Supply Chain Vulnerability, Risk, Robustness & Resilience Helen Peck, Cranfield University In Mangan, Lalwani & Butcher, Global Logistics and Supply Chain Management John Wiley & Sons [2008] Finland 2010 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 Finland 2010 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 Finland 2010 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 Finland 2010 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 Finland 2010 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 Finland 2010 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 Finland 2010 Level 3: Organization & InterOrganizational 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 Finland 2010 Level 4: Macro-Environment • Political – Green movement – Wars • • • • Economic Social Technological RISK MANAGEMENT – Risk avoidance – Contingency planning Finland 2010 Supply Chain Risk Categories 6 sources CATEGORY RISK NATURE External Natural disaster, plant fire, disease & epidemics POLITICAL SYSTEM “ War, terrorism, labor disputes, regulations COMPETITOR & MARKET “ Price, recession, exchange rate Demand, customer payment New technology, obsolescence substitutes AVAILABLE CAPACITY Internal Capacity cost, supplier bankruptcy INTERNAL OPERATION “ Forecast inaccuracy, safety Bullwhip, agility, on-time delivery Tradeoff: inventory/fill rate Quality INFORMATION SYSTEM “ System breakdown Distorted information Integration Viruses/bugs/hackers Finland 2010 Supply Chain risk management process P. 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 Finland 2010 Risk Reduction Strategies C.S. Tang Journal of Logistics: Research and Applications 9:1 [2006] 33-45 1. 2. 3. 4. Identify different types of risk Estimate likelihood of each event Assess potential loss from major disruption Identify strategies to reduce risk Finland 2010 Robust Strategies Tang [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 Finland 2010 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 Finland 2010 Samsung Electronics ERM MS Sodhi, S Lee Journal of the Operational Research Society 58 [2007] 1430-1439 Finland 2010 Samsung Risk Management • Supply chain risks mitigated by – Keeping inventories low – Keeping capacity flexible – Redundant suppliers for non-core components – Use of information technology Finland 2010 Specific Risk-mitigation Steps Supply 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 Finland 2010 Specific Risk-mitigation Steps Demand 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 Finland 2010 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 futures Euros 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 Finland 2010 Rolls Royce Early Supplier Involvement G.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% Finland 2010 Rolls Royce ESI process 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Establish customer need Identify EDI project Develop component target costs Prepare ESI project & milestones Inform business units Determine commodity breakdown Develop potential supplier list Develop business objective Supplier workshops Review expectations with suppliers Conduct ESI workshop Value engineering, evaluate prices & technical Evaluate & score suppliers Make recommendations Inform suppliers Develop working agreements & implement Finland 2010 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 Finland 2010 Risk of Disintermediation J.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 Finland 2010 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 Finland 2010 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 Finland 2010