Risk management in the global

economy
The challenge of global logistics

PRODUCT MARKET
LINE DIVERSITY PRODUCTION CONCENTRATION
DISPERSION
Techno- Custo-
logy / dev- mer
elopment Parts / Marketing
Components Inbound Physical /retailing
supply Assembly distribution

• Shorter product • Concentrated

life cycles demand
• Product / model • Price erosion
proliferation
• Global sourcing
• Focused factories

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 GLOBAL RISK MANAGEMENT
• Global supply chains are a source of competitive
advantage.
• Global configurations of firms provide access to
– cheap labor
– raw materials
– better financing opportunities
– larger product markets
– arbitrage opportunities
– additional inducements
• offered by host governments to attract foreign capital
(AlHashim, 1980; Kogut and Kulatilaka, 1994).
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 However, coupled with these benefits that entice
firms to go global are the uncertainties and
consequent risks that managers face in global
supply chains.
Global supply chains are more risky than domestic
supply chains due to numerous links
interconnecting a wide network of firm’s.

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 Global business : Singer Sewing
Machines

 Body shells from USA

 Motors from Brazil
 Drive Shafts from Italy
 Assembled in Taiwan
 Sold around the world
 This pauses several challenges

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 How
To many countries
make this does
jacket for the it take
UK market, toKong
Hong make a coat
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.

China, the world’s largest

producer of cotton made the liner

Thailand, a leading exporter of

imitation fur, ringed the hood

Germany, which gave the world

the snap fastener in the 1880s, Taiwan, which specialises in making
sent the snaps material for outdoor clothing, produced
the shell and fleece

Japan, the globe’s biggest producer

of stainless steel for zippers, put its
teeth in this zipper

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These links are prone to;
Disruptions
Bankruptcies
Breakdowns
macroeconomic
political changes
disasters
Thus leading to higher risks and making risk
management difficult

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 Managing total cost of ownership
• Not just the purchase price, but …..
• Increased transport costs
• Increased inventory financing costs
• Increased uncertainty of supply
• Longer lead-times
• Less visibility and increased likelihood of
“bullwhip” effect
• Loss of control in quality
• Longer development cycles for new products
• Increased exposure to security risks
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 Supply Chain Risk Management BPLM II Sem
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 Defn
Global supply chain risk management is the
identification and evaluation of risks and consequent
losses in the global supply chain, and implementation
of appropriate strategies through a coordinated
approach among supply chain members with the
objective of reducing one or more of the following
 losses, probability, speed of event, speed of losses, the
time for detection of the events, frequency
exposure – for supply chain outcomes that in turn lead to
close matching of actual cost savings and profitability
with those desired.

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 Literature suggests four categories of risks: supply,
demand, operational, and security.
Security risk is the distribution of outcomes related to
adverse events that Threaten human resources,
operations integrity, and information systems; and
may lead to outcomes such as freight breaches, stolen
data or proprietary knowledge, vandalism, crime, and
sabotage

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 Operations risk is the distribution of outcomes related
to adverse events within the firm that affect a firm’s
internal ability to produce goods and services, quality
and timeliness of production, and/ or profitability.
Demand risk is the distribution of outcomes related to
adverse events in the outbound flows that affect the
likelihood of customers placing orders with the focal
firm, and/or variance in the volume and assortment
desired by the customer.

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In another widely used classification, Ghoshal (1987)
classifies risks as:
• macroeconomic risks associated with significant economic
shifts in wage rates, interest rates, exchange rates, and
prices;
• policy risks associated with unexpected actions of national
governments;
• competitive risks associated with uncertainty about
competitor activities in foreign markets
• Resource risks associated with unanticipated differences in
resource requirements in foreign markets.

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 • The risk events most salient to the global supply chain
include;
– Currency
– transit time variability
– Forecasts
– Quality
– Safety
– business disruption
– Survival
– inventory (and tools) ownership
– Culture
– dependency and opportunism
– oil price fluctuation
– risk events affecting suppliers and customers.
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 Global supply chains are linked to each other in
complex patterns with one risk leading to another, or
influencing the outcome of other risks. Although such
inter-linkages are also present in domestic supply
chains, their unpredictability and impact increases in
global supply chains.

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 Strategies
Flexibility. Upton (1994) defined flexibility as “the
ability to change or react with little penalty in time,
effort, cost or performance.” In uncertain supply and
demand markets, a more flexible supply chain can
exercise its options faster than its competitors. You
need to have the flexibility to do whatever operations
you need to do, wherever you need to do them and
source whatever you need from wherever you can get
it best.

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 Flexibility is important in global supply chains because
it plays a facilitating role in the Coordination process
and provides a unique ability to help firms manage the
high levels of environmental and operating uncertainty
inherent in global operations. Firms that achieve higher
levels of flexibility significantly outperform their less
flexible counterparts (Fawcett et al., 1996).
Flexibility positively impacts not only the firm’s ability
to extend its global reach but also its ability to enhance
comparative performance relative to leading industry
competitors.
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 Postponement.
Postponement entails delaying the actual commitment
of resources to maintain flexibility and delay incurring
costs (Bucklin, 1965).
Form postponement is an operations design principle
requiring that changes in product form occur at the
latest possible point in time along a manufacturing and
distribution process. Form postponement includes
labeling, packaging, assembly.

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 Time postponement refers to the movement of goods
from manufacturing plants only after customer orders
are received (Zinn and Bowersox, 1988).
The extent of form postponement depends on demand
customization, component costs, product life cycle,
and product modularity.
This is for supply chains that face high demand
uncertainty.

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 Speculation.
Speculation (also called selective risk taking) is a demand-
side risk management strategy that is the opposite of
postponement. Bucklin(1965), mentions that” the principle
of speculation holds that changes in form, and the
movement of goods to forward inventories, should be made
at the earliest possible time in the marketing flow in order
to reduce the costs of the marketing system.”
It includes such actions as forward placement of inventory
in country markets, forward buying of finished goods or
raw material inventory, and early commitment to the form
of a product, all in anticipation of future demand.

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 Hedging.
• Hedging is a supply side risk management strategy. In a
global supply-chain context, hedging is undertaken by
having a globally dispersed portfolio of suppliers and
facilities such that a single event (like currency
fluctuations or a natural disaster) will not affect all the
entities at the same time and/or in the same magnitude.
• Hedging is an expensive strategy because it involves
creating multiple options for decision variables. For
example, dual sourcing can be used as a hedge against
risks of quality, quantity, disruption, price, variability in
performance, and opportunism (Berger et al., 2004), but
dual sourcing requires more investment than single
sourcing.
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 Control/share/transfer.
Research suggest that control, share, or transfer of
risks take the form of vertical integration, contracts,
and agreements. Vertical integration increases the
ability of a member of a supply chain to control
processes, systems, methods, and decisions. Vertical
integration may take the form of forward
(downstream) or backward (upstream) integration, and
is therefore, both a supply side and demand side risk
management strategy.

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 Security.
Global supply chain security encompasses information
systems security, freight breaches, terrorism, vandalism,
crime, and sabotage. Security strategy is aimed at
increasing a supply chain’s ability to sort out what is
moving, and identify unusual or suspicious elements.
Security strategy also encompasses working closely with
government and port officials’ to proactively comply
with regulations and avoid unnecessary delays at border-
crossing points. Several government efforts such as the
• Container Security Initiative
• Customs Trade Partnership Against Terrorism (CTPAT)

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 Avoidance. Studies have pointed to the existence of
two types of avoidance strategies. Avoidance strategy
Type 1is used when the risks associated with operating
in a given product or geographical market, or working
with particular suppliers or customers, is considered
unacceptable. Miller (1992) suggests that avoidance
takes the form of exiting through divestment of
specialized assets, delay of entry into a market or
market segment, or participating only in low
uncertainty markets.

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 Avoidance strategy Type 1 is geared toward driving
overall probabilities associated with risk events of a
decision to zero by ensuring that the risk does not
exist. In avoiding risks, managers are aware of the
supply-demand and/or operating trade-offs associated
with the options and choose to avoid or drop some of
these risks.

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 Avoidance strategy Type 2 takes the form of
preempting adverse events. For example avoidance
strategy for off-shoring quality issues consists of site
audit and approval, and product audit and approval.
Managers ensure that all participants are on a quality
base line so that quality problems are avoided.
However, they understand that although quality is a
given, there are variations across people (including
those who do the audits) and suppliers.

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 Robust Strategies
Tang [2006]; Khan & Burnes [2007]; Wagner & Bode [2008]; Manoj & Mentzer
[2008]

Strategy Examples
Postponement Standardization, commonality, modular Nokia, Xilinx,
design – delay point of product differentiation Benneton

Strategic stock, buffers Safety stock for key items Toyota, CDC
Flexible supply base Sole sourcing through multiple suppliers HP

Make-and-buy Outsource HP; Zara

Economic supply incentives Pay premium Flu vaccine

Flexible transportation Multi-modal transportation
Dynamic pricing, promotion Influence demand through price Dell
Dynamic assortment planning Influence demand by display, location Groceries
Silent product rollover Slowly leak new products Zara, Swatch
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 Samsung Risk Management
Supply chain risks mitigated by
Keeping inventories low
Keeping capacity flexible
Redundant suppliers for non-core components
Use of information technology

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 Specific Risk-mitigation Steps
Supply related risks
RISK MITIGATION
Mergers & acquisition threats Close relations with suppliers (IT
integration)
Acts of God, war, terrorism, Multiple locations for plants & suppliers
sanctions
Political risk Multiple locations for plants & suppliers
Capacity risk Flexible capacity – multi-platform lines
Single sourcing Limit to core-components only (30%)
Intellectual property risk Internal manufacturing for all core
technologies;
Close relations with suppliers
Supplier delays Global control center; Integrated SAP;
Local suppliers for non-core components;
Supplier plants integrated with Samsung’s
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 Specific Risk-mitigation Steps
Demand related risks
RISK MITIGATION
Worldwide recession Samsung Economic Research Institute research
Reputation risk Name recognition; Use reputable auditors
Technology change risk Heavy R&D investment
Customer preference change CRM center
Forecast risk Monitor retail store inventories with Rosetta-Net
Receivables risk Use hard currency in risky countries

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 Specific Risk-mitigation Steps
Contextual risks
RISK MITIGATION
Environmental risk & Environment team created;
compliance Proactive anticipation of regulations
Regulation compliance Use of reputable auditors
Exchange rates Use of futures
Euros used in Central & Eastern Europe
Financial risk Strategic restructuring;
Transparent financials
Systems risk Data center backed up in different locations
Cultural differences In-house training

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 Barriers/ limitations to RM
Arises from the poor awareness of risk itself, still
typical for the staff, but also for managers, including
even board members. According to The Economist's
report from 2007 [Best Practice in Risk Management
2007] , this is the most important factor to the success
of risk management. Surprisingly often executive
officers do not realize what a variety of risks they may
face in business and what are the standard ways to
successfully cope with them.

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 The intuitional and reactive approach to risk
management is still much more common [The Supply
Chain Management Benchmark Report 2005]
especially in small and middle enterprises than
organized, holistic systems
As a result, insurances and contingency plans are
continuingly most typical practiced forms of risk
treatment, whereas much more effective are obviously
preventive, proactive actions aiming in risk reduction
or other than insurance forms of risk transfer

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 Weaknesses of the risk management process itself.
These imperfections are mostly the consequence of the
still early stage of development of risk management
discipline. Typical for such situations is lack of unique,
commonly approved and established paradigm of risk
management.
Very often the implementation of risk management is
limited to selected functions [Enterprise Risk
Management 2004], or appointed areas of company's
activities only, instead of the comprehensive, holistic
system. In such case we cannot recognize it as risk
management process.
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 Lack of skills is pointed in The Economist's report as one
of greatest barriers to the effective management of risk
[Best Practice in Risk Management 2007]. Similar
observations may be found in other surveys [e.g. Taking
Risk on Board 2005]. Practically, educational systems do
not provide professionals in risk management in any
country. Only in few of them appropriate specialized
courses are available. The problem of low risk awareness
mentioned above is the direct consequence of almost
absolute absence of risk related subjects in educational
programs at economical, technical, and even business high
schools, universities and colleges.
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 The tools and techniques available for risk
management purposes, mainly at risk assessment and
analysis stage. Generally speaking, lack of appropriate
tools is repeatedly pointed as major obstacle in risk
management efforts. Doing this job, we have to deal
with a variety of risks, which must be described,
"measured", and analyzed. "To measure" means here
to describe risk magnitude, its possible impact value
and likelihood that it will materialize - in practical
dimension that is to realize, what real threat is related
to each particular risk category.
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 Cont’d
Two main approaches - and consequently - two types
of methods, tools and techniques may be applied here:
quantitative and qualitative ones. The first approach
obviously provides more accurate results, but requires
data and measures of the same accuracy, what is
mostly rather difficult to collect.

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 The cost barrier; or rather renitence in spending
money on protecting the company against something
uncertain, what may be never happens.
Each additional cost seems to be doubtful, alike risk
management actions. That is another reason, why
implementation of risk management requires
significant conviction and even determination.
Y2K bug, was it worthy it?

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 Competition with other priorities.
Fear of creating a risk-averse and bureaucratic culture.
Another report, made by The Economist in 2007 [Best
Practice in Risk Management 2007] as number one
obstacle shows lack of time and resources.
The need for outstandingly advanced collaboration
with supply chain partners. In many cases this is not
easy [Taking Risk on Board 2005], as enterprises
protecting their independency are rather temperate in
exhibiting their weaknesses or vulnerabilities.

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 Poor visibility
Lack of one owner
Poor information flow

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 Organizational Support: supply chain risk management
needs cross-functional participation, agreement and
cooperation in order to succeed. It cannot be done within a
department without significantly limiting the impact on the
business. This requires executive level commitment and
active participation. Building this is a critical first step in
the implementation process.
Rules and strategies: Before risk management activities
can start, a decision must be made as to the approach and
the strategy. The main guidelines for managing risks and
the rationale behind them must be developed, documented
and communicated.
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 • Roles, Responsibility: Clear roles and responsibility are
critical for any process or program. In the case of supply
risk management, even more so. Cross-functional,
companywide responsibility and authority are critical for
success. In addition, supply risk management adds new
responsibilities to existing jobs. These must be clearly
communicated, current skill levels of incumbents assessed
and corrections made (training or replacement) as required.
• Funding: Effective levels of funding are always a
challenge in any company. The amount depends upon the
scope of your program and how much detail is requirement.
Top line annual risk assessment can be very inexpensive
and might be a good place to start while the organization is
training in new concepts of risk management.

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 Mitigation: The mitigation of risk considers options for
treating risks that were not considered acceptable. This
phase aims at identifying options to either reduce
negative consequences, or to reduce the likelihood of
adverse outcomes. In general terms, risk identification,
analysis, assessment and mitigation means answering the
following questions:
What can happen?
 How can it happen?
 Why could it happen?
 What are the potential outcomes?
 How we can overcome potential disruptions?
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 Cont’d
Once these questions have been answered, this 3rd
phase aims at identifying available actions in order to
reduce risk’s negative outcomes. These actions will
take place at the operational level. This phase clearly
requires an intimate knowledge of the organization, the
market in which it operates, the legal, social, political
and cultural environment in which it exists, as well as
the development of a sound understanding of its
strategic and operational objectives.

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 • Coordinate and align the program: This phase places a
strong emphasis on cooperation among departments within
a single company and among different companies of a
supply chain to effectively manage the full range of risks as
a whole. A closer coordination of risk management
activities performed throughout the supply chain is
intended to conserve resources and increase effectiveness.
• Risk Management coordination could be achieved by the
establishment of a Risk Management Coordination
Committee, whose purpose is to advise and coordinate the
identification and inclusion of risk management treatments
within the overall risk management process.
• However conflicts arise always

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 Monitor and act: Finally, after all decisions have
been made and roles and responsibility have been
assigned, the results have to be continuously
monitored in order to act (or react) when necessary.
The monitoring process goes along the entire supply
chain risk management process and interacts with each
step bi-directionally, allowing for feedback and
reconsideration of choices.

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 • Conversely, certain risk management purchasing
practices can create new problems and risks. Single
sourcing, just-in-time deliveries, and reduced supply bases
all have the potential for disrupting supply chain processes.
Reliance on e-procurement tools also involves additional
risks.
• For example, security of transactions in an electronic
environment is a potential risk management problem
(Kendall, 2003; MacKinnon, 2002). Information in the hands
of a “competitor” or a “hacker” could create major confusion
for the supplier. Also, shipments of material that can be used
to make illegal items, such as pipe bombs and biological,
could wind up in the wrong hands. Recently, extensive
publicity has been given to the lack of security over the
contents in shipping containers unloaded daily from ships at
major port cities in the USA. 0773495583
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