Supply Chain Management

Lecture 5
Supply Chain Risk Management

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 Agenda
• Why are supply chains more vulnerable?
• Understanding the supply chain risk profile;
• Managing supply chain risk; achieving supply
chain resilience;
• Managing global sourcing risks
Why are supply chain more
vulnerable?
 Why are today’s supply chains so vulnerable?

● A focus on efficiency rather than effectiveness

● The globalisation of supply chains
● Focused factories and centralised distribution
● The trend to outsourcing
● Reduction of the supplier base
All of which combine to make supply chains vulnerable to disruption

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 Changing times and an uncertain world
• ‘Known’ problems, are only part of the picture:
– Known Unknowns, Knowable Unknowns and Unknowable
Unknowns
– Y2K: The Millennium Bug
– Creeping Crises (e.g. Foot and Mouth disease in British
livestock herds; Hurricane Katrina; COVID-19)
– Post 9/11 Security Matters
• Container Security Initiative (CSI)
• Customs-Trade Partnership (C-TPAT)
– Corporate Scandals, Operational Risk and Business
Continuity (GSK corruption; Nestle palm oil; Apple labour)
Slides: https://prezi.com/wsuajlkeikz8/apples-ethical-dilemm
a/
Supply chain risk example

VS

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 Examples of Supply Chain Disruptions
• Iceland volcano disrupting flights caused enormous disruption
to air travel across western and northern Europe over an
initial period of six days in April, 2010;

• Boeing supply chain issues; The 787 Dreamliner is over three

years behind schedule (first plane delivered in Sept. 2011);
planned deliveries (2008); 677 orders placed by 2008; airliners
claimed for compensation;

• Ericsson disruption of RF chips (2000)-read mini case study

“The fire that changed an industry”;

How did Ericsson and Nokia respond differently?

Why Nokia excelled; Ericsson went down?
Understanding the supply chain
risk profile
 What is supply chain risk?
Risk is a function of probability of loss and
consequence of loss: Risk=P (loss) x C (loss)

• General risk issues …

– What are common sources of risk?
– How can they be managed effectively?

Watch video:
https://www.youtube.com/watch?v=a7CFZOjfTmE
(GM SC risk management)
Understand supply chain to identify key risks

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Source: McKinsey & Company (2019)
 Risk assessment questions
• Where is organization vulnerable to potential risk?-risk sources

• Why is organization vulnerable? Or What are the causes of risk?

- deep reasons-risk assessment

• How will risk affect organization’s … if it happens?-

consequences of risk
– Customers
– Suppliers
– Stakeholders

• What should organization do if, and when, risk occurs?-

mitigating strategies
 Consequences of SC Risk
• Expenditures of time, effort, and money;

• Negative public relationships;

• Loss of customer confidence;

• Lost sales
Categories of Supply Base Risk

Sourcing
risk
Market Financial
risk risk

Political Supplier
Buyer
risk risk
 Market Risk
• Number of buyers competing for supplier’s
goods, services, and capabilities-Nestle
procurement of coffee beans in China
• Increasingly shorter product life cycles;

• Threat of emerging technologies-Apple disrupted

one industry after another (music player; mobile phones,
laptops etc. i.e., New tech + New business retailing model)
• Maintaining trade secrets and intellectual
properties.
 Sourcing/supplier Risk
• Longer supply pipelines (e.g., transportation);

• Potential for supply disruption (e.g., Ericsson’s SC

disruption of RF chips);

• Suppliers shared focal firm’s knowledge with

competitors;

• Communication and time differences.

 Sourcing/supplier Risk
• Financial stability and future viability;
– Early detection
– Sources of information-PwC, IMF, Economist
Intelligence Unit
• Replacement supplier: evaluation and
selection;
• Supplier capabilities;
• Supplier’s own supply chain;
• Mergers and acquisitions
 Financial Risk
• Inventory carrying costs (e.g., obsolescence);

• Currency exchange rate fluctuations;

“Soft” vs. “hard” currencies: political and fiscal
stability; reliable and stable store of value;

• Terms of sale or INCOTERMS (International

term of sales)
Identifying Supply Chain Vulnerability (Peck,
2005)
• What has disrupted operations in the past?
• What known weaknesses do we have?
• What “near misses” have we experienced?

• What would be the effect of a shortage of a key

material?
• What would be the effect of the loss of our
distribution site?
• What would be the effect of the loss of a key supplier
or customer?

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 Managing supply chain risk;
achieving supply chain resilience;
“It is not the strongest of the species that survive
nor the most intelligent, but the one most
responsive to change”.

-- Charles Darwin

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 Supply Chain Risk Management
• How supply chain members communicate and
collaborate regarding sources of risk, utilizing
risk management tools to mitigate and
minimize risk and uncertainty across supply
chain (Mangan et al., 2012);

• Systems approach to identify, assess, and

develop appropriate risk responses.
 SCRM Capabilities
• Visibility
– Integrating with and deploying analytics gathered
from ERP systems data
• Event recognition and early warning system
(e.g., triggers)
– Ability to react quickly and effectively in early
stages of a risk event
 SCRM Capabilities
• Broad mix of real-time supply chain analytics
– Simulating models of risk events
– Suggesting risk mitigation strategies
– Evaluating different risk responses

• Critical evaluation of competing scenario

responses.
 Supply Chain Resilience
• Resilience – the ability of a system to return to
its original state or a new equilibrium status
after being disrupted

• Consideration of risk and resilience in SCM:

– Encourages a whole system perspective;
– Explicitly accepts that disturbances happen;
– Implies adaptability to changing circumstances.
 Supply Chain Vulnerability and Supply Chain Resilience

Resilience Fitness Space (Source: Pettit et al. 2010; Zhang et al.,

2021)
 Supply Chain Resilience Capabilities (Christopher and
Peck, 2004)

• Supply Chain Reengineering (Flexibility; Redundancy );

• Collaboration (Trust; Information Sharing);

• Agility (Visibility; Velocity);

• SCR Management Culture (Leadership; Innovation).

 Proposed Conceptual Framework
Supply Chain Resilience
Capability Portfolio Supply Chain Resilience
Capability Portfolio Supply Chain
Resilience Zone
Supply chain Reengineering
 
Erosion
Flexibility Transformative
of Profits
Redundancy Capacity

Adaptive
Collaboration Capacity Next supply
Trust chain resilience
Information Sharing status
Absorptive
Agility Capacity Expose to Risk
Visibility
Velocity
Supply chain Resilience
Culture Intensity of Vulnerability
Leadership
Innovation

 
Co-evolve with external environment
Risk management: Contingency Management
Tools

Multiple Third-party
Inventory
sourcing intermediaries

Scenario Currency
Insurance
analysis hedging

Automated
visibility
systems
 Inventory
• Traditional method of dealing with risk BUT
expensive; Inventory carrying costs;

• Requires maintenance of the “right” mix of

products;

• Reactive, short-term focus only; so it is the last

resort, NOT the first choice!
 Multiple Sourcing
Upside
• More competitive marketplace;
• Alternative sources of supply;

Downside
• Added product variability;
• Limited use of more complex sourcing
strategies.
 Third-Party Intermediaries
• International freight forwarders (e.g., Maersk)
• Non-vessel operating common carriers
• Export management companies
• Export packers
• Goods surveyors
• Export trading companies

Assumption: a firm doesn’t have the expertise to

manage import transaction, so use experts.
 Scenario Analysis
Used by Royal Dutch/Shell during Arab oil crises in the
1970s.

• Attempt to explore and prepare for possible future

risk scenarios
– Not considered forecasting;
• “What if” planning or “rehearsing the future”;
• Creation of focused contingency plans prior to an
actual risk occurrence;
• Need to periodically review and update plans.
 Steps in Scenario Analysis
1. Identification of specific issue or risk
situation- ID risk sources;
2. Classify risk scenarios as to severity and
disruptive impact on operations- Risk
assessment;
3. Create viable working strategies and plans to
allow quick response- Mitigating strategies;
4. Identify and implement risk “triggers”- Risk
prevention systems;
5. Review for continued applicability.
 Currency Hedging
• Known as: “Managing transaction exposure”;

• Protects domestic currency value of a future foreign

currency cash flow; Protects against major swings in
currency exchange rates;

• Futures and forward exchange contracts- call in

currency exchange experts!

• Currency options-buy an insurance policy to hedge

currency risk.
 Insurance
• Every international shipment should be
insured
– Matter of “when” loss occurs, not “if”
• Goods in international trade subject to much
higher risk of loss or damage;
• Insufficient insurance coverage often
discovered only after loss occurs;
• Not every loss can be fully covered.
 Insurance
• Some losses are explicitly excluded from
coverage unless additional rider is attached
and extra premiums paid;

• Need to pay close attention to choice of

INCOTERMS which specify …
– Who pays insurance premium?
– Who owns the goods and suffers actual loss?
Global sourcing risk management
 Global Sourcing Risk & Management
 Majority of the research published after 2008;
 Identification and categorisation of GS risk: supply
risk, environmental and sustainability risk, process
and control risk and demand risk (Christopher et al.,
2011):
Supply risks associated with sourcing of products by a focal
company (e.g., product defects; opportunistic behaviour of a
supplier);
Logistics risk: problems in the physical movement of goods
(e.g., on-time delivery; inventory problems/safety stock;
customs regulation);
Protection of IPR
(e.g., loss of IPOR; data security);
Sources of risk in the supply chain (Christopher et al., 2011)

SUPPLY PROCESS DEMAND

RISK RISK RISK

CONTROL
RISK

Environmental Risk
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 The five sources of risk
1 Supply risk
How vulnerable is the business to disruptions in supply? Risk may be higher due
to global sourcing, reliance on key suppliers, poor supply management, etc.
2 Demand risk
How volatile is demand? Does the ‘bullwhip’ effect cause demand amplification?
Are there parallel interactions where the demand for another product affects
the demand for ours?
3 Process risk
How resilient are our processes? Do we understand the sources of variability in
those processes, e.g. manufacturing? Where are the bottlenecks? How much
additional capacity is available if required?.

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 The five sources of risk
4 Control risk
How likely are disturbances and distortions to be caused by our own internal
control systems? For example, order quantities, batch sizes and safety stock
policies can distort real demand. Our own decision rules and policies can
cause ‘chaos’ type effects.
5 Environmental risk
Where across the supply chain as a whole are we vulnerable to external
forces? Whilst the type and timings of extreme external events may not be
forecastable, their impact needs to be assessed.

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Global SC risk sources (Manuj and Mentzer, 2008)
Global sourcing risk management-process (Manuj and Mentzer, 2008)
 Risk mitigation strategy-Hedge
- A hedge is a position established in one market in an attempt to offset exposure to price
changes or fluctuations in some opposite position with the goal of minimizing one's exposure to
unwanted risk.

Example: Hedging an agricultural commodity price

A typical hedger might be a commercial farmer. The market values of wheat and other crops
fluctuate constantly as supply and demand for them vary, with occasional large moves in either
direction. Based on current prices and forecast levels at harvest time, the farmer might decide
that planting wheat is a good idea one season, but the forecast prices are only that —
forecasts. Once the farmer plants wheat, he is committed to it for an entire growing season. If
the actual price of wheat rises greatly between planting and harvest, the farmer stands to make
a lot of unexpected money, but if the actual price drops by harvest time, he could be ruined.

If the farmer sells a number of wheat futures contracts equivalent to his crop size at planting
time, he effectively locks in the price of wheat at that time: the contract is an agreement to
deliver a certain number of bushels (1 bushel=36.4 litres) of wheat to a specified place on a
certain date in the future for a certain fixed price. The farmer has hedged his exposure to wheat
prices; he no longer cares whether the current price rises or falls, because he is guaranteed a
price by the contract. He no longer needs to worry about being ruined by a low wheat price at
harvest time, but he also gives up the chance at making extra money from a high wheat price
at harvest times.
 Global sourcing relational risk

Performance risk (hard factors) vs. relationship risk (human

factors) (Jia and Rutherford, 2010)

As organizations seek to improve global supply base

performance, the issue of supplier relationship management
needs to be an important part of this discussion (Handfield
and Nichols, 2004).

Human factors play an important role; buyer-

supplier trust, communication and personal
relationships
 Supply relational risk
• Define Supply Chain relational risk:
“ The risk to the supply chain of either party in a buyer-supplier
relationship not fully committing to joint efforts due to either
problems associated with cooperation or problems associated
with opportunistic behaviour.” (Jia and Rutherford,2010)

 Another dimension: psychic distance or national

cultural differences
-Cultural differences are a major barrier and risk
to China-west buyer-supplier relationships; how
do MNCs address this problem? (Smagalla, 2004)
 Global sourcing risk (Mattel case; Tang, 2008)

What made a 10 plus year Western buyer-Chinese supplier relationship dissolve?

Trigger: Mattel toys were found to contain excessive lead levels by the US authorities;

Outcomes: Mattel’s stock price fell by 13 percent (March, 2008); millions of

products recalled; damaged company/brand image; disruption of
supply chain (stop producing the problematic models); Lee der Boss-hang
himself;

Apparent cause: As it turns out, the non-compliant paint was produced by a supplier
owned by a close friend of the Lee der boss;

Beyond the surface level, there are two fundamental reasons:

- This is indeed caused by opportunistic behaviour of Lee der and/or its paint supplier.
(Supply risk)
- Learning of quality control by the principal supplier (Lee Der) had not been disseminated
to its sub- tier suppliers. (No mitigating strategies e.g., SC learning)

Raise a question: how do Western MNCs manage their suppliers in China to mitigate
global sourcing relational risk?
Supply chain risk example

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 Mitigating GS relational risk-process
 Socialisation mechanisms ⇨ relational capital ⇨
alliance performance (Cousins et al., 2006)

 Relational capital⇨ alliance learning (Kale et al.,

2000)

To summarize, Socialisation mechanisms ⇨ relational

capital⇨ alliance learning⇨ alliance performance
Note: the arrows represent causal relationships .
 Mitigating global sourcing relational risk-
process (Jia et al., 2016; IBR)

Inter-firm
Formal/inform
learning/adap Hybrid culture
al socialisation
tation

Relational
capital