ASSIGNMENT: 3

Sonali Singh
MBA LSCM
500066324

"Managing Risk to Avoid Supply-Chain Breakdown"

Supply-chain breakdown or problems result from natural disasters, labour

disputes, supplier bankruptcy, acts of war and terrorism, and other causes. They
can seriously disrupt or delay material, information and cash flows, any of
which can damage sales, increase costs or both.

In case of Supply chain risk & drivers:

Before finding the solution for any problem we first need to categorize them in
terms of analysing any situation or condition in the most effective manner.
Hence, the writer has categorized the various risks for better analysis with
proper examples called the drivers of the risk.
Disruptions can be Natural disasters, Labour dispute, Supplier bankruptcy, War
and terrorism or Dependency on a single source of supply as well as the
capacity and responsiveness of alternative suppliers
Delays such as High capacity utilization at supply source, Inflexibility of supply
source, Poor quality or yield at supply source or Excessive handling due to
border crossings or to change in transportation modes
Systems can be Information infrastructure breakdown, System integration or
extensive systems networking or E-commerce
Forecast can be Inaccurate forecasts due to long lead times, seasonality,
product variety, short life cycles, small customer base or “Bullwhip effect” or
information distortion due to sales, promotions, incentives, lack of supply-chain
visibility and exaggeration of demand in times of product shortage
Intellectual Property such as Vertical integration of supply and Global
outsourcing and markets
Procurement as Exchange rate risk, Percentage of a key component or raw
material procured from a single source, Industrywide capacity utilization and
Long-term versus short-term contracts
Receivables such as Number of customers and Financial strength of customers
Inventory the Rate of product obsolescence, Inventory holding cost, Product
value and Demand and supply uncertainty
Capacity such as Cost of capacity, Capacity flexibility
Coming to the Mitigation strategies:

Risks are such instances which always can’t be forecasted, neither there is can
great strategy to deal with all kinds of risk at every instance. Therefore,
managers are the middle men between a problem and a solution. So, they need
to know which mitigation strategy works best against a given risk.
So, by adding Capacity the risks related to delay, procurement and inventory
risk can be overcome or can be stabilized. Still the risk lies under capacity
underutilization.
The best strategies can be increasing flexibility, responsiveness and
capability. To have more customer accounts and to aggregate or pool
demand.

Now, Stress testing your supply chain:

It tells us about exploring “what if” some scenarios can help groups identify,
understand and prioritize risks, a key prerequisite to tailoring effective risk-
mitigation strategies.

Balancing supply chain risk/reward relationship:

The first relationship shows the increasing cost of risk reduction, which means
that using inventory to cover a high level of demand risk proportionately costs
far more than doing so with a low level of demand risk.
The second relationship shows that pooling forecast risk, receivables risk or
other risk reduces the amount of reserve required for a given level of risk
coverage. Thus, the required level of inventory needed to mitigate forecast risk
decreases as it is pooled.
The third relationship illustrates how the benefit of pooling grows with the
level of risk covered. This means pooling inventory produces significant
benefits only for products with high forecast or inventory risks.

Lastly, Tailoring reserves for risk mitigation:

Once a company clearly understands its supply-chain risk, it can select the
appropriate general mitigation approach and specific tailored strategy.
Increasing Capacity leads to Focus on low-cost, decentralized capacity
for predictable demand, Build centralized capacity for unpredictable
demand and Increase decentralization as cost of capacity drops
Acquire Redundant Suppliers Will Favour more redundant supply for high-
volume products, less redundancy for low-volume products, Centralize
redundancy for low-volume products in a few flexible suppliers.
Increasing Responsiveness will Favour cost over responsiveness for
commodity products and Favour responsiveness over cost for short lifecycle
products
Increasing Inventory will Decentralize inventory of predictable, lower value
Products, Centralize inventory of less predictable, higher value products.
Increasing Flexibility will Favour cost over flexibility for predictable, high
volume products, favour flexibility for low-volume unpredictable products.
Centralize flexibility in a few locations if it is expensive.
Pool or Aggregate Demand will help in increasing aggregation as
unpredictability and Grows
Increase Capability will Prefer capability over cost for high-value, high-risk
products, favour cost over capability for low-value commodity products,
Centralize high capability in flexible source if possible.

By continually stress testing their supply chains and tailoring reserves,

managers can protect and improve the bottom line in the face of many types of
supply-chain risks. Like Ericsson, smart companies do not wait for lightning to
strike twice before taking action.