Managing the Supply Chain

in an Age of Uncertainty

Omera Khan
Cranfield School of Management
Agenda

● Supply chain risk and vulnerability

● The impact of global sourcing

● Supply chain risk management

● Agility holds the key to resilience

● Creating the resilient supply chain

Page 2
Why are today’s supply chains so vulnerable?

● Widespread adoption of ‘lean’ practices

● The move to off-shore manufacturing and sourcing

● Out-sourcing and reduction in the supplier base

● Global consolidation of suppliers

● Centralised production and distribution

All of which combine to make supply chains vulnerable to disruption

Page 3
Supply chain risk (i)

“The entire Japanese vehicle industry ground to a

halt following an earthquake that stopped production
of piston rings for engines provided by Riken, the
industry leader in the domestic market.

Toyota, in particular, was forced to stop operations at

all 12 of its domestic plants.”

Financial Times, 24 July 2007

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Supply chain risk (ii)

“A fire at a key Philips semiconductor factory in 2000

caused a worldwide shortage of the radio frequency
chips used by both Nokia and Ericsson. Nokia
immediately lined up another source and redesigned
other chips so they could be produced elsewhere.
However, Ericsson responded more slowly and lost an
estimated $400 million in mobile phone handsets.”

MIT Sloan Management Review

Summer 2006

Page 5
Supply chain risk (iii)

“Yesterday it emerged that ice-cream supplies may

run short because Unilever’s only UK factory, based
in flood-stricken Gloucester, has been closed for the
past ten days.

The company usually manufacturers five million ice-

creams and lollipops a day at the plant. It has stocks
in freezers but it could be days before normal
production resumes. Industry insiders predict that
there will now be an ice-cream war as rival brands
attempt to exploit Unilever’s predicament and gain
market share.”
The Times, 31 July 2007

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Supply chain risk is systemic

• The biggest risk to business continuity may lie

outside the company in the wider supply chain

• The complexity and inter-connectedness of

modern supply chains increases their
vulnerability to disruption

• Environmental risks are outside our control, but

systemic risk is created through our own
decisions

Page 7
There are two generic categories of supply
chain risk

• Supply chains comprise nodes and links

• Nodes – organisational risk

• Links – network risk

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Supply Chain Risk Management

“The identification and management of risks within the

supply chain and risks external to it through a
coordinated approach amongst supply chain members
to reduce supply chain vulnerability as a whole”.

“Avoiding the loss of customer confidence and the

erosion of shareholder value resulting from
supply chain disruption.”

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How would you assess the capability of your company to
mitigate the key supply chain risks it faces right now?

1 Somewhat Capable
9 % of respondents1
11 (n=3,079)

Extremely Capable
Somewhat Capable
27 Slightly Capable
Not Very Capable
Not at all Capable
53

Source: September 2006

1
All data weighted by GDP of constituent countries; figures do not sum to 100%, McKinsey Quarterly
Global Survey of Business Executives
because of rounding; excludes respondents who answered “don’t know.”
Page 10
How does your organisation assess the
risks to its supply chain?

On a wing and a prayer

% of respondents1
15 24 (n=2,924)

There is no Formal
Assessment
Qualitatively/Intuitively

28 With rough Quantative

Estimates
With Detailed Models
of Cash Flow at Risk
34

Source: September 2006

1
All data weighted by GDP of constituent countries; figures do not sum to 100%, McKinsey Quarterly
Global Survey of Business Executives
because of rounding; excludes respondents who answered “don’t know.”
Page 11
Does your company have in place corporate standards and
practices for overseeing the mitigation of supply chain risk?

% of respondents1 How strictly enforced are those standards

(n=3,172)
and practices?
(n=1,301)2

Very Well 23
13

Somewhat
49
Well
42
Yes
No Slightly Well 23 Standards Enforced
Don't Know
Not Very
45 6
Well

Not at All 0

0 10 20 30 40 50

1
All data weighted by GDP of constituent countries; Source: September 2006
2
Figures do not sum to 100%, because of rounding; excludes respondents McKinsey Quarterly
who answered “don’t know.” Global Survey of Business Executives
Page 12
What is risk?

Risk = probability of occurrence x consequences

Page 13
The risk management challenge

High
Consequence/
Impact

Low

Low High
Probability of Occurence
• Where can we reduce the probability?
• How can we reduce the consequence?
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The five sources of risk

• Supply risk

• Demand risk

• Process risk

• Control risk

• Environmental risk

Page 15
Location of risk in the supply chain

SUPPLY PROCESS DEMAND

RISK RISK RISK

NETWORK/
CONTROL
RISK

Environmental Risk

Page 16
The five sources of supply chain risk

Demand Risk Supply Risk Process Risk

• Loss of major accounts • Dependency on key suppliers • Manufacturing yield variability

• Volatility of demand • Consolidation in supply markets • Lengthy set-up times and
• Concentration of customer • Quality and management issues inflexible processes
base arising from off-shore sourcing • Equipment reliability
• Short life cycles • Potential disruption at 2nd tier level • Limited capacity/bottlenecks
• Innovative competitors • Length and variability of • Outsourcing key business
replenishment lead-times processes

Network/Control Risk Environment Risk

• Asymmetric power relationships • Natural disasters

• Poor visibility along the pipeline • Terrorism and war
• Inappropriate rules that distort demand • Regulatory changes
• Lack of collaborative planning and forecasts • Tax, duties and quotas
• Bullwhip effects due to multiple echelons • Strikes

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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

Page 18
Global business : Singer Sewing Machines

 Body shells from USA

 Motors from Brazil

 Drive Shafts from Italy

 Assembled in Taiwan

 Sold around the world

Page 19
How many countries does it take to make a coat

To make this jacket for the UK market, Hong Kong 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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The challenge of globalisation

Continued trends to off-shore sourcing and

focused factories bring reduced costs to
purchase/manufacture but …………

………… have the potential to increase total supply

chain costs and to reduce agility.

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Understanding the total costs 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
……………….. etc

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Pipeline Inventories

• Due to the length and increased uncertainty of global product pipelines,

both planned and unplanned inventories may be higher than optimal

Illustrative inventory comparison: domestic vs.

global product pipelines each with customer demand
of 10 per week
Domestic Pipeline = 70 units inventory

Plant Transit DC Transit

20 20 20 10

Global Pipeline = 170 units inventory

Plant Transit Origin Ocean Destination Transit DC Transit

30 20 Forwarder Transit Forwarder 20 30 10
20 20 20

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Managing supply chain risk

● Map the supply chain

● Identify the critical paths
● Utilise cause and effect analysis (TQM tools)
● Implement supply chain event management
● Adopt agile practices
● Formalise supply chain risk management

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Identify the critical path(s)

Critical paths are characterised by:-

• long lead-times
• no short-term alternative source of supply
• bottlenecks
• high levels of identifiable risk (i.e. supply,
demand, process, control and environmental
risk)

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Use cause and effect analysis

e.g.

● pareto analysis
● asking ‘why?’ five times
● fishbone charts
● failure mode and effects analysis

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Pareto analysis

80% of disruptions will share 20% of the causes

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Asking “why?” five times
1. Q. Why did the machine stop?
A. There was an overload and the fuse blew.

2. Q. Why was there an overload?

A. The bearing was not sufficiently lubricated.

3. Q. Why was it not sufficiently lubricated?

A. The lubrication pump was not pumping sufficiently.

4. Q. Why was it not pumping sufficiently?

A. The shaft of the pump was worn and rattling.

5. Q. Why was the shaft worn?

A. There was no strainer and metal scrap got in.

Repeating why five times like this can help uncover the root problem and correct
it. If this procedure were not carried through, one might simply replace the fuse
or the pump shaft. In that case the problem would reoccur in a few months.

Taiichi Ohno
Toyota Production System
Page 28
Cause and effect analysis

No Stock Lead-Time
Available Too Short
Materials
Supply Problem Failure to Inflexible
Achieve Plan Systems
Forecasting
Capacity Problems
Failure to Constraint
Deliver on
Time Inadequate
Communications Poor Process
Control
Inadequate
Supplier
Poor Management
Scheduling
Carrier Quality
Performance Problems

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Failure mode and effects analysis
(FMEA)

• Asks three questions:

- What could go wrong?
- What effect would this failure have?
- What are the key causes of this failure?

• Provides an assessment of risk for each

possible failure:
S = severity of effect
O = likelihood of occurrence
D = likelihood of detection

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Risk analysis scoring system

S = Severity 1. no direct effect on operating service level

2. minor deterioration in operating service level
3. definite reduction in operating service level
4. serious deterioration in operating service level
5. operating service level approaches zero

O = Likelihood of occurrence 1. probability of once in many years

2. probability of once in many operating months
3. probability of once in some operating weeks
4. probability of weekly occurrence
5. probability of daily occurrence

D = Likelihood of detection 1. detectability is very high

2. considerable warning of failure before occurrence
3. some warning of failure before occurrence
4. little warning of failure before occurrence
5. detectability is effectively zero

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Agility holds the key

Agile supply chains are designed to respond rapidly to

unpredictable change. They are based upon a number
of principles:-

• Very close connection to final marketplace

• Visibility of real demand
• High levels of synchronicity upstream and
downstream
• Organisational focus on processes rather than
functions
• Advanced level of collaborative planning with
supply chain partners
• Continuous search for time compression
opportunities

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What Does it Take to Become More Agile?
Zara and M&S’s Approach

• Changed structure of network to working directly with more raw material

suppliers that have the capability to produce the garments, hence considerably
reducing manufacturing time and the risk of miss-communicating design briefs

• Advance technical improvements in raw material supply base and garment

manufacturers in QR to meet market demands

• Direct sourcing means that companies have become more agile because the
procurement process is much quicker and cost effective

• Sourcing a mixture of suppliers with various skills & with close proximity to
market for QR and to enable late configuration of products

• Manage SC risk by avoiding a narrow supply base & enables them to switch
product to avoid supply chain disruption caused by political or economic events,
or natural disasters

Page 33
Zara & M&S: Design-Led Supply Chains

• Both fashion retailers have integrated design into their supply chains in
recognition that this mitigates risk and enhances supply chain agility

• Starting design procurement process as close to each selling season

• Avoid costs of storing finished products
• Make last minute changes (late customisation) as receive trend information & utilise
sales information from the current season – hence reducing time-to-market
• Design-led procurement prevents the build up inventory & enables companies to be
more responsive
• Designers are linked to the buying process and in control of design decisions

• By aligning design with the supply chain in this way, the companies have
reduced their exposure to supply chain failure & ensured that suppliers are
able to produce exactly what they require

Page 34
Achieving Agility in The SC Through Design

● There are a number of critical principles underpinning design-led supply

chains

– The Supply chain ‘begins on the drawing board’

– Design is the start of the supply chain, not the end
– Design must be integrative rather than functional orientation (silo)
– Supplier integrated approach - (share product knowledge)
– Multi-functional teams
– Postponement & Planning
– De-Coupling
– Flexible

Design management is a holistic process which is not only concerned with the aesthetics
of the product but rather the impact this product will have on the entire supply chain

Page 35
The importance of supply chain event
management

● Supply chain visibility to enable potentially

disruptive events to be identified as they happen
– or even before they happen.

● Work as a supply chain community to define the

business rules and exceptions that need to be
monitored.

● Use shared information across the extended

supply chain in as close to real time as possible to
create supply chain intelligence.

Page 36
Robust or resilient?

• A robust process can be defined as “a process able to deal with

reasonable variability”

• A resilient supply chain can be defined as “a supply chain with the

ability to recover quickly from unexpected events impacting supply
chain performance”

A robust process can deal with reasonable variability in input whilst

maintaining good control over output variability. It has some
resilience but is it capable of recovery from an event that causes
exceptionally high levels of variability in input or output
requirement?

Page 37
Characteristics of Robust and Resilient
supply chains

Robust Resilient

‘Lean thinking’ central Risk mitigation central to supply

to supply chain chain management
management
Lean Agile
Strong Elastic
Internal quality control Internal and external risk
management
Responsive to Capable of responding to
reasonable variation in sudden and significant variation
input in input
Low inventory levels Built in spare capacity and
throughout buffers at critical nodes
Supply chain Velocity Supply chain Velocity &
Acceleration
A culture of quality A culture of risk and quality
awareness (i.e. Six awareness
Sigma)
Processes are stable and under control
Non-value adding activities and processes removed

Page 38
Creating a Resilient Supply Chain:
Strategic Approaches
Supply Chain
Understanding
Supply Chain Supply Base
Design Strategy

1. Supply Chain
(re)engineering Collaborative
Visibility Planning

The Resilient 2. Supply Chain

4. Agility
Supply Chain Collaboration

Supply Chain
Velocity Intelligence
3. Supply Chain
Risk Management
Supply Chain Culture
Consider risk in
Continuity
decision making
Teams
Board level
responsibility &
leadership
Page 39
The last word

“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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