Supply Chain Risk and Reliability Management

Supply chains are all around us. Everything that we wear, that we eat, that we touch, or use
every day was part of some supply chain to transform raw material from some other location
into a finished product that you're enjoying now. Supply chains literally connect the world.

So, what is supply chain management?

Basically, it's the art and science of getting products from where they're made to where you the
consumer want them to be. It's how the pair of shoes you ordered online are manufactured in
Italy and sent to your front door in Kuala Lumpur, Malaysia. It's how the pears from Chile get
your supermarket in Winnipeg, Canada in the winter. It's how your smartphone was assembled
with more than 100 parts from over a dozen different
countries. It's not just about moving stuff around. Service
industries like restaurants, tourism, and health care have
some of the most sophisticated supply chains. You can
think of supply chain management as managing three
flows. The flow the physical product, the flow of information,
and the flow of money. It also deals with a reverse flow of
products at the end of their life for recycling, re-manufacturing
or disposal. While the term itself, supply chain management,
wasn't coined until the 1980s, the art and science of logistics
dates to ancient Roman times. It combines both theory and
practice. You need to master these theoretical concepts but also, can temper them with practical
considerations. So, supply chain management is a hybrid area
that combines different disciplines, methods, and ideas. Supply
chain management is the backbone of the global economy. The
need for professionals who can design, manage, and operate
these complex global supply chains, continues to grow. The
main objective of this course is to provide Supply chain
Analytics knowledge and this can be used in your career. Analytics in Supply Chain, covers
the basic mathematical techniques that are used in supply chain management software systems,
Supply Chain fundamentals and examine different forecasting techniques, develop inventory
replenishment policies, and analyse transportation mode trade-offs, Supply Chain Design of
three primary flows within the supply chain, the physical, the financial, and the information.
ASCM explores the softer side of supply chains and introduces some of the complexities
inherent in real operations.

Let's talk about some supply chains for a few different products. And so, what I'm showing
here are four very different products that you would think have very different supply chains.
And you'd be right. In the top left, we have bananas being sold in a U.S. grocery store. On the
right, we have an integrated ignition assembly. On the bottom, right, we have women's pumps.
On the bottom left, we have a bunch of bags of cement-- of concrete. So, if you look at these,
you'd think, wow! There's nothing that could be similar in these supply chains. And the
interesting thing about supply chain management is that every product has a story, and every
product is part of multiple supply chains. So, everything you touch-- and most things you don't-
- flow through supply chain somewhere in the world. It's very, very rare where you can think
of an item that gets created, manufactured, or grown, and consumed in the exact same place, at
the exact same time. You need to have supply chains to overcome the tyranny of time and
space. And that's what supply chains do. But again, you look at these four very different
products, and what's interesting is there's a lot of similarities you might not think about. So if I
look at the bananas up here in the top left, and compare that to the shoes, you can think about
perishability. Because, yes, bananas will spoil over time, but so will women's shoes. Style is
very fickle. So what's in for this season will not be in for too long. So the idea of perishability,
how long something will stay fresh and able to be sold at its normal standard price, is something
that is not just about fruit, it's about many other fashion items. Then you can think about
sourcing. You don't have a lot of choice of where you can source cement, or for where you can
source bananas. I can't grow bananas up here in Boston. I could try in a greenhouse but it'd be
very, very expensive. You can't mine for cement where it doesn't already exist. So sometimes
your product is tied to a sourcing location that you cannot change. Then you could think of
products that are single-- individual items like bananas, there's really only one part to the
banana, or the cement-- while there are many chemicals you might put in there as additives.
But you look at products like this ignition and the shoe. They're made up of components. And
it could be that those components are not made by you, but by someone else. And therefore,
you're part of a larger supply chain. And finally, you can look at who you sell to. For shoes,
you're selling to a consumer. A woman is probably buying these and, who knows, maybe a
guy. You never know. So someone is buying this as a consumer. Same thing with bananas. It's
a B to C, a business to consumer, business. For these ignition assemblies, it's probably being
sold to an auto manufacturer, or an original equipment manufacturer, or OEM. Same thing with
these bags of cement. Chances are it's being sold to a construction company. So if I look at
these four different products, what's really interesting is that the same decisions are being made
by the people managing those supply chains in each one of these products. Now the values and
the outcomes might differ, but they're all making the decisions of where can I source from?
How much inventory do I hold? How do I forecast my demand? Where do I stock my
inventory? How do I move my product from source to final consumption? And all those
kind of things. And what we'll do in this course, is discuss the concepts and methodologies that
will allow you to plan supply chains for products as diverse as bananas, women shoes,
automotive parts, cement, and everything in between. So what are we going to do in this
lecture? Well, we're going to answer five big questions. First is, what's a supply chain?
So what is a Supply Chain? Let's look at some examples. You can think of a supply chain as
being any two parties or more that are linked by a flow of resources. And so the key word here
is "flow." The idea of supply chains is managing flows. And flows of what? Flows of product
or material, flows of information, and flows of money. And all of these things, all of these three
flows, manage between the multiple parties and ultimately fulfil a customer request. So let's
look here at a simple example. I have a retailer over here on the right, and I've got some kind
of manufactured something on the left. And I’ve got a consumer. Customer comes in-- you can
see his shopping cart. So what's going to happen? Well, what's the idea of what the store will
do? Well, at some point the store's going
to have to place an order or send some
information over to its supplier. At some
point the supplier's going to send material
in the form of a delivery back to the store.
So the physical flow moves. Then
eventually-- hopefully sooner than later
for the supplier-- the retailer will send money or payment or financial terms to the supplier. But
also during this transaction-- throughout the physical delivery and the time between the order
being placed and fulfilled-- there will be other information that's going back and forth for status.
And so you can see these three major flows-- information, material, and money-- will always
go back and forth between the different parties in the supply chain. And what supply chain
management is all about is managing those three flows. How do you manage those three flows
to minimize cost, maximize profit, improve level of service to customers, and all those other
metrics that we'll talk about in a little while? But it's not just this simple little link. This is the
link in the whole supply chain, the simplest piece of a supply chain. Because you can think
about supply chain as a series of these going all the way from this retailer, where the customer
comes in, to the farm. You might have a distribution centre here, one manufacturing plant here,
a raw processing plant here-- but it all goes back to this farm or some raw material. And it's
even more complicated than that-- this is a serial supply chain where everything is one to the
next to the next-- because in real life, it looks something like this. Where I have multiple
retailers, so I have these distribution centers that are servicing multiple locations. I might have
these raw material providers, this farm, might ship directly to the store. So they might have a
direct link beyond these echelons, and skip a bunch of these intermediate players and go straight
to the final customer. You might have a farm here that's providing two different manufacturers'
raw products. And so there's all these different flows between different companies, between
different levels in the supply chain. So it's not just a simple link, link, one to the other. It's more
of a web. But the common phrase is supply chain. Another way to look at this is, let's think
about a bicycle manufacturer. So if I'm manufacturing bicycles, I probably don't make
everything myself. I probably have some supplier that, say, gives me hardware-- the gears, the
wheels, all the different pieces that go on top of stuff-- and then the frame itself, the metal
frame that everything sits upon. And so each one of those vendors probably also have vendors.
Because whoever makes the hardware probably doesn't make the tires themselves. They might
get that from a third party. They might have a manufacturer specializing in gears, some
specialized in pedals, and so forth. The same thing for the frame supplier. They probably don't
cast their own aluminium frames. They probably take that and then maybe mold them. Same
thing with the paint. They must get the paint from a third party. And we can go even further
down to the inputs to each of those. So if I'm thinking of the bicycle manufacturer, if I'm sitting
here, then these people would be my first tier of suppliers. This would be the second tier. And
here is the third tier. So when people talk about my first tier suppliers, those are the companies
that I do business with directly. But when I talk about my third tier customers, if I'm here at
this bicycle manufacturer, that's someone I don't even talk to directly. And so this is an
interesting point that we'll come back upon later, because there's a lot of risk here. Because
what goes into the products down here eventually end up in my product, but I don't talk to them
directly. I talk to the people who talk to the people who talk to them. So this end tier or third
tier manufacturer supplier problem is something we'll talk about a little later. But this is only
half the supply chain. Because now I've made my bicycle, I've got to sell it somewhere. And
you have the same type of tiered structure. I might sell to wholesalers, who then in turn sell to
retailers, who in turn sell to customers. And there might be other intermediary ones in there. In
fact, lately, there might be something where I sell directly to a retailer, like an online retailer,
and they sell directly to the customer. There's no wholesaler involved. And even more, it might
be that I have my own website, for example, and people can buy directly from me. So there's a
lot of flux in how things are changing. But the idea of a supply chain-- the concept hasn't
changed too much. When people talk about a downstream supply chain, what they're talking
about is the direction that the product flows. So customers are downstream. So when anyone
talks about moving closer downstream, they're moving closer to the customers. Think of it as
a river. And when people say upstream-- I'm worried about my upstream logistics-- they're
talking about closer to your supplier, supplier, supplier. So the idea of downstream and
upstream and tiers of suppliers is common in all supply chains. So one last comment. The
whole idea of a supply chain. Think about all these links that we have going on, but the primary
purpose of a supply chain is only to satisfy some customer's need somewhere. There's only one
source of revenue in the supply chain, and that's at the very end. Some customer buys it. And
that all the payments between the different parties are just fund exchanges. And so the division
of this intra-supply chain payments are really a function of power, market conditions, and a
bunch of other factors. But it's very helpful to think about the supply chain as one entity that's
providing value to that customer. Because we try to think about the supply chains as
maximizing the total value generated. So it's what the customer pays minus the total effort it
takes to fulfil that order. Now this is a gross simplification, but thinking about in this way
makes things a lot easier when we look longer term and look at the total landed cost and the
effect of working together as a supply chain that crosses multiple firms.

The many faces of risk

This compounds supply-chain problems. “In many cases shippers have gone
too far in implementing the lean supply chain and have found themselves
virtually out of business because of a by now annual catastrophic event,” says
Mr Scherck. As examples, he cites a dock strike in California, a typhoon in
Taiwan, a tsunami in Asia and a hurricane in New Orleans. More recently a
huge explosion at the Bunce field oil storage terminal in Britain's
Hertfordshire caused widespread problems for businesses not just locally but
across a large part of England.

In 2003 a number of companies suffered serious disruption because of severe

acute respiratory syndrome (SARS). Even though SARS turned out to be not
as virulent as influenza, and only 8,000 people got infected, with one in ten
dying, it still cost an estimated $60 billion in lost output in South and East
Asia. The latest worry is the spread of avian flu. If the virus concerned were
to mutate and become infectious for humans, the consequences could be far
more devastating.
Sometimes even a political wrangle in Brussels will bring a supply chain to a
shuddering halt. Last autumn some 80m items of clothing were impounded
at European ports and borders because they exceeded the annual import
limits that the European Union and China had agreed on only months earlier.
Retailers had ordered their autumn stock well before that agreement was
signed, and many were left scrambling to find alternative suppliers. A
compromise was reached eventually.

The cost of failure

However, most supply-chain disruptions have internal causes, says Vinod
Singhal, a professor of operations management at the Georgia Institute of
Technology (see chart 3). His research on the effects of supply-chain failures
shows that they can be immensely damaging. This emerged from an
investigation into what happens to shareholder value when companies
announce supply-chain problems, based on a sample of 800 such
announcements big enough to generate news in the financial press. The
disruptions ranged from a delay in 2000 of shipments of workstations and
servers by Sun Microsystems to a parts shortage at Boeing in 1997 that the
company said would delay some deliveries.

Typically a company's share price dropped by

around 8% in the first day or two after such an
announcement. This is worse than the average
stockmarket reaction to other corporate bad news,
such as a delay in the launch of a new product
(which triggers an average fall of 5%), untoward
financial events (an average drop of 3-5%)
or IT problems (2%). And the effects can be long-lasting: operating income,
return on sales and return on assets are all significantly down in the first and
second year after a disruption.
“It's like having a heart attack,” says Mr Singhal. “It takes a long time to
recover.” And have the dangers increased in recent years? Like other experts,
he believes that some companies may be running their supply chains a little
too lean: “It's great when it's working, but too much leanness and meanness
can actually hurt you.”
The financial information analysed for this study came out before the
terrorist’s attacks on America on September 11th 2001 and the subsequent
massive tightening of security around the world, so global supply chains today
are subject to many more potential hold-ups. Still, it is impossible for customs
officials to search every container, box or package entering every country, so
the responsibility for security and import declarations rests with the shipper
and the company carrying the goods. In effect, the system works by a process
of pre-clearance. The details of everything contained in a shipment now have
to be sent ahead electronically, and customs and security officials at ports
and cargo hubs divert anything they want to take a closer look at.

Companies that put a lot of effort into ensuring the safety of the goods they
are sending, or carrying on behalf of others, are likely to be rewarded by seeing
them pass swiftly across borders. Customs clearance is itself a huge business.
“Information and technology is the only way to accomplish this,” says Ed
Clark, chief executive of FedEx Trade Networks. These systems also need to
be able to cope with unplanned events. For instance, if a cargo aircraft has to
divert to another airport because of bad weather, centrally held electronic
versions of the necessary “paperwork” can be transmitted to a new port of
entry.

Sometimes even computer systems will not alert a company to a problem. For
instance, Toyota is upgrading its business-interruption planning to a higher
level in response to the filing for Chapter 11 bankruptcy protection last year
by Collins & Aikman, a big American-based supplier of trim items for cars.
The parts company had been supplying Toyota in Europe, which had an
inkling that something might be wrong and started to arrange alternative
supplies to be on the safe side.

“We realised that through good communication and contacts we had managed
to identify a risk in good time and take action,” says Mark Adams, Toyota's
European purchasing manager. It was a lesson the company wanted to apply
more widely, so it launched a weekly get-together for managers, sometimes
by videoconference, to discuss any new rumours and potential risks—and
work out a recovery plan just in case.

Toyota builds more than 600,000 cars a year in Europe, where it has some
200 first-tier suppliers operating more than 400 factories. They work with
second, third and fourth-tier suppliers, so the overall number grows
exponentially the further you go down the chain, where problems can be
harder to spot. This means the suppliers themselves have to be involved in
the risk-management process.

Mr Adams says a supplier may find it difficult to tell the company that it has
a problem. But Toyota emphasises that given the co-operative nature of a
supply chain, with early knowledge there is more chance of putting things
right. Mr Adams explains that as a first step the company would seek to help
its suppliers solve their own problems. “We are hugely more competent at this
than we were a year ago,” he adds. And so far, Toyota has been able to act
swiftly enough to prevent any supply problems holding up production.

Is a lean, flexible and highly outsourced supply chain like Toyota's any safer
than the vertically integrated production methods of old, as practised at Henry
Ford's giant River Rouge manufacturing complex near Detroit? At its zenith
in the 1920s, ships carrying raw materials
such as iron ore and coal—often from Ford-
owned operations—would unload directly
into the plant. Steel was produced on site,
then cast, pressed and machined into all the
components needed to assemble a car. The
process was inflexible—which is why Ford's
cars could be any colour as long as it was black—as well as rather inefficient.
Toyota has turned that process on its head, making its manufacturing system
far more capable of responding to change. That is one of the best insurance
policies a company can have.

Ford's way with supply chains Corbis

“You are always looking for flexibility, particularly as you manage risk,” says
Cisco's Mr Mendez. Again, transparency is important. “Once you understand
where you are, you can begin to design and budget for contingencies,” he
adds. The risk-management budget should perhaps be seen as separate from
the operating and capital budgets, he suggests, to allow risks and their
potential costs to be dealt with more directly.

The limits to leanness

Are competitive pressures pushing companies towards running their logistics
operations ever leaner? “They are galloping there,” replies Michael Cherkasky,
the boss of the company that owns Marsh, the world's largest insurance and
risk specialist. “I don't think many understand the risks that are involved.”
He is concerned that companies are outsourcing not only peripheral activities
but many core functions too. That makes it difficult to pick up the pieces
when things have gone wrong.

Britain's Cranfield University is running a research programme into the

fragility of supply chains, prompted by the British government after protests
over high fuel costs in 2000. Lorry drivers blockaded fuel-delivery depots,
bringing many businesses to a standstill. “I reckon this was the first time the
government realised there were such things as supply chains, and just how
fragile they had become,” Mr Christopher told a recent conference.

Some people even suggest that supply chains should be regulated, a bit like
public utilities, because countries have become so highly dependent on
private-sector production infrastructure. Barry Lynn, author of a book on this
subject, “End of the Line”, thinks that perhaps companies should be required
to limit their outsourcing and use more than one supplier of essential items.
In his book, he argues that globalisation and outsourcing provide only a
temporary benefit to consumers because the companies that form part of
supply chains will buy each other up in pursuit of ever greater efficiency, and
thus lose most of their flexibility.
There are signs that some companies are already alert to these concerns and
may be planning to reorganise their supply chains to make them safer. That
process could speed up if disruptions become more common. Mr Sheffi is in
no doubt that the best way to achieve a resilient supply chain is to create
flexibility—and that flexible companies are best placed to compete in the
marketplace.

“Customers are rethinking their global supply chains for a lot of their
products,” says Mr Scherck. For bigger firms, that could mean adopting what
he calls the “continental strategy”: having a spread of suppliers in different
continents for added flexibility, as Dell and Cisco do. Smaller firms may not
be able to achieve a geographical spread. But in any case, companies do not
want to go back to carrying lots of inventory in different locations. “So you
need to do something in-between,” concludes Mr Scherck. “You will have to
carry a little more cost than an absolutely lean model, but you get protection.”

“There are very legitimate, very good business reasons not necessarily to
complete and ship from Asia,” says Flextronics's Mr Wright. Companies may
consider other options in other parts of the world even though these may look
more expensive. “Sometimes you might have to go to a higher cost structure
to make your supply chain more robust and reliable,” observes Mr Singhal.

So the limits of globalisation may end up being defined by the management

of supply-chain risk. And unfortunately the world is unlikely to become any
safer. There will always be natural disasters, as well as corporate mistakes.
In order to insulate themselves from the consequences, companies will have
to spread their risks more widely. That does not necessarily mean fewer
aircraft will be queuing up to land at Louisville and Memphis, or that fewer
container ships will set sail from Asia's bustling ports. But it does mean that
in future companies may spend rather more to maintain a number of different
supply chains, and some of those may be closer to home.

Two decades 1990-2000 and 2000-2010, have witnessed natural and man-made disasters
causing havoc with the supply chains of many global companies. Supply chain status have
increasingly cited by CEOs and CFOs to explain poor financial performance. Since the term
SCDigest started.

Caveats:

1. Focused on man-made disasters and excluded such things as mother nature and
factories burning down, even though those often evidence holes in supply chain strategy
and risk reduction plans.
2. Looked for examples that had a significant impact on the company in terms of finances,
stock prices, brand equity etc.,
3. It is still subjective and probably missed good candidate

Interestingly, none of Top 11 occurred after 2001. Coincidence? While at one level we see
more public attention to supply chain issues, it appears the lessons from failures in the past
have at least led companies to avoid the catastrophic impacts.

Introduction:

All types of organization shall face one form or other form of risk which effects
success of organizations. Understanding and managing risks can help the
organizations to face immediate or long term effect of causes. Standards of risk
management is essentially in all sorts of industries, specifically, aviation industry,
healthcare industry it is a must and should.
What is risk?
An uncertain future event or condition which if happens affect the mission objective.
It could have a positive or negative effect. Positive risk can be coined as opportunity;
organizations would take maximum advantage of these risks.
Risk is associated with future event, which has not happened yet. Whereas, a risk
which is already happened can be looked in to issue.

Concepts of risk appetite and risk tolerance is an extent of how companies is

comfortable to taking risk.
Risk appetite:
Amount and type of risk that an organization is prepared to seek, accept or tolerate.
Risk tolerance:

Organizations readiness to bear the risk after risk treatments in order to achieve its
objectives. More risk leads to more rewards, but that is not true always. There should
be a balance between risk and rewards. “More rewards with less risk”.
What is risk management:
Risk management is identification, assessment and prioritization of risks (Positive or
Negative) followed by coordinated and economical application of resources to
minimize, monitor and control the probability and/or impact of unfortunate events
or to maximize the realization of opportunities.
Risk management principles:

 Create values
 Be an integral part of organizational processes
 Ba a part of decision making process
 Be systematic and structured
 Be transparent
 Be responsive to change
 Be capable of continual improvement and enhancement
 Be continually or periodically re-assessed

Applications of risk management:

Better decision making through a good understanding of risks and their likely
impact:

 Fewer surprises
 Effective use of resources
 Reassuring stakeholders

Risk management steps:

  Plan Risk management
 Identify risks
 Analyse risks
 Plan risk response
 Monitor and control risks

Plan Risk Management:

Risk management plan specifies the management intend systems and procedures
requires for managing risks. Risk management will provide various definitions of
risk, roles and responsibilities, tools and templates.
Identifying risks:

Identifying risks is the first the management key step. This is the process of
identifying potentials of risk.

 Risk identification is the systematic and methodical process

 It is best done in a group environment
 Wide number of people shall be participating in the process including
Management, employees, customer, and other stakeholders

Tools used in identifying risks:

 Brainstorming is the most common approach

 Other tools include:
1. Ishikawa diagram (Cause and effect)
2. Flow diagram
3. SWOT diagram

Risk register:

 Output of identify risks process is a risk register

 This lists down all the risks identified
 In the next process these risks are prioritised and action plan is created to
address these risks

Analyse risk:

 Risks are analysed to prioritise

 Sets focus on high priority risks
As a first step to managing supply chain risk, we focus on ways to identify and
categorize risks. First, causes of risk from effects, drivers and from consequences.
We shall be discussing “Butterfly” model that conceptually separates underlying
causes, actual events and consequences.

Butterfly depiction of supply chain risk:

 It is helpful to think of the commonly used term “risk” as issues ranging from
underlying causes to actual risk events to impacts.
 A useful point of delineation is the occurrence of a risk event or incident.
Causes are before the risk event while the impact is felt after the occurrence
of such an event.
 causes for a risk event may lie far from where the incident actually occurs and
the impact of any incident may be felt far beyond the location of this event.
 x-axis representing time as well as the relative location in the supply chain.
The risk event is the body (thorax and abdomen) of the butterfly. The left-hand
wing represents underlying causes and prevention efforts that could lead to
this event, while the right wing depicts the post-event impact and response
efforts. The left wing can be extended to represent causes upstream in the
supply chain and the right wing extended to depict impacts further
downstream in the supply chain relative to the time and location of the risk
incident.
 Any preparation for quick response to risk events has to be done before the
response but such preparation could be before or after the event. There are
several benefits of the butterfly depiction as regards how to manage any risk
category.
 The observable risk event separates causes and effects, adding clarity to what
is the risk. The timeline reflects prevention, response, and preparation-to
response efforts in time so we can plan these for any particular risk category.
Probability and Impact Matrix:

 It is a qualitative risk tool analysis

 It evaluates likelihood that particular risk will occur
 Each risk is analysed for probability and Impact; a nine point rating,
five point rating and three point rating is used for calculating the Risk
score (Risk Score=Probability X Impact
 Sample probability table:
Probability Probability Description
category value
Very High 9 Risk event expected to occur

High 7 Risk event is more likely than not to occur

Probable 5 Risk event may or may not occur

Low 3 Risk event is less likely than to occur

Very Low 1 Risk event is not expected to occur

 Sample Impact table:

Project 1 3 5 7 9
Objective
Cost Insignificant <10% 10-20% 20-40% >40%
cost impact
Schedule Insignificant <5% 5-10% 10-20% >20%
schedule
Impact
Scope Barely Minor Major Changes Product
noticeable areas areas unacceptable becomes
useless
 Quality Barely Minor Major Quality Product
noticeable functions functions reduction becomes
unacceptable useless

Probability and Impact Matrix:

P
r
o
b
a
b
i
Impact
l
Local
i and Global Drivers and Consequences:
t
Global Risk: It is defined in the context of the global environment within which the
y
supply chain operates. The corresponding uncertainties pertain to social or political
instabilities, credit crunch crises, and commodity price increases.
Local Risk: It is defined in the context of specific supply chain entities. Risk events
could be natural disasters, labour union strikes, supplier bankruptcies,
contaminated production processes, or loss of intellectual property rights at a
specific supply chain entity.
Risk Categorization Motivated by Supply Chain Organization:

1. Supply Risk
2. Process Risk
3. Demand Risk
4. Corporate-level Risk

Supply Risk:
Supply risk pertain to supplier side that include supplier defaults, or other
unexpected changes in supply cost, delivery, quality or reliability. Outsourcing risk
fall in to this category and their importance is growing as more manufacturers reduce
the number of direct suppliers and source globally.

Supplier failure. This is a well-documented risk with many examples such as the
bankruptcy in 2001 of UPF-Thompson, sole chassis supplier to Land Rover, which
caused major problems for the auto maker. During the 2008-09 economic crisis
including the credit squeeze, auto makers BMW and Daimler along with UK defence
company VT Group told their top suppliers to come to the company for financial help
as a way to reduce their supply risks.

Supply Commitment. If the buying organization has to commit to long-term

purchases from its supplier without the option of revising the quantities, it can have
the risk of having unmet demand or excess inventory over time. For instance, Canon
is the sole supplier of the engines for the HP Laser Jet printers. Hewlett-Packard has
to place its order six months in advance and is not all owed to change the order
quantity once the order is placed.
Supply Cost:

This refers to unanticipated increases in acquisition costs resulting from

supplier price hikes or from fluctuating exchange rates. Price increases are
more likely when a company uses only one supply source. When Intercon
Japan’s connector manufacturer sourced a special type of bronze from a
single metal supplier (Asahi Metal), it had little bargaining power.
Consequently, Intercon Japan experienced significant price increases from
Asahi Metal (Tang, 1999).
Process Risk:
These risks pertain to risks within the organization’s internal supply chain,
typically pertaining to design, manufacturing and distribution.
Design:
Despite significant efforts in implementing Total Quality Management (TQM),
Lean Manufacturing and Six Sigma, many companies are still facing risks
from products produced as a result of faulty design or manufacturing.
Toyota’s recall of cars in late 2009 and early 2010 owing to “sticky”
accelerators has hurt the company’s reputation, demand and stock price.
Yield:

If the manufacturing yield at a plant is uncertain, it can result in the company not
being able to match its supply to its demand. Yield problems in 2004 at IBM’s plant
in East Fishkill, New York contributed to the $150 million first-quarter loss by its
microelectronics division (c.f., Krazit 2004).
Inventory:
Excess inventory hurts financial performance. That was the case in late 2000, when
the PC industry carried roughly12 weeks of inventory. The combination of excess
inventory and falling prices hurt many companies such as Compaq.
Capacity:
Inadequate capacity means a company may be unable to meet its demand and thus
suffer from unmet demand. To avoid this, companies can err on the side of having
excess capacity. However, building excess capacity is usually a strategic choice as it
may take much longer to ramp capacity up or down compared to changing inventory
levels and may cost a lot more.
Demand risk:
The uncertain nature of product demand is one of the supply chain risks that all
companies need to face with uncertainty surrounding volume and product mix.
Forecasting:
Forecast risk stems from the mismatch between a company’s forecast and actual
demand. If the forecast turns out to have been too low, then there may not be enough
products available to sell. If forecast turns out to have been too high, the weak
demand will result in excess inventories and price-markdowns. In late 2003, for
example, product shortages in western Europe led Nokia customers to order more
than they needed, so they would be able to meet demand in case Nokia began
rationing or allocations. These exaggerated figures distorted Nokia’s reading of the
market, causing the company to inaccurately forecast sales.
Supply Chain Risk Drivers:
We are going to examine the risk
management process internal and
external risk drivers. Supply chain
risk is about any threat of
interruption to the workings of the
supply chain. Risk may be generated
as a result of risk 'drivers' that are
either internal or external to the
company.
Mitigation and Contingency risk:
Mitigation is a hedge against risk built into the operations themselves and,
therefore, the lack of mitigating tactics is a risk in itself. Contingency is the
existence of a prepared plan and the identification of resources that can be
mobilised in the event of a risk being identified. The classic mitigations in
supply chain management are:
● Inventory
● Capacity
● Dual sourcing
● Distribution and logistics alternatives
● Back up arrangements
Supply Chain Risk Assessment:
Risk assessment is a critical step because the results of the risk assessment
can influence the decisions to be made by the organization and the
commitment from its top management.
First and foremost, risk assessment is the basis for allocating funds to
different risk mitigation efforts against a backdrop of competing needs. The
competing needs in supply chain risk are investment in inventory and
capacity etc.,
Secondly, the risk assessment exercise can help management focus on
specific areas of vulnerability whether within the organization’s four walls or
in its extended supply chain.
Thirdly, companies also use risk assessment program to meet legal or
regulatory requirements.
Finally, companies use risk assessment to develop contingency plans by
attempting to understand the nature of threats and other risks to help counter
these better.
Type of risks to assess:
Normal risks: Frequent fluctuations of process yields, material costs,
currency exchange rates, ad product demands can be viewed as normal risks.
Abnormal risks: Rare events such as natural/man-made disasters,
contaminated products, and system failures can be treated as abnormal risks.
A Case study of risk assessment.
In 2010, a survey was conducted on Chief Risk Officers of companies from
different industry sectors to see how they viewed risks and risk management
in their own organizations. Also wanted to observe whether there is any
relation between insurance coverage and residual risk. A questionnaire
sought to understand the risk in absolute terms while still depending on
subjective responses on a 10-pint scale.
Sample:
The sample comprised major UK-based companies from different sectors, with
many companies covering more than one sector. Started with 41 companies
but dropped two companies due to inadequate data for the analysis presented.
The top three sectors in the sample are (1) Retail and distribution; (2)
Industrial and manufacturing; and (3) Food and drink. Other sectors include
chemicals, construction, financial institutions, media/telecoms/IT, Utilities,
and transportation with four or more CROs responding.
 Number of risk managers responding to their satisfaction with current state of risk management in their
organizations

The companies are mostly large, with three-fourths that had revenues
exceeding one billion pounds in 2009. Two-third of the responding CROs
have a remit over more than 10,000 personnel spread over many locations
in multiple countries; nearly 90% are responsible for more than 1,000
people.
1. What is the demographic scale of measurement collected for
satisfaction level?
2. Write your observations from the given graph.

Risks that were assessed:

CROs are asked to assess for their companies’ specific risk categories that
are tied to single identifiable incidents. Emphasised on seeking ratings of
risks assuming no prevention or response controls in place to get an
estimate of “threat” of such incidents.
1. Fire explosion
2. Food, earthquakes and other natural catastrophes
3. Incidents involving loss of life
4. Manufacturing or distribution failure within the supply chain
5. Failure of key supplier disrupting the supply chain
6. Unintentional IT failure/Communication failure
7. Hacking/Wilful damage to IT /communication infrastructure
8. Strike/People disruption
9. Product recall/Unexpected warranty costs
10. Environment pollution incidents
11. Fraud perpetrated on the company
12. Company involving on bribe
13. CSR issues
14. Litigation losses
How to assess the risk:
First ask the respondents the frequency of risk incidents assuming there

Account
SC Risk Mitigation:
The process by which an organization introduces specific measures to
minimize or eliminate unacceptable risks associated with its operations. Risk
mitigation measures can be directed towards reducing the severity of risk
consequences, reducing the probability of the risk materializing, or
reducing the organizations exposure to the risk.

March – 2010, Philips Chip Manufacturing

IT BEGAN on a stormy evening in New Mexico in March 2000 when a bolt of
lightning hit a power line. The temporary loss of electricity knocked out the
cooling fans in a furnace at a Philips semiconductor plant in Albuquerque. A
fire started, but was put out by staff within minutes. By the time the fire
brigade arrived, there was nothing for them to do but inspect the building and
fill out a report. The damage seemed to be minor: eight trays of wafers
containing the miniature circuitry to make several thousand chips for mobile
phones had been destroyed. After a good clean-up, the company expected to
resume production within a week.

That is what the plant told its two biggest

customers, Sweden's Ericsson and
Finland's Nokia, who were vying for
leadership in the booming mobile-handset
market. Nokia's supply-chain managers
had realised within two days that there was
a problem when their computer systems
showed some shipments were being held up. Delays of a few days are not
uncommon in manufacturing and a limited number of back-up components
are usually held to cope with such eventualities. But whereas Ericsson was
content to let the delay take its course, Nokia immediately put the Philips
plant on a watch list to be closely monitored in case things got worse.

They did. Semiconductor fabrication plants have to be kept spotlessly clean,

but on the night of the fire, when staff were rushing around and firemen were
tramping in and out, smoke and soot had contaminated a much larger area
of the plant than had first been thought. Production could be halted for
months. By the time the full extent of the disruption became clear, Nokia had
already started locking up all the alternative sources for the chips.

That left Ericsson with a serious parts shortage. The company, having decided
some time earlier to simplify its supply chain by single-sourcing some of its
components, including the Philips chips, had no plan B. This severely limited
its ability to launch a new generation of handsets, which in turn contributed
to huge losses in the Swedish company's mobile-phone division. In 2001
Ericsson decided to quit making handsets on its own. Instead, it put that part
of its business into a joint venture with Sony.

This has become a classic case study for supply-chain experts and risk
consultants. The version above is taken from “The Resilient Enterprise”
by MIT's Mr Sheffi and “Logistics and Supply Chain Management” by
Cranfield's Mr Christopher. It illustrates the value of speed and flexibility in a
supply chain. As Mr Sheffi puts it: “Nokia's heightened awareness allowed it
to identify the severity of the disruption faster, leading it to take timely actions
and lock up the resources for recovery.”

There are two types of risk in a supply chain, external and internal. As in the
Ericsson case, they can conspire together to cause a calamity. This seems to
be happening more and more often. It is not just that inventory levels are
getting leaner, but the range of items that companies are carrying is also
growing rapidly, points out Ted Scherck, president of Colography, an Atlanta-
based logistics consultancy. Just look around a typical supermarket. Where
it once stocked mainly groceries, it now also sells clothing, consumer
electronics, home furnishings and many other items.

Risk mitigating types:

Risk acceptance:

Risk acceptance does not reduce any effects however it is still considered a
strategy. This strategy is a common option when the cost of other risk
management options such as avoidance or limitation may outweigh the cost
of the risk itself. A company that doesn’t want to spend a lot of money on
avoiding risks that do not have a high possibility of occurring will use the risk
acceptance strategy.

Risk avoidance:

Risk avoidance is the opposite of risk acceptance. It is the action that avoids
any exposure to the risk whatsoever. Risk avoidance is usually the most
expensive of all risk mitigation options.

Risk limitations:

Risk limitation is the most common risk management strategy used by

businesses. This strategy limits a company’s exposure by taking some action.
It is a strategy employing a bit of risk acceptance along with a bit of risk
avoidance or an average of both. An example of risk limitation would be a
company accepting that a disk drive may fail and avoiding a long period of
failure by having backups.

Risk transference:

Risk transference is the involvement of handing risk off to a willing third party.
For example, numerous companies outsource certain operations such as
customer service, payroll services, etc. This can be beneficial for a company if
a transferred risk is not a core competency of that company. It can also be
used so a company can focus more on their core competencies.

Risk Mitigation strategies:

1. Alignment of supply chain partners incentives to reduce the
behavioural risk with the supply chain.
2. Flexibility to reduce not only demand risk but also supply and process
risks.
3. Building buffers or redundancies.

Alignment:
As per the Tang(2006b) reviews different types of supply chain contracts to
coordinate a supply chain so that all parties will act in the interest of the
entire supply chain when dealing with demand risk including with wholesale
price contracts, buyback contracts, and revenue sharing contracts. A two-
part tariff i.e., fixed cost and per unit wholesale price, can be used to entice
the downstream partner partner to order according to the optimal order
quantity for the entire supply chain. A buy-back contract is a returns policy
under which the manufacturer is required to buy back the retailer’s excess
inventory at a reduced price. Under certain conditions, doing so can achieve
supply chain coordination. Under a revenue sharing contract, the retailer
shares the revenue with the manufacturer and obtains a reduction in the
wholesale price in return, achieving supply chain coordination.
Flexibility:
There are at least five different types of flexibility strategies corresponding to
multiple suppliers, flexible supply contracts, flexible manufacturing process,
postponement and responsive pricing. The ability to shift order quantities
across suppliers can be a powerful mechanism for the manufacturer to hedge
against supply risks. Under flexible supply contracts, the manufacturer is
allowed to adjust the order quantity within a pre-specified range,say,a few
percent of the order quantity. This helps to mitigate the impact associated
with demand risks

OPTIMIZATION MODELS IN
SUPPLY CHAIN RISK MANAGEMENT
A major decision type in Supply Chain is route selection, as transportation
across supply chain facilities is a major issue, as well as selection of those
facilities. LP was developed during world war II. It provides a means of
optimization of system. It is a particular type of mathematical programing that
has been used to improve efficiency of business operations.

Programming models applying in SC

Demonstration model:

This model will present involving identification of a shipping schedule to

deliver petroleum products from refineries to depots. The firm has refineries
in Houston, Corpus Christi, and Fort Worth. It has depots in San Antonio,
Bryan, El Paso. Following table gives supply and demand volumes in
thousands of gallons.

System parameters

The costing of transporting 1,000 gallons from each refinery to each depot is:
Use LP for optimizing the cost of transportation.

To illustrate the developed approach let’s consider the simulation results of ten deliveries of products
from producer to consumer without intermediaries taking into account that any delivery can be
presented as the combination of eight logistics operations (Table 5). Accordingly, the first three
deliveries are shown on Figure. Apart from failures the Table 5 shows the costs associated with the
restoration of supply chain's operability

Recording of failures (disruptions) and costs associated with the maintenance of supply chains’
operability

By using the data from the Table 5 let’s calculate the indicators of reliability of the supply chain.

Consider the approach to assessing the probability of faultless operation P0 without redundancy.
Since the supply chain consists of eight operations, which are performed sequentially, for calculation
of P0 can be used the classical formula of probability theory:

where Pi – the evaluation of faultlessness of ith operation.

Value P0 = 0,366 indicates that the supply chain is almost inoperable and requires adjustment.
Consider the approach to assessing the probability of faultless operation with account of redundancy
when the 3, 5 and 7 operations are executed.

We remind that operations 3 and 7 “processing of documents” include an assessment of the perfect
order. Let’s carry out calculations in several stages.