of web-sites, Li
& Fung stays in touch with its
worldwide suppliers and can
compress the time it takes to get
items into stores.
The challenge of globalization

Continued trends to off-shore sourcing and focused factories bring

reduced costs to purchase/manufacture but …………

………… have the potential to increase total supply chain costs

and to reduce agility.
Understanding the total costs of ownership

Not just the purchase price, but …..

o Increased transport costs
o Increased inventory financing costs
o Increased uncertainty of supply
o Longer lead-times
o Less visibility and increased likelihood of “bullwhip” effect
o Loss of control in quality
o Longer development cycles for new products
o Increased exposure to security risks
• ……………….. etc.
 Pipeline Inventories

Illustrative inventory comparison: domestic vs.

global product pipelines each with customer
demand of 10 per week
o Due to the length and
increased uncertainty of Domestic Pipeline = 70 units inventory

global product pipelines, both

planned and unplanned
inventories may be higher Plant Transit DC Transit
than optimal 20 20 20 10

Global Pipeline = 170 units inventory

Plant Transit Origin Ocean Destination Transit DC Transit

30 20 Forwarder Transit Forwarder 20 30 10
20 20 20
Managing supply chain risk

oMap the supply chain

oIdentify the critical paths
oUtilize cause and effect analysis (TQM tools)
oImplement supply chain event management
oAdopt agile practices
oFormalize supply chain risk management
Supply Chain Risk Categorization
▪ Risk Category is a cluster of risk causes with a label such as external, environmental,
technical or organizational

Strategic (e.g. single sourcing, market dynamics, product line

development, information sharing etc.)

Tactical

Operational (e.g. equipment malfunctions, system

failures, labor strikes etc.)

Financial (e.g. Loans/ Credits, Accounts Receivables

etc.)

Technological (e.g. IT failure, Cyber Disruptions etc.)

Environmental (e.g. Natural Disasters, Sustainability etc.)

Supply Chain Risk Management
▪ Supply Chain Risk - The variety of possible events and their outcomes that could have
a negative effect on the flow of goods, services, funds, or information resulting in some
level of quantitative or qualitative loss for the supply chain

▪ Supply Chain Risk = f (Cost, Schedule, Performance, Level of Service, Threat,

Vulnerabilities, Consequences …)

▪ Supply Chain Risk Management - The systematic identification, assessment and

quantification of potential supply chain disruptions with the objective to control exposure
to risk or reduce its negative impact on supply chain performance

Determine
Analyze
Categorize How to Best
Identify Risk Exposure to
Risk Handle Those
Risk
Exposures

1 2 3 4
Risk Levels
Risk Level = Probability of Occurrence X Magnitude of Loss

▪ The combination of Probability of Occurrence and Magnitude of Loss creates a 2X2 matrix

Highly
Likely
Probability of Occurrence

Likely

Possible

Unlikely

Minor Moderate Major Critical

Magnitude of Loss
Supply Chain Risk Management using SCOR
Risk Management in different Business Processes of Supply Chain has been analyzed
using process-oriented SCOR (Supply Chain Operations Reference) Model. It is a cross-
industry standard diagnostic tool for Supply Chain Management.

Business Processes

Metrics

Plan Source Make Deliver Return

Best Practices
1 2 3 4 5

Technology Features
Supply Chain Risk Management
Plan Source Make
Demand Forecasting Procurement Production
• Exchange Rate Fluctuations • Lean and Just-in-Time
• Long Lead Time
Manufacturing
• Serious Forecasting • Single/ Few Source(s) Purchasing
• New Product
Errors • Transit Time Variability Development
• Demand Uncertainty, • Contractual Agreements • Quality Function
Variability, Seasonality • Suppliers relationships • Insufficient
• Product Variety • Supplier solvency Maintenance
• Outsourcing
• Short Life Cycles
• Bullwhip Effect

Supply Planning Deliver Return

Inventory Management Warranty Management
• Cost of Capacity & • Product Obsolescence
Subcontracting • Poor customer service
• Inventory Cost
• Fraudulent claims
• Operator absence/ • Demand & Supply Uncertainty
• Service Level • Warranty policy changes
accidents
• Equipment Breakdown Logistics & Transportation Field Service
• Natural Disaster, Cargo Security
• Labor Disputes/ Strikes • Response time after
• Delayed and Damaged Shipments
service call
• Changes in Customs & Regulations
• Scheduling of Field Workers
• Hazardous Materials
The Risk Drivers are indicative
only and not an exhaustive list
IT Risks in Supply Chain Management
Information
Infrastructure
Breakdown
Lack of
Information
Transparency
IT/ Data & Cyber
Security

Lack of
Technology Compatibility in
Obsolescence IT Platforms

Information Not Embracing

Delays Digital
Technologies
Identify the critical path(s)

Critical paths are characterized by:-

o long lead-times
o no short-term alternative source of supply
o bottlenecks
o high levels of identifiable risk (i.e. supply, demand, process, control and
environmental risk)
Use cause and effect analysis

e.g.

❑pareto analysis
❑asking ‘why?’ five times
❑fishbone charts
❑failure mode and effects analysis
Pareto analysis

80% of disruptions come from 20% of the causes

Asking “why?” five times
(1) Q. Why did the machine stop?
A. There was an overload and the fuse blew.
(2) Q. Why was there an overload?
A. The bearing was not sufficiently lubricated.
(3) Q. Why was it not sufficiently lubricated?
A. The lubrication pump was not pumping sufficiently.
(4) Q. Why was it not pumping sufficiently?
A. The shaft of the pump was worn and rattling.
(5) Q. Why was the shaft worn?
A. There was no strainer and metal scrap got in.
Repeating why five times like this can help uncover the root problem and correct it. If this procedure were not carried
through, one might simply replace the fuse or the pump shaft. In that case the problem would reoccur in a few months.
Taiichi Ohno
Toyota Production System
Cause and effect analysis

No Stock Lead-Time
Available Too Short
Materials
Supply Problem Failure to Inflexible
Achieve Plan Systems
Forecasting
Capacity Problems
Failure to Constraint
Deliver on
Time Inadequate
Poor Process
Communications
Control
Inadequate
Supplier
Poor
Management
Scheduling
Carrier Quality
Performance Problems
Failure mode and effects analysis
(FMEA)
▪ Asks three questions:
- What could go wrong?
- What effect would this failure have?
- What are the key causes of this failure?

▪ Provides an assessment of risk for each possible failure:

S = severity of effect
O = likelihood of occurrence
D = likelihood of detection
Risk analysis scoring system
S = Severity 1. no direct effect on operating service level
2. minor deterioration in operating service level
3. definite reduction in operating service level
4. serious deterioration in operating service level
5. operating service level approaches zero
O = Likelihood of occurrence 1. probability of once in many years
2. probability of once in many operating months
3. probability of once in some operating weeks
4. probability of weekly occurrence
5. probability of daily occurrence
D = Likelihood of detection 1. detectability is very high
2. considerable warning of failure before occurrence
3. some warning of failure before occurrence
4. little warning of failure before occurrence
5. detectability is effectively zero
Agility holds the key

Agile supply chains are designed to respond rapidly to

unpredictable change. They are based upon a number of
principles:-
o Very close connection to final marketplace
o Visibility of real demand
o High levels of synchronicity upstream and downstream
o Organizational focus on processes rather than functions
o Advanced level of collaborative planning with supply chain partners
o Continuous search for time compression opportunities
What Does it Take to Become More Agile?
Zara and M&S’s Approach
o Changed structure of network to working directly with more raw material suppliers that have
the capability to produce the garments, hence considerably reducing manufacturing time and
the risk of miss-communicating design briefs
o Advance technical improvements in raw material supply base and garment manufacturers in
QR to meet market demands
o Direct sourcing means that companies have become more agile because the procurement
process is much quicker and cost effective
o Sourcing a mixture of suppliers with various skills & with close proximity to market for QR
and to enable late configuration of products
o Manage SC risk by avoiding a narrow supply base & enables them to switch product to avoid
supply chain disruption caused by political or economic events, or natural disasters
Zara & M&S: Design-Led Supply Chains
Both fashion retailers have integrated design into their supply chains in
recognition that this mitigates risk and enhances supply chain agility
▪ Starting design procurement process as close to each selling season
▪ Avoid costs of storing finished products
▪ Make last minute changes (late customization) as receive trend information & utilize
sales information from the current season – hence reducing time-to-market
▪ Design-led procurement prevents the build up inventory & enables companies to be more
responsive
▪ Designers are linked to the buying process and in control of design decisions
▪ By aligning design with the supply chain in this way, the companies have reduced their
exposure to supply chain failure & ensured that suppliers are able to produce exactly
what they require
Achieving Agility in The SC Through
Design
There are a number of critical principles underpinning design-led
supply chains

▪ The Supply chain ‘begins on the drawing board’

▪ Design is the start of the supply chain, not the end
▪ Design must be integrative rather than functional orientation (silo)
▪ Supplier integrated approach - (share product knowledge)
▪ Multi-functional teams
▪ Postponement & Planning
▪ De-Coupling
▪ Flexible
The importance of supply chain event
management

▪ Supply chain visibility to enable potentially disruptive

events to be identified as they happen – or even before
they happen.
▪ Work as a supply chain community to define the business
rules and exceptions that need to be monitored.
▪ Use shared information across the extended supply chain
in as close to real time as possible to create supply chain
intelligence.
Robust or resilient?

▪ A robust process can be defined as “a process able to deal with reasonable variability”
▪ A resilient supply chain can be defined as “a supply chain with the ability to recover quickly
from unexpected events impacting supply chain performance”

A robust process can deal with reasonable variability in

input whilst maintaining good control over output
variability. It has some resilience but is it capable of
recovery from an event that causes exceptionally high levels
of variability in input or output requirement?
Characteristics of Robust and Resilient
supply chains
Creating a Resilient Supply Chain:
Strategic Approaches
The last word

“It is not the strongest of the species that

survive nor the most intelligent, but the
one most responsive to change”.
---Charles Darwin
References
▪ APICS CSCP BOK
▪ APICS Dictionary 14th Edition
▪ “Supply Chain Management : Strategy, Planning & Operation” by Sunil Chopra, Peter
Meindl
▪ APICS Supply Chain Council
▪ BCG Analysis
▪ PwC Analysis
▪ [Link]
▪ International Journal of Production Research
▪ ChainLink Research
▪ The Global Supply Chain Institute, University of Tennessee
▪ Supply Chain Risk Leadership Council (SCRLC)
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