Global Supply Chain Risk

MARCH 2010www.et21symposium.org

PROGRAM ON GLOBAL SECURITY

et21.rutgers.edu

Caitlin Scuderi

is adoctoral student inthe Division of Global Affairs. Her interests includeglobal security,Economicdevelopment, andsocial movementsin the Middle East.She is a member of the GeorgiaPolitical ScienceAssociation and theNew York StatePolitical ScienceAssociation.She will next bepresenting researchon global securitythreats at theannual NYSPSAconference inSaratoga Springs,New York. Shecompleted her MAat DartmouthCollege and her BAat Michigan StateUniversity.

SYMPOSIUM BRIEF

Introduction

Supply chain risk management (SCRM) is not a new phenomenon. As the global mar-ket began to fully open in the 1980s, an extensive network of global chains began tak-ing root. Outsourcing, lean manufacturing, specialization, and heavy reliance on con-tractors has helped international corporations minimize costs and allowed for moretime and effort to be spent on core competencies. This complexity of cross-border ex-changes, however, has created new vulnerabilities for these companies. Disturbancesto international supply chains can cause disruptions including, but not limited to: re-ductions in revenue, decrease of market share, inflation of costs, and failure to staywithin budget. Although each disruption can severely hinder the progress of a globalcorporation, perhaps the most threatening disruption is the damage to a corporation’scredibility in the eyes of both its shareholders and its potential customers and partners.To avoid these disruptions, supply chain risks need to be identified and assessed sothat their negative impacts can be lessened or avoided all together. In order to do this,corporations are focusing more on managing these risks. As a result, supply chain risk management (SCRM) is emerging as an essential part of corporate management.With thirty plus years of this type of highly-connected intermarket exchangeexperience, the advancement of SCRM has become neatly separated into two streamsof thought: one espousing the criticality of continuous information gathering as it re-lates to preventing risks of the future – a proactive approach – and another focusingmore on fortifying these global chains to prepare for inevitable ‘uncertainties’ – a re-active approach. Eckert and Hughes (2010) discuss a proactive model for avoidingrisks by gathering information on an already running supply chain and the externalenvironment. The practice of continuous information gathering, compared to the prac-tice of managing risks as they present themselves, the authors argue, separates corpo-rate

survivors

from

rulers.

On the other hand, Ratick et al. (2008) argue that the greater problem pre-sented to supply chain managers is responding to varying uncertainties. Reactivity be-comes the indicator of corporate supply chain success. Considering both streams of thought concerning SCRM, this brief will assess analytics, data needs and structures of both processes and provide a broad reaching methodology for threat assessment as itrelates to SCRM.190 University Ave, Suite 219 Newark, New Jersey 07102Tel (973) 353-5416 Fax (973) 353-5074

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Analytics

Generally speaking, it is the suppliers that serve as a conduit through which risks flow toglobal corporations. Without SCRM, disruptions at the supply level flow through the chaincausing disruptions at the corporate level. Importantly, the longer the supply chain, the higher the potential for risks. SCRM was created to manage these supplier-related risks through miti-gation and avoidance.Before designing and implementing either a proactive or reactive SCRM model, globalcorporations need to assess their relationships with their suppliers. There are four key areas of interest to consider during this evaluation:

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Do any active suppliers showcase a “parent-child” relationship? Is the supplier in thechain a subsidiary of another larger company? If the answer to this question is yes,the parent company’s volatility needs to be measured.

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Where does the suppliers’ balance of trade lie? Is a supplier unevenly dependentupon one customer for a majority of its revenue? If this is the case, how likely is thesupplier to survive if that relationship were damaged?

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Are any suppliers “component critical”? In this situation, a supplier’s output de- pends heavily or solely on one component. What would that supplier do if the supply of that component were limited?

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Are the suppliers financially healthy? Are they in the black and do they have a his-tory of making well-informed financial decisions?A broad assessment like this will allow supply chain managers and other decision mak-ers to decide which model, either proactive or reactive, will be best suited for their company. Achain showcasing a relatively unstable supply base, for instance, is a candidate for a proactiverisk management model; in an environment where there is a relatively high probability of risk,firms are more likely to survive if they can identify and monitor risks as early as possible. Con-versely, a relatively stable supplier base implies that a reactive risk management model may bemore appropriate. With a lower probability for risk exposure, global corporations can nearlyquantify how they must respond in the case of a chain disruption.Beyond the overall health of the supplier base, however, both the physical and monetarysize of the corporation needs to be assessed before prescribing a risk management plan. Asmentioned earlier, the length of a supply chain is directly related to the amount of risk thatchain is exposed to. Based on this, larger global corporations naturally become better candidatesfor proactive SCRM models. Because proactive SCRM models are comprehensive in terms of data collection and analysis, the implementation of these models tends to be costlier than that of others. This generally implies that larger firms in terms of size and capital are better suited for proactive SCRM models.Reactive SCRM models, subsequently, are better suited for smaller corporations. Thistype of model does not require such extensive data collection and analysis and so can be run ata lower cost threshold. This does not mean that this type of model is ineffective, though.Smaller corporations with shorter supply chains are inherently exposed to fewer risks than their

Global Supply Chain Risk

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March 2010

larger counterparts. An efficient SCRM model, then, would only need to account for thoserisks.

Data Needs and Structures

The majority of the data a global corporation needs in relation to SCRM is directly related tothe health of its supplier base. Because SCRM models are largely determined by supplier-related information, these data must be comprehensive and complete in order to properly cus-tomize the model to the company’s profile. Based on the results yielded by the four key areasmentioned above, supplier stability can be quantified during this assessment by categorizingsuppliers into groups defined as: “okay,” “monitor,” or “act.” The process of supplier categori-zation is directly related to a chain’s overall probability of risk. Because of this, the categoriza-tion of suppliers must be deliberate and based on the four key areas mentioned above.

Global corporations more suited for a proactive SCRM model must create a comprehen-sive database for continuous information gathering and performance analysis. In addition to in-formation related to supplier health, these models require data concerning and in relation to themicro- and macroeconomic environments in which suppliers are located. A nation’s stock mar-ket, for example, should be monitored. Although it may not be directly related to a certainglobal supply chain, fluctuations in economic markets tend to have effects on localized labor and employment trends. Additionally, proactive SCRM models collect data on comparativeglobal corporations. Taking stock of other firms’ behaviors can prove beneficial to a corpora-tion offering an example of what to, or what not to do. Such extensive and comprehensive in-formation gathering is necessary as proactive models are designed not only to mitigate andavoid risks, but also to present possible alternatives in the event of a chain disruption.

Data collection is more internally focused for global corporations using the reactiveSCRM model. Because these corporations deal with a relatively stable supplier base, the major-ity of gathered information is focused on recovery measures. In these cases, supply chain man-agers need to identify vulnerable sections of the chain and where and how potential substitutescan be acquired. Relatively accurate forecasts can be made here. Well-customized models candictate how much of a specific component a corporation would need if certain risks were real-ized. For instance, if a shipment of components were delayed, a reactive SCRM model would provide quantitative details concerning amounts of alternate components to use and where andhow those components could be acquired. This is where data collection in reactive SCRM mod-els is most concentrated – in relation to emergency stocks and substitutes.

Methodology

Regardless of the variation across global corporations and commodity sectors in relationto SCRM models, a basic methodology can be derived from the data needs and structures men-tioned above. In a proactive SCRM model, the focus is on comprehensive external informationcreating a sense of foresight for the corporation.