Supply Chain Risk

The dark side of supply chain mangement

Guest lecture, LOG 711, 12.11.2008

Jan Husdal

[email protected]  71214289

Outline
• What is (supply
chain) risk?
risk
• What are typical
supply chain risks?
risks
• How to manage
supply chain risks?
 Supply chain risk?

Loss of vehicle
Replacement?
Loss of goods
Insurance?

Injured personell
Hiring and training?

Delayed delivery
Brand reputation?
Weather conditions
Detour?

Supply Chain Trends >>> Consequences

• The trend towards just-in-time and lean practices
>>> efficiency rather than effectiveness.
• The trend towards reducing costs (at almost any cost)
>>> globalization of supply chains, more complex and vulnerable.
• The trend towards economies of scale
>>> centralized distribution and manufacturing
>>> lower costs but at the same time less flexibility.
• The trend towards outsourcing non-core business activities
>>> loss of control of the supply chain when it is most needed.
• The trend towards consolidation of suppliers
(intentional and incidental mergers and acquisitions)
>>> increased potential for supply failure.
Christopher, M. (2005) Managing risk in the supply chain. In: Christopher, M. (Ed.) Logistics and Supply
Chain Management. 3rd ed., Prentice Hall, pp. 231-258.
 Supply Chain Risk - Piracy

http://www.icc-ccs.org/

Why is supply chain risk important?

• Even a relatively small supply chain disruption caused by a
localized event may have consequences across the global
economic system.
system
• Globalization, offshoring and outsourcing leads to

>> “no” control over causes

to events in the supply chain.

>> “only” control over consequences

of events in the supply chain.
World Economic Forum (2008) Hyper-optimization and supply chain vulnerability: an invisible
global risk? In: Global Risks 2008 – A Global Risk Network Report, REF: 090108, World Economic
Forum, Switzerland.
http://www.weforum.org/pdf/globalrisk/report2008.pdf
 Supply Chain Risk – an example

A well-
well-handled An ill-
ill-handled
supply chain disruption supply chain disruption
>>> business continuity >>> business dis-
dis-continuity

Norrman and Janson (2004) Ericsson’s proactive supply chain risk management after a serious sub-supplier
accident. International Journal of Physical Distribution and Logistics Management, Vol 34, No 5, pp. 434-456

What is risk?
Risk :
- exposure to the chance of injury or loss
- hazard or dangerous chance
- chance of loss
- degree of probability of such a loss

Aven, T. (2002) Foundations of Risk Analysis: A Knowledge and Decision-Oriented

Perspective, John Wiley & Sons.
 The risk concept
• Risk is an ambiguous concept.
concept
• There are many definitions of risk, depending on their specific
application and on their situational context.
context
• Risk denotes the precise probability of specific eventualities.
eventualities
• Technically, risk has no value, so these eventualities can be
beneficial or adverse (i.e. financial risk).

RISK = Probability * Consequences

Risk analysis

A commonly used method for risk

analysis is by plotting unforeseen or
unwanted events in a risk matrix.
matrix
This can be done qualitatively,
qualitatively where
probabilities and impacts are
subjective values (e.g. low/high and
minor/major),or quantitatively,
quantitatively
where probablities and impacts are
objective values (e.g. frequency and
cost in $$$).

Norman, A. and Lindroth, R. (2004) Categorization of Supply Chain Risk and Risk
Management. In: Brindley, C. (Ed.) Supply Chain Risk. Ashgate, pp. 14-27.
 Proactive versus Reactive

Mitigative actions address risk sources.

Contingent actions address risk consequences.
Asbjørnslett, B E and Rausand, M (1997) Assess the vulnerability of your production system. Report
NTNU 97018. Norwegian University of Science and Technology NTNU, Department of Production
and Quality Engineering, Trondheim, Norway.
Tomlin, B. (2006) On the Value of Mitigation and Contingency Strategies for Managing Supply
Chain Disruption Risks. Management Science, Vol. 52, No. 5, pp. 639-657
Ritchie, B. and Brindley, C. (2004) Risk Characteristics of the Supply Chain – A Contingency
Framework. In: Supply Chain Risk. Ed. Brindley, C. , Ashgate Publishing, pp. 28-42,197-202

Business risks
In order to understand suply chain risk it is useful to first
look at business risks in general.

• Externally-driven or environmental risk

- external factors, competitors, customers, regulations
• Internally-driven or process risk
- operations and processing
• Decision-driven or information risk
- insufficient or erroneous decision support
De Loach, J. W. (2000) Enterprise-wide Risk Management: Strategies for linking risk and opportunity,
Financial Times/Prentice Hall
 Supply Chain Risk
Supply Chain Risk can be viewed as a 4-fold construct:
Risk sources.
sources
Consequences of the risk sources.
Risk drivers that turn risks into consequences.
Strategies to address the risks.

Jütner, U., Peck, H. and Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for
Future Research. International Journal of Logistics: Research and Applications, Vol. 6, No. 4, pp. 197-210.

Supply chain risk sources 1/2

Risks can be seen as
internal or external to
the focal firm,
and be seen as internal
or external to the supply
chain:

•Process risk
•Control risk
Internal to the focal firm
•Supply risk External to the focal firm
•Demand risk Internal to the supply chain
External to the supply chain
•Environmental
Environment risk
Peck, H. (2003) Supply Chain Resilience. UK Department of Transport/ Cranfield University, Carnfield, UK.
 Supply chain risk sources 2/2

Sources of risk can be broadly

categorized along three
different levels:
1)Organization
1)Organizational risk
2)Network
2)Network risk
3)Environment
3)Environmental risk

Jütner, U., Peck, H. and Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for
Future Research. International Journal of Logistics: Research and Applications, Vol. 6, No. 4, pp. 197-210.

Types of supply chain risk 1/3

Organizational Risks

• Procedure Risks
- lack of formal procedures, lack of quality control system
• Decision Risks
- bureaucracy (red tape), lack of authority, lack of decision support
• Communication Risks
- cultural differences, language barriers, misunderstanding
• Knowledge Risks
- lack of formal education, lack of training, unskilled labor
Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,
Vol. 29, No. 1, pp. 133-155
 Types of supply chain risk 2/3
Network (Supply Chain) Risks

• Supply Risks
- disruption of supply, inventory and schedules, incoming delays
• Operational
Operation Risks
- failure or breakdown of operations, changes in technology
• Demand Risks
- variations in demand
• Security Risks
- theft, counterfeiting, terrorism, piracy, infrastructure breakdown

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,
Vol. 29, No. 1, pp. 133-155

Types of supply chain risk 3/3

Environment Risks

• Macro Risks
- economic shifts, recession, labour costs, exchange rates, customs
• Policy Risks
- actions and sanctions of governments, shifts in legislation
• Competition Risks
- uncertainty about competitors’ moves and actions
• Resource Risks
- lack of human resources, capital or technology

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,
Vol. 29, No. 1, pp. 133-155
Supply Chain Risks and Drivers 1/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan
Management Review, Vol. 46, No. 1, pp. 53-61.

Supply Chain Risks and Drivers 2/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan
Management Review, Vol. 46, No. 1, pp. 53-61.
 Risk Management Strategies
Before we look at strategies for managing supply chain risk,
let us look at general strategies for managing risk

Avoid Transfer Reduce Retain

Deloach, J (2000) Enterprise-Wide Risk Management: Strategies for Linking Risk & Opportunity.
Financial Times Management/ Prentice Hall.

Supply Chain Risk Management

Supply chain risk management can be described as the

intersection of supply chain management and risk
management. 1 It has a collaborative and structured
approach, and is included in the planning and control
processes of the supply chain, to handle risks which might
goals 2
affect the achievement of the supply chain goals.
1 Paulsson, U. (2004) Supply Chain Risk Management. In: Brindley, C. (ed): Supply Chain Risk. Ashgate
Publishing Limited, pp.79-99.
2 Kajüter, P. (2003) Risk Management in Supply Chains. In: Seuring, S Müller, M., Goldbach, M.,

Schneidewind, U. (eds.) Strategy and Organization in Supply Chains, Physica, Heidelberg, pp. 321-336.
 Supply Chain Risk Management
Strategies
• Avoidance
- exiting a market (or product) or delay entering a market (or product)
• Postponement
- delay commitment of resources to maintain utmost flexibility
• Speculation
- assuming risk to gain competitive advantage
• Hedging
- globally dispersing your portfolio of suppliers, customers and facilities

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,
Vol. 29, No. 1, pp. 133-155

Supply Chain Risk Management

Strategies
• Control
- vertical and lateral integration of suppliers and business partners
• Transferring/sharing risk
- outsourcing, offshoring, contracting
• Security
- identifying and protecting against unwanted penetration

Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management. Journal of Business Logistics,
Vol. 29, No. 1, pp. 133-155
 Supply Chain Disruptions
What happens to supply chain performance during an
unforeseen event?

Warning?

Sheffi, Y. (2005) The Resilient Enterprise - Overcoming Vulnerability for Competitive Advantage, MIT Press

Supply Chain Disruptions

The difference between Robustness, Flexibility and Resilience

• Different supply chain

characteristics will result in
different ways a suply chain
disruption is handled.
• A resilient supply chain is
impacted, but it is able to come
back to a stable state, although
not necessarily to where it was
before the disruption.
• In business setting the ability to
survive (resilience) is more
important than regaining stability
(robustness)
 Supply Chain Disruptions 3/3
Resilient organizations

Resilient organisations

Resilient supply chains

Mc Manus, S. et al (2007) Resilience Management – A Framework for Assessing and Improving the
Resilience of Organisations. Research Report 2007/01, Resilient Organisations, New Zealand.
www.resorgs.org.nz

Supply Chain Design vis-a-vis supply chain disruptions

Factors (risk drivers) that can aggravate or lessen
supply chain disruptions:

Supply Chain Design

A supply chain is more likely to be severely impacted if there is
supply chain density
supply chain complexity
node criticality

Supply Chain Mitigation Capability

A supply chain is less likely to be severely impacted if there is
adaptive capacity (recovery capability)
information sharing/ visibility (warning capability)

Craighead, C. W., Blackhurst, J., Rungtusanatham, M. J. & Handfield, R. B. (2007) The Severity of
Supply Chain Disruptions: Design Characteristics and Mitigation Capabilities. Decision Sciences,
Vol. 38, No. 1, pp. 131-156.
 Supply Chain Vulnerability 1/2

• Which parts of the supply chain are most important? (”Criticality”)

• What can we do if something happens? (”Preparedness”)
• Not being prepared is the biggest risk (”Passive Acceptance”).

Supply Chain Vulnerability 2/2

• Prioritize earnings drivers
• Identify critical infrastructure that affect the earnings drivers
• Locate vulnerabilities in the critical infrastructure
• Model scenarios for the vulnerabilities
• Develop responses to the scenarios
• Monitor, detect and respond to potential disruptions as soon
as possible

Preparing for Evil, Harvard Business Review, April 2003, pp. 109-115
 Selecting the right strategy
Which
strategy works
best against
which risk?

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan
Management Review, Vol. 46, No. 1, pp. 53-61.

Tailored Risk Mitigation 1/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan
Management Review, Vol. 46, No. 1, pp. 53-61.
 Tailored Risk Mitigation 2/2

Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan
Management Review, Vol. 46, No. 1, pp. 53-61.

Manage supply chain risk 1/2

• Understand the supply chain
– view it from end to end, from supplier to end customer.
• Improve the supply chain
– can you simplify and reduce complexity and variability?
• Identify critical paths
– what are the bottlenecks and key nodes/links?
• Manage the critical paths
– make contingency plans.

Christopher, M. (2005) Managing risk in the supply chain. In: Christopher, M. (Ed.) Logistics and Supply
Chain Management. 3rd ed., Prentice Hall, pp. 231-258.
 Manage supply chain risk 2/2
• Allow network visibility
– don't be afraid to share information.
• Establish a supply chain continuity team
– make it cross-functional
• Work with suppliers and customers
– are your suppliers and customers aware of their
own vulnerabilities?

Christopher, M. (2005) Managing risk in the supply chain. In: Christopher, M. (Ed.) Logistics and Supply
Chain Management. 3rd ed., Prentice Hall, pp. 231-258.

Summary
• Supply Chains are exposed to a variety of risks that are
unique to each supply chain.
• These risks are related to actions and events that are inside
and outside of the supply chain.
• Supply Chain Risk Analysis seeks to identify these risks, their
sources and drivers,
driver and their impact on the supply chain.
• Supply Chain Risk Management seeks to establish mitigative
and contingent strategies for how to deal with the identified
risks and their potential impact on the supply chain.
Thank you