Supply Chain Vulnerability, Risk, Robustness & Resilience

Helen Peck, Cranfield UniversityIn Mangan, Lalwani & Butcher, Global Logistics

and Supply Chain ManagementJohn Wiley & Sons [2008]

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Definitions• Risk:

– Decision theory – range of possible outcomes & their values, upside gains & downside losses– Hazard or threat (technological risk; political risk)– Safety & Engineering: Downside consequences of rational decision (worst case scenario)

• Supply Chain Vulnerability:– 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 key material shortage?– What would be the effect of the loss of a distribution site?– What would be the effect of the loss of a key supplier or customer?

• Robust Strategy:– Firm able to manage regular demand fluctions regardless of disruption

• Resilience– Ability of the system to return to its original (or desired) state after disturbance

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Donald Rumsfeld

• What hasn’t happened is interesting– There are known knowns• Things we know we know

– There are known unknowns• We know that we don’t know• Y2K

– There are unknown unknowns• We don’t know we don’t know• 9/11• THESE ARE USUALLY THE DIFFICULT MATTERS

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Creeping Crises

• Systematic supply chain disruptions– Post-9/11 security concerns– Hurricane Katrina– Inadequate managerial controls

• Enron (WorldCom; Dutch retailer Royal Ahold; Italian dairy conglomerate Parmalat Finanziara)

• Barings Bank– Mitigating legislation

– Need Business Continuity Management, due diligence• Sarbanes-Oxley• Basel Accords in International Banking

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Supply Chain wicked problems

• Level 1: Value stream/product/processes– Flow of work, material, information, money

• Level 2: Asset & infrastructure dependencies– Fixed & mobile assets

• Level 3: Organizations & inter-organizational network power dependencies– Commercial wellbeing, contractual & stakeholder

relationships• Level 4: Social & natural environment– Society, economy & natural environment

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Level 1: Process Engineering & Inventory Management

• Flows within and between organizations– Underlies lean manufacturing– End-to-end perspective of agile manufacturing

• RISK MANAGEMENT– Improved visibility of demand, inventory– Velocity (reduce likelihood of obsolescence)– Tight monitoring and control (TQM, 6 Sigma)

• Mastery of process control facilitates identification, management and elimination of risk– But need to consider rest of system

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Level 2: Asset & Infrastructure dependencies

• Nodes (facilities) & links (roads, trucks, etc.)• Asset-based RISK MANAGEMENT

• Catastrophes• IT, supply chain system disruption• Loss of key skills

– Probability x severity– Impact on operations of loss of links or nodes

through network modeling– Mitigating impacts through business continuity

planning

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Level 3: Organization & Inter-Organizational Networks

• Financial consequences of events or decisions• Loss of sole supplier or customer

– Impact on budget or shareholders– Strategic management– Conflicts of interest

• RISK MANAGEMENT– Partnering– Dual sourcing– Outsourcing– Contractual obligations

• UPSIDE– Look for competitive advantage in core competencies

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Level 4: Macro-Environment

• Political– Green movement– Wars

• Economic• Social• Technological• RISK MANAGEMENT– Risk avoidance– Contingency planning

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Supply Chain Risk Categories6 sources

CATEGORY RISK

NATURE External Natural disaster, plant fire, disease & epidemics

POLITICAL SYSTEM “ War, terrorism, labor disputes, regulations

COMPETITOR & MARKET “ Price, recession, exchange rateDemand, customer paymentNew technology, obsolescence substitutes

AVAILABLE CAPACITY Internal Capacity cost, supplier bankruptcy

INTERNAL OPERATION “ Forecast inaccuracy, safetyBullwhip, agility, on-time deliveryTradeoff: inventory/fill rateQuality

INFORMATION SYSTEM “ System breakdownDistorted informationIntegrationViruses/bugs/hackers

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Supply Chain risk management processP. Chapman, M. Cristopher, U. Juttner, H. Peck, R. Wilding,

Logistics and Transportation Focus 4:4 [2002] 59-64• Risk Identification

– Uncertainties: demand, supply, cost {quantitative}– Disruption: disasters, economic crises {qualitative}

• Risk Assessment– Political– Product availability– Capacity, demand fluctuation– Technology, labor– Financial instability, management turnover

• Risk Avoidance– Insurance– Inventory buffers– Supply chain alliances, e-procurement

• Risk Mitigation– Product pricing, other demand control– Product variety– VMI, CPFR

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Risk Reduction StrategiesC.S. Tang

Journal of Logistics: Research and Applications 9:1 [2006] 33-45

1. Identify different types of risk2. Estimate likelihood of each event3. Assess potential loss from major disruption4. Identify strategies to reduce risk

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

Strategy Examples

Postponement Standardization, commonality, modular design – delay point of product differentiation

Nokia, Xilinx, 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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Risk Context• SUPPLY

– Political risk (acts of God, acts of man)• DEMAND

– Changes in demand from• Loss of reputation for quality• Loss of technological or design competitive edghe• Unpredictable customer preferences• Economic recession

• CONTEXTUAL RISKS– Cultural differences– Environmental risk– Regulations risk– Exchange rate risk

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Samsung Electronics ERM

MS Sodhi, S LeeJournal of the Operational Research

Society 58 [2007] 1430-1439

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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 StepsSupply related risks

RISK MITIGATION

Mergers & acquisition threats Close relations with suppliers (IT integration)

Acts of God, war, terrorism, sanctions Multiple locations for plants & suppliers

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 StepsDemand 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 & compliance Environment team created 1993; Proactive anticipation of regulations

Regulation compliance Use of reputable auditors

Exchange rates Use of futuresEuros 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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Rolls Royce Early Supplier InvolvementG.A. Zsidisin, M.E. Smith, The Journal of Supply Chain

Management [Fall 2005] 44-56

• Aerospace Division– Industry driven by cost, reliability– Extensive R&D • Rolls Royce typically 3-4 years for new product• Industry averaged 10 to 20 years

– Supplier-provided components 65-80%

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Rolls Royce ESI process1. Establish customer need2. Identify EDI project3. Develop component target costs4. Prepare ESI project & milestones5. Inform business units6. Determine commodity breakdown7. Develop potential supplier list8. Develop business objective9. Supplier workshops10. Review expectations with suppliers11. Conduct ESI workshop12. Value engineering, evaluate prices & technical13. Evaluate & score suppliers14. Make recommendations15. Inform suppliers16. Develop working agreements & implement

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ESI Benefits

• Reduced threat of excessive costs• Reduced legal liabilities• Improved quality• Relaxed supplier capacity constraints• Reduced product development time• Better able to handle product design changes• Better control over supplier leadership issues

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Risk of DisintermediationJ.F. Mills & V. Camek, International Journal of Physical distribution &

Logistics Management 34:9 [2004] 714-727

• Motokov UK Ltd– British importer/distributer in tractors, tires– TRACTORS

• Landini – Italian agricultural machinery manufacturer• Initially marketed through Edwards Ltd tractor dealership• Replaced with exclusive dealership (Motokov) for 3.5 years• Replaced with newly formed Landini UK distribution

– Landini had damage settlement expenses when terminated with disintermediated firms

– Felt they obtained better control, worth expense

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Tires• Motokov dealt with Matador Tyres

– Exclusive UK distributors– Tires frangible, low margin

• Matador disintermediated Motokov in early 1990s• 1994 Motokov rebuilt business around Barum tires (Czech)• Barum acquired by Continental, who reconfigured their supply

chain• 1995 Motokov dropped Barum, returned to Matador

– No longer sole importer• 2002 Matador acquired large customers wanting reduced costs

– Source producer dealt directly with customers– Motokov too small, disintermediated

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Tractors

• Zetor a Czech tractor producer, founded 1946• 1960s supplied UK through Motokov• Late 1990s Zetor had financial problems– Full capacity, but no profit– 1998 to 2000 halted production

• Before 1998 Motokov sold about 600 Zetor tractors per year– 2000 down to 200– Zetor would benefit from buying out Motkov, reduce

costs

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