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Supply Chain Risk Management

Vinod R. SinghalScheller College of Business

Georgia Institute of TechnologyAtlanta, GA, 30332

vinod.singhal@scheller.gatech.edu

May 2, 2013Presented in the MOT Program at Sogang University

Seoul, South Korea

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Identify the primary sources of supply chain risks.

Identify the causes of supply chain risks

Estimate the likelihood (probability, frequency, or chances) of the risk occurring.

Estimate the financial consequences (impact) of risks.

Prioritize risks based on likelihood and financial impact.

Identify strategies and actions to mitigate the frequency and\or financial consequences of supply chain risks.

Review the risk management process and continuously improve the process.

A process for managing supply chain risks

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Natural disasters

Inaccurate forecasts

Supplier• Poor Performance• Long lead times• Bankruptcy

Customers• Changing needs• Variability in demand• Bankruptcy

Logistics• Equipment shortages• Congestion• Accidents• Regulations

Categories of supply chain risks

Internal risks• Inflexible capacity• Equipment breakdown• Long lead times

Procurement• Long-term vs. short-term• Squeeze prices• Single sourced

Supply chain structure• Complexity• Globalization• Outsourcing• Single sourcing• Over concentration• Lean supply chains

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Labor• Strikes\absenteeism• Inflexible workforce Information technology• Unreliable IT systems• Non-integrated IT network• Lack of timely information

Categories of supply chain risks

Macro-economic factors• Exchange rate• Interest rate• Tax policies• Credit squeeze

Government/regulatory• Security• Rules and regulations

5Debra Elkins: A framework for Business Interruption

Risk Analysis: GM Research Lab Paper

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Estimate the likelihood of occurrence of risk• Estimate the probability/frequency• Qualitative assessment (point scale or categories)

Estimate the financial consequences• Estimate the $ value of the risk• Qualitative assessment (point scale or categories)

Likelihood/consequences of supply chain risks

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Information from your own organization

Trade association and trade publications

Conferences

Internet, newspaper, and magazines

Universities

Experts and consultants

Getting information about supply chain risks

EXAMPLE RESULTS OFINITIAL RISK IDENTIFICATION

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almost certain 0 0 0 1 0

RiskLevel

Total

likely 0 0 0 1 0 critical 2

possible 0 17 33 9 0 major 66

unlikely 0 19 39 19 0 moderate 130

rare 0 17 32 23 5 minor 17

insignificant minor moderate major critical

Risk Ranking Matrix - Operating Location

LIK

EL

IHO

OD

CONSEQUENCE

Initial risk ranking is conducted by checklist method, and typically results in 40 to 80 critical plus major risks. Initial ranking is followed by discussions (calibrations) to agree the most significant 10 to 25 risks.

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Survey

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Who should be involved

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Contingency planning

• Analyze what could potentially go wrong

• Identify and analyze possible alternatives

• Develop plans – what to do, when, how, and who

• Assign responsibility and give authority

• Monitor the situation

• Execute the plan as needed

Strategies for managing supply chain risks

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Redundancy

• Extra inventory

• Extra capacity

• Backup systems

• Multiple suppliers

• Multiple sites

• Dedicated resource to products, processes

Strategies for managing supply chain risks

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Reduce the frequency (probability) of disruptions

• Better forecasting

• Better planning

• Communicate, collaborate, and share

• Build trust in the network

Develop ability to predict disruptions (business intelligence)

• Select, define, and track key performance indicators

• Analyze disruptions to develop key leading indicators

• Track leading indicators

• Need visibility

Strategies for managing supply chain risks

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Elapsed time between the occurrence and detection of disruptions

• Aim for zero elapsed time

• Real time visibility of the extended supply chain

Time it takes to resolve disruptions

• Quick resolution, prevent escalation and worsening

• A process for dealing/responding to disruptions

• Developing capabilities to react and respond

Strategies for managing supply chain risks

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Know your suppliers

•Two-way communication - build trust and relationship

with critical suppliers

• Set up a financial rating system – profitability, cash

flows, ownership structure, debt structure

• Set up an early warning system – quality, capacity,

delivery issues, financial issues

• Know your suppliers’ suppliers

• Interdependencies of your suppliers – same

customers, same industries, same shareholders

Strategies for managing supply chain risks

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Know your customers

•Two-way communication - build trust and relationship

with key customers

• Set up a financial rating system – profitability, cash

flows, ownership structure, debt structure

• Set up an early warning system – payment timing,

inventory

• Concentration of customer base

• Know your customers’ customers

• Other suppliers to your customers

Strategies for managing supply chain risks

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Visibility

• Aware of what is happening in supply chains

• Select key leading indicators of supply chain

• Monitor these indicators using appropriate benchmark

• Communicate deviations to appropriate levels

Collaborate and cooperate with your supply chain partners

• Develop trust among supply chain partners

• Show that you are willing to collaborate

• Agree upfront on how to share the benefits

• Share information, joint decision making/problem solving

Strategies for managing supply chain risks

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Improve the accuracy of forecasts

• Long-term forecasts are less accurate than short-term

• Aggregate forecasts are easier than disaggregate

• Collect data from your supply chain partners

• Question the assumptions that go into building a forecast

Reduce mean and variance of lead times

• Remove non-value added steps and activities

• Improve the reliability and robustness of processes

• Consider lead time issues in planning and forecasting

Strategies for managing supply chain risks

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Flexibility- Product design

- standardization- modularity

- parts commonality- Manufacturing

- flexible technology and capacity - committed and uncommitted capacity

- standard processes - cross-training

- Sourcing- flexible contracts- multiple sourcing- supplier capabilities

- spot markets

Strategies for managing supply chain risks

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Strategies for managing supply chain risks

• Turbo charge your imagination

• Build Scenarios

• Probabilities

• Face reality

• Quick response

• Share the bad news

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Have you done a post-mortem or review of your risk management processes and framework?

Have you evaluated the effectiveness of your process?

What worked and what did not?

What can be improved?

Have the key lessons been recorded for other members of your firm to learn from?

Improving the supply chain risk management process

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Managing supply chain risks should be a critical issue for top management

Top management should provide leadership and resources for the organization to address supply chain risk issues

Firms need to develop capabilities for effectively managing risks

Ability to manage supply chain risks can determine whether a firm can compete effectively

Final Thoughts