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Supply Chain Risk- Best practices for
exposure management
LAUREANO ALVAREZ
Senior Risk Expert
McKinsey
w w w. k u w a i t e r m . c o m
Supply chain failures have significant and lasting negative
impact on the company
Overall cumulative average abnormal returns1
%
0,5
Disruption date
Time to disruption, working days
0,0
7x actual loss
-0,5
Decline in market cap
10x actual loss is 12x actual loss
after 120 days
Actual loss =
0.16% of market
capitalization
-1,0
-1,5
-2,0
-2,5
-40
-20
0
20
40
60
80
100
120
1 Based on sample of more than 350 operational loss events, normalized for industry performance
SOURCE: McKinsey Risk Management Practice
5
In recent years, companies have faced high levels of risk
in their supply chains … and these risks are increasing
As the nature of supply
chains have evolved …
▪
Globalization and
new markets
▪
Massive gains in
productivity and
efficiency
▪
Just-in-time supply
chains
▪
Increased
automation
▪
Consolidation of
suppliers
▪
Offshoring
… the amount of risk in supply chains continues to increase
▪
70% believed they
are at more risk
from supply chain
issues (e.g., business
partners going bust)
compared with a year
ago
SOURCE: McKinsey Risk Management Practice
▪
65% believed levels
of operational risk
have increased in
the past year
▪
85% believe greater
disruptions next
year
▪
Around half stated
that redundancies
and cost reductions
have affected the
effectiveness of dayto-day operations and
increased
operational risk
6
Best practices in supply chain risk management
▪ Clear understanding of
▪
the culture gaps …
openly discussed
Nurtured culture with
bias toward acting,
impact, and continuously
improving
5
Risk culture and
performance
transformation
▪ Insight into the risks that really
1
4
▪ Embed SC risks in
▪
▪
governance … from
board down
Adequate resource
levels to manage risks
Roles and
responsibilities aligned
Risk
organization and
governance
Risk
management
framework
▪ Explicit risk appetites (in
Strategy
and risk
appetite
3
Risk-enabled
key decisions
▪
2
▪ Mitigation action decisions optimized with risk-informed
▪
matter
– Objectives at risk (production,
revenues, environmental)
– End-to-end supply chain
(both internal and external)
– Cascading reports lead to
action
Insight
and risk
transparency
▪
terms of objectives at Risk)
Standard, measurable way to
discuss exposure
– Concentration risk
– Considering impact?
Likelihood? Preparedness?
Strategy informed by risk
insights, including explicit
consideration of natural owners
approaches
Strong links between SCRM, key BUs, and other functions
SOURCE: McKinsey Risk Management Practice
7
1 Critical risks are identified from a roster of risks that
can affect different parts of the value chain
Sources of risk are analyzed
…
Roster of 50-60 standard sources
of risk from the different functions
… to prioritize the top 8-10 risks
that can affect the supply chain…
… which are then analyzed in detail
to understand knock-on effects
Prioritization requirements
▪
Cross-functional team discussion
▪
Quantitative assessment
Detailed exposure analysis
Upstream
Midstream
Value
chain
-
Impact
Timeline for recovery
Knock-on effects across the
value chain
Refining
Petchem
Each of the top 8-10 risks is
analyzed based on its impact to
the key supply chain objectives of
demand, cost ,and quality and its
knock-on effects
Exports
SOURCE: McKinsey Risk Management Practice
8
1 Risk prioritization requires to assess exposures against
each of the primary supply chain risk objectives
Primary supply chain objectives-at-risk
A
Other
Environmental: Comply with
requirements for a particular site
or activity
Health&Safety: Comply with
requirements to minimize any
HS risk
Quality: Comply with regulatory
requirements for product quality
D
SOURCE: McKinsey Risk Management Practice
Production: Meet a specified
level of end-customer demand
within a specified lead time
B
Supply: Obtain specified level
of feedstocks and raw material
supply to meet production
C
Margin: Achieve a
specified level of
Margin/contribution to
shareholders in a
specified time period
9
2 Everything is about risk appetite
It is not about how much
risk you can take on …
… but rather how much risk
you actually want to bear
SOURCE: McKinsey Risk Management Practice
10
2 Exposures impact need to be compared with
risk appetite
Assess exposure
importance to key supply
chain objectives …
… to risk-categorize all
exposures…
Production
H
Financials
Financials
Production
M
A
Other
L
L
M
H
Production
Reputation
Consider exposures
contribution to enterprise
objectives around
production, financials,
reputation
… and compare with risk
appetite by supply chain
objective
Use the importance of a
exposure to key enterprise
objectives to categorize them
SOURCE: McKinsey Risk Management Practice
D
B
Supply
C
Margins
Set thresholds around risk
appetite for key supply
chain objectives
11
3 Decisions need to be optimized with risk-informed
approaches: risk appetite and cost-benefit trade-off
Mitigation option
Mitigation decision
Mitigate (reduce risk
impact)
Supply chain risk
exposure
Not mitigate
(assume risk)
Buy insurance (transfer to
3rd party)
Build flexibilities in the
value chain (reduce
impact)
Build redundancy in the
value chain (reduce
impact)
Increase maintenance
(reduce likelihood)
Do we want to assume this
risk? How does it compares
with our risk appetite?
SOURCE: McKinsey Risk Management Practice
What is the preferred
option? How is the cost
benefit trade-off?
12
4 3-level governance structure to oversee Supply
Chain Risk
 Quarterly meetings with 3-hours dedicated to Risk topics
Top
management
team (BU-level)
 Oversees Supply Risk Management activities,
 Approves strategic risk mitigation measures & high investments
 Regular meetings fully dedicated to Risk topics
Supply Risk
Management
Core team
 Responsible for developing and delivering the overall supply risk strategy
 Assess Supply Risks in a timely and effective manner
 Consists of operational experts supply chain organization
Operational
team
 Responsible for following the supply risk process and executing the
activities
 Tracks and communicates changes in the supply chain to the core team &
top management
Multidisciplinary approach is required to the complexity
and the inter-linkages of the value chain
SOURCE: McKinsey Risk Management Practice
13
5 Weaknesses in risk culture help create the
circumstances where serious failures can occur
Isolated management, a ‘fear of
bad news’, prioritizing launch
objectives over 100% confidence in
safety. Result: shuttle break-up from
previously-flagged failure
Hierarchical management
structure, risk insights not
communicated up the line, workers
indifferent to making changes.
Result: an explosion that killed 15
people and billions of
costs/compensations
SOURCE: McKinsey Risk Management Practice
14
5 Risk Culture is critical to manage Supply Chain Risk and
requires: timely information sharing, rapid elevation of
emerging risks and willingness to challenge practices
Risk culture McKinsey framework
Individuals do not challenge
each others’ attitudes, ideas,
and actions
Management and employees
feel inhibited about passing on
bad news or learning from
past mistakes
People believe that their
organization is immune/
insulated from risk as a result
of its superior position or
people
Warning signs of both internal
or external risks are not
shared
Leadership has not
communicated a clear risk
appetite or has presented a
coherent approach or strategy
The organization fails to
understand the risks it runs or
thinks that’s the preserve of
risk specialists
Challenge
The organization sees external
changes but reacts too late and/or
is in denial about innovation or
impact of change
Speed of
response
Openness
Acknowledgement
Confidence
Communication
Responsiveness
Definition:
The norms of behavior
within an organization that
determine collective risk-taking
and the ability to identify,
understand, and act on the
organization's current
and future risks
Transparency
Respect
Tolerance
Level
of insight
SOURCE: McKinsey Risk Management Practice
Adherence
to rules
Level
of care
Cooperation
A reluctance to react to situations
or to not care about the outcome
either due to bad faith or
incompetence
Individual units take risks or
embrace projects that benefit them
or are not in line with organizational
risk appetite
People’s’ risk appetites are
misaligned with the organization’s,
potentially resulting in fraud
15
Concluding Remarks
 End-to-end view of the supply chain is required to assess
top exposures and understand cascading effects
 Risk exposures on different supply chain objectives need to be compared
with company risk
appetite
 Decisions need to be optimized with risk-informed approaches:
risk appetite and mitigation cost-exposure reduction trade-off
 A multidisciplinary approach is required because of the
complexity and the inter-linkages of the value chain
 Risk Culture is critical to manage Supply Chain Risk
17