Supply Risk Management Fundamentals

What, why and how?

Risk Defined
Risk in general can be defined as a collection of pairs of likelihood (L) and outcomes (O): Risk = {(L1, O1), (L2, O2),, (Ln, On)} where Oi and Li denote outcome i and its related likelihood. The distribution pattern of the (likelihood; outcome) pairs is called a risk profile (Ayyub, 2003). Definitions of risk must also have a time dimension or a specific time horizon (day, month, year, etc.) and a specific perspective or view that defines the unit of analysis (boundaries, whats not included, etc.).

Risk Defined
The International Organization for Standardization (ISO, 2002) defines two of the essential components of risk: 1. losses (along with related amounts) and 2. uncertainty of their occurrence.

In the financial industry, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events (New Basel Capital Accord, 2006).

What is Supply Chain Risk Management?

Business Continuity Management (BCM), defined by the Business Continuity Institute as an holistic management process that identifies potential impacts that threaten an organization and provides a framework for building resilience and the capability for an effective response that safeguards the interests of its key stakeholders, reputation, brand and value creating activities (BCI, 2005). Business Vulnerability, defined as an exposure to serious disturbances, arising from risks within the supply chain as well as risks external to the supply chain (Christopher, 2003). Vulnerability is a result of any weakness within a complex system that can seriously jeopardize its activities (Ayyub, 2003). Enterprise Risk Management (ERM) as a set of coordinated actions about protecting and enhancing share value to satisfy the primary business objective of shareholder wealth maximization (Chapman, 2006). Resilient enterprise meaning the ability of the company to recover quickly from a disruption (Sheffi, 2005). Deloitte and Touche (2004) and Tang (2006) define supply chain risk (SCR) as the uncertainty of the occurrence of an event that could affect one (or more) partner or link within the supply chain and that could influence (generally in a negative sense) the achievement of companys business objectives. They define supply chain risk management (SCRM) as having the objective to control, monitor and evaluate supply chain risk, optimizing actions in order to prevent disruptions (that is, the occurrence of an event that causes a business interruption) or to quickly recover from them.

SCRM Defined
Supply chain risk management is the systematic identification, assessment, and quantification of potential supply chain disruptions with the objective to control exposure to risk or reduce its negative impact on supply chain performance. Potential disruptions can either occur within the supply chain (e.g. insufficient quality, unreliable suppliers, machine break-down, uncertain demand, etc.) or outside the supply chain (e.g. flooding, terrorism, labor strikes, natural disasters, large variability in demand, etc.). Management of risk includes the development of continuous strategies designed to control, mitigate, reduce, or eliminate risk.

Evolution of Supplier Development

Higher STRATEGIC SUPPLIER DEVELOPMENT REACTIVE SUPPLIER DEVELOPMENT

Evolutionary Strategies
Supply Base Performance/ Capability

SUPPLY BASE REDUCTION SUPPLY BASE ASSESSMENT TOTAL QUALITY MANAGEMENT

7700 suppliers /$bil spend to 1700

Lower Time

Impact of Major Supply Chain Disruption on Stock Price

Trading day relative to announcement date

Average shareholder returns (%)

-61 0 -5 -10 -15 -20 -25

-49

-37

-25

-13

-1

11

23

35

47

59

Hendricks and Singhal, 2005

Number of firms (%)

Pa rt
10 15 20 25 30 0 5

S ho rta ge s

C ha ng e

22.54

s by C us to m er s

13.48

Reasons for glitches

Pr od uc tio n R am p/ ro l ls ou tp ro bl em s P pr ob le m

10.21

9.24

Q ua li t y

D ev el op m

ro bl em s en tp ro bl em s N on e P

6.93 4.43

ro vid ed

15.61

Mattel Toys to Be Pulled Amid Lead Fears

18.5% Decline
On a $10 Bil Market Cap Or 1.9 Bil loss Verbal Report To CPSC

"We heard in early July that we had a possible issue," said Mr. Walter, who added the company stopped production in the Chinese factory around July 7. After further investigation, Mattel approached the Consumer Product Safety Commission with a verbal report July 20. A written report was filed July 26. The product is being recalled under the "fast-track" recall program whereby Mattel has admitted to the contamination and the CPSC hasn't done additional testing.

Why Focus on Supply Risk Management?

When Conventional Wisdom Isnt. After applying a holistic risk model to several companies, we have seen something that contradicts the conventional wisdom that there is a trade-off between risk and supplier performance (total cost of ownership). Dr. Kevin McCormack DRK, LLC

Meet demand at higher service level = Top Line Growth!

Years of Research, Publication and Experience in Supply Risk

Supply Chain Risk Management: Minimizing Disruptions in Global Sourcing (Resource Management) (Hardcover) by Robert Handfield (Author), Kevin P. McCormack (Author) List Price:$79.95 Price:$68.13 & this item ships for FREE with Super Saver Shipping. Details You Save:$11.82 (15%)

Searched for SC Disruption Patterns

Research questions for 2003, 4 and 5:

What are the event patterns is supply chain disruption events? How are companies addressing them? What are the impacts?

Participated in 2003-4 Research: Dr. Jennifer Blackhurst, NC State, Dr. Christopher W. Craighead, Auburn University Debra Elkins, Enterprise Risk Modeling General Motors R&D Center, Dr. Robert B. Handfield, NC State.

A Perspective
Companys Environment

Suppliers Environment

Customers Environment

Suppliers

Supplier and Market Intelligence

Company
Business Intelligence

Customer and Market Intelligence

Customers

Sourcing (CPO)

What we saw: Three key elements of supply chain disruption management.

Disruption Discovery What type of detection and intelligence does a firm need to detect disruptions? Disruption Recovery Once the disruption is discovered, how does a firm effectively recover from a disruption? Supply Chain Redesign How can a company strategically re-design its supply chain over time to become more resilient and avoid or easily mitigate future disruptions?

Disruption Discovery Supply Chain Redesign

Disruption Recovery

Disruption Discovery and Recovery

Impact of Disruption ($, Customer Account, Market share) Impact (B)

The key is prediction. This could eliminate the possible disruption or allow planning that minimizes discovery and recovery time.
Disruption Discovery and Recovery time (B)

Disruption Amplifiers (Globalization and Complexity)

Disruption Discovery and Recovery time (A)

Excess Resources
Impact (A)

Visibility Systems

Discovery (A) Recovery (A)

Discovery (B)

Recovery (B)

Time

Supply Risk Disruption Profiles

Detection and response Recovery - minimized Initial Impact

In the future Estimated Ave: $1,200,000

Sustaining Impact = 0

Performance

Full Impact Avoided! Sustaining Impact >0

Initial Impact Preparation Detection and Response Full Impact

At present Ave: $120,000,000

Recovery Disruption Event

Time

Research Conclusions
Visibility is a core element of supply chain risk mitigation. Predictive measures are the key to early discovery. SC Risk Management is needed but difficult to perform (manpower, data collection, clarity of cause and effect, etc.) It must be technology enabled but cant be fully automated must have people interpreting the data.

Analytics Drive the Power of Information

Scenario modeling & root cause analysis
Enterprise Performance

RROI

Our Risk Model And Approach

How can I act on this insight? What is the best that could happen ?

Optimization

Predictive modeling Descriptive modeling Reports Data Cleansing & & OLAP Why did Raw Classification data

What will happen ? it happen ?

ROI

What happened (hindsight)?

Data Information Knowledge Intelligence

Insight Vs. Hindsight

Searched for Predictive Models

Research questions for 2005-7:
What are the precursors (predictors?) of these events? What are the mitigation actions?

Participated in 2005-7 Research: Dr. Kevin McCormack Dr. Robert B. Handfield, NC State. Sherry Yu Zhao Jing Goa and several master student research teams from NC State

Supply Risk Model

Using the Model
Boston Scientific Freightliner Chrysler Shell

Sample of Companies that participated in the base research:

GM Boston Scientific Bechtel Halliburton Bank of America Chevron Texaco John Deere Progress Energy Engelhard

Supply Chain Risk Perspectives

Companys Environment

Suppliers Environment

Customers Environment

Suppliers

Supplier Facing

Company

Customer Facing

Customers

Relationship Risk Supplier Performance Risk Human Resource Risk Supply chain disruption risk Supplier Environment Risk Disaster Risk Supplier Financial Risk Regulatory Risk

Internal Facing Operational Risk Technical Risk Financial Risk Legal Risk Environmental Risk HR / Health and Safety Risk

Market Risk Brand / Reputation Risk Product Liability Risk Environmental Risk

SC Risk Assessment Units of Analysis

s
Interactions and Relationship

s
s
Supplier Environment

s s

SC Network Organizer

s
Commodity Category

Supplier Attributes
Supply Chain Network:
A complex adaptive supply network is a collection of firms that seek to maximize their individual profit and livelihood by exchanging information, products, and services with one another (Choi et al., 2001). Choi, T.Y., Dooley, K.J., Rungtusanatham, M., 2001. Supply networks and complex adaptive systems: Control versus emergence. Journal of Operations Management 19 (3), 351

SC Risk Assessment Event Probability

s
Event Probability What is The likely hood of a SC Disruption event in this Specific network? (experts)

s
s s s

SC Network Organizer

s s
Supplier Attributes and Environment Risk Index (RI) What are the behaviors and attributes of the supplier, the interactions and the relationship that increase or decrease the event risk index (survey and analysts review)

Predictive Supply Risk Assessment

Supply Chain Network/Categories to be measured
s s s
Supplier Environment
Environmental

Interactions and Relationship

Performance Relationship

The customers reputation with suppliers is also a critical factor.

s s s
Supplier Attributes
Human Resources

Geographic, market, transportation, etc.

SC Network Organizer

Supply Chain Disruption Financial Health

Copyright 2007 DRK Research, a partner with SAS

Structuring the Relationships of Supply Risk

CAUSES
(Categories of Predictive Measures) Relationship

DISRUPTION EVENTS
Misalignment of Interests

CONSEQUENCES
(Impacts)

Sudden Loss of Supplier

Finished Goods Shipments Stopped

Performance Supplier Attributes

Quality, Delivery, Service Problems

Supplier Union Strike, Ownership Change, Workforce Disruption

Recall for Quality Issues Locate and Ramp Up Back up Supplier Emergency Buy and Shipments Emergency Rework and Rushed FG Shipments

Human Resources

EFFECTS Revenue Losses and Recovery Expenses

Supply Chain Disruption

Supplier Locked Tier II Stoppage Supplier Bankruptcy (or financial distress) Disasters (Weather, Earthquake, Terrorists)

Situational Factors

Financial Health

Reputation
Market Share Loss

Environmental

OTHER IMPACTS Foregone Income

Copyright 2007 DRK Research, a partner with SAS

Why are there so few questions in the survey?

Statistical or logical Relationship to the question selected for use in the survey.

R R R

Associated Factors (survey questions) that track with the indictor

Statistical Indicator : the question selected for use in the survey. It represents the entire Group of factors.

R R
R

How do all the factors influence the score in the survey?

Statistical or logical Relationship to the question selected for use in the survey.

Statistical Indicator : scored 15. The score is higher or lower depending on how many relationships are perceived (by the participant) as being in place or not. Also, how institutionalized they are.

R R
4/5

Associated Factors (survey questions) that track with the indictor

R R
R

Statistical or logical Relationship perceived as not in place or not institutionalized.

Supply Risk - Information Sources

Human Resources

Supply Chain Disruption

Tier 2 suppliers Material availability Miscommunication

Employee turnover Senior position turnover

Environmental Risk Market Dynamics Transportation Risk

Labor unionization Pay Position

Merger & acquisition

Location Risk Regulatory change

Process change
SC disruption history Insurance data

Information Types
Risk Analysts Review Supplier Survey Results Internal Co. Information Third Party Information
Financial Health Financial data sharing Business performance Financial Indicators External Financial data

Performance Accreditation Technical support

Relationship
Co. spend/ Supplier revenue Critical Info Sharing Supplier Reputation

Responsiveness
Upside Flexibility Quality

Co spend leverage

Delivery

SCRM Process
Supply Risk Management
Mitigation Planning Planning VP SCM
Assign Risk Management Strategy and Guidelines 0010.8b Review and Adjust Strategy and Program 0010.11d Review/Approve Risk Mitigation Actions

Implement & Sustain

0010.13b Review, Revise Reassess

Risk Program MGMNT

0010.1 Develop Program and Plan

0010.2 Set Priorities Assign Resources

0010.8a Monitor and Manage Program

Data Collection
0010.5a Set up and Distribute Survey 0010.6 a Interview Suppliers and ID Part No. 0010.7 Gather Spend, Perf Data and Rev impact

Analysis and Reporting

0010.9 Analyze Results, Validate, 0010.10b Develop Risk Mitigation Actions

0010.11c Review/Adjust Risk Mitigation Actions

0010.12c Monitor Rollout, Adjust

0010.13a Review, Revise Reassess

Risk Analyst

0010.3 Define Target Value Chain Plan Assessment

0010.4a Gather contact Info and pre-survey Feedback

0010.11b Propose Risk Mitigation Actions

BI/MI

Commodity Manager

0010.3 Define Value Chain Plan Assessment

0010.4b Provide pre-survey Feedback

0010.7 Gather Spend Data and Rev impact

0010.9 Review Validate Results

0010.10a Develop Risk Mitigation Actions

0010.11a Propose Risk Mitigation Actions

0010.12a Rollout, Implement & Sustain

Supplier Preparation Technology

0010.4b Provide pre-survey Feedback

0010.5b Complete Survey

0010.6 b Complete Interview

0010.11a Propose Risk Mitigation Actions

0010.12a Implement And Sustain

Phase III
SAS SAP SAS SAS Sas SAS SAS

10000

No. of Suppliers/Bil. $ Spend

Highly Competitive (High Buyer Power) High Supplier Economic Risk 5000

Highly Complex / Competitive (High Buyer Leverage) High Supplier Performance Risk

Concentrated (High Supplier Power)

Concentrated / Invested (High Supplier Power)

High Price/Availability Risk

0 5000

High Price/Performance Risk

10000

No. of Supply SKUs or parts /Bil. $ Spend

H Supply Risk Management Road Map

Supply Network Optimization

Risk Managed Revenue and Improvements

Definition, assessment, advanced prediction, advanced (multi-tier) network monitoring and advanced (multi-tier) network redesign - improvement actions.

Supply Network Expansion

Definition, assessment, advanced prediction, network monitoring and network redesign - improvement actions.

Multiple Category Expansion

Definition, assessment, basic prediction and category and cross category redesign - improvement actions.

Single Category- Pilot

Definition, assessment, basic prediction and key supplier focused redesign improvement actions.

L L
Copyright 2007 Dr. Kevin McCormack

No. of Suppliers under SRM