20100322uvtsupplychainriskmanagementguestlecture-1292846105823-phpapp02

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Supply chain risk management& resilience

Guest lecture | Tilburg University | 31 March 2010

Robbert JanssenE-mail: [email protected]


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31 March 2010Robbert Janssen, TNO | Supply chain risk management and resilience2

Outline

Short introduction

What is supply chain risk? Why is it important? Case: Nokia vs. Ericsson Trends and developments in supply chain management Supply chain risk and its sources Risk perception Supply chain disruptions Supply chain vulnerability

Supply chain risk management & resilience How to manage and mitigate risks?

Reconciling supply chain risk with supply chain management

Time for questions


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Introduction

Robbert Janssen Logistics & Operations Management

Writing master thesis at TNO Mobility & Logistics, Delft

Topic: empirical investigation into supply chain risk management

and the vulnerability of supply chains

Questionnaire with EVO and TLN, distributed to firms in the

Netherlands

+/- 325 responses

Some results in this presentation


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Recent years

Source: Yahoo Finance


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Recent years.


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Most important risks faced by multinational firms

Aon Global Risk Management Survey 2009 Survey among 550 multinational companies (> $ 1 billion

revenue)

1. Economic slowdown

2. Regulatory / legislative change3. Business interruption risks4. Increasing competition5. Raw materials / commodity prices6. Damage to reputation7. Cash flow / liquidity risk8. Supply chain failure9. Third party liability10.Difficult to attract top talent

Supply chain risksmentioned three timesin Top 10!


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Risks in supply chains?


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Natural disasters reported 1900-2008

Source: EM-DAT (2010)


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It does not happen to our company

9


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Risks in the supply chain an exampleThe Albuquerque accident

March 2000 Philips semi-conductor plant in Albuquerque, New Mexico, USA

Sole-supplier of radio-frequency chips to Nokia and Ericsson

Lightning strike lead to small fire in clean rooms at Philips plant

Sprinkler installation activated in clean rooms It took 3 weeks before production was up and running again

After 6 months, production yields were only 50%

It took years before new equipment was delivered and installed


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2 very different responses to the accident

Did not recognise threat for weeks

When they tried to recover: entire

worldwide supply for RF-chips was

committed to Nokia

Outcome Missed critical product introduction

Business interruption costs: $ 200

million (insurance paid)

Annual P/L statement: $ 400

million loss

Ceased making cell phones underindividual brand ( became Sony-

Ericsson)

Immediately recognised threat

Actively responding, sending 30

engineers to restore supply from

Philips-plant

Secured entire worldwide capacity of

Philips-chips Actively searching for other suppliers

all over the world

Redesigning existing handsets to use

different chips

Outcome Achieved sales targets

Increased market share

Source: Normann & Jansson (2003), Sheffi & Rice Jr. (2005)


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Some developments and trends in supply chainmanagement

Globalisation and global sourcing Longer, more complex supply chains

Volatile markets

Strong focus on achieving efficiency and economies of scale Lean, JIT-processes

Centralised distribution and manufacturing

Single-sourcing / reduction number of suppliers

Shorter lead-times and delivery cycles

Working capital optimisation

Outsourcing and off-shoring non-core activities Loss of control

Source: Christopher (2005), Husdal (2009)


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What are the most important developments / trends thatlead to increased risks in the Netherlands?

1. Reliance on IT-infrastructure

2. Increased dependency on customers

3. The economic downturn

4. Increased competition in the market place

5. Legislative changes (compliance)

All these factors can haveconsequences for the supply chain

Source: TNO-onderzoek: Risicos en Kwetsbaarheden in Logistieke Ketens (2010)


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4 constructs that we need to deconstruct

Usually, research in the field ofsupply chain riskconsists of 4

constructs Supply chain risk

Supply chain disruption

Supply chain vulnerability

Supply chain risk management (and resilience)

Supply chain risk management


Supply chain disruption

Triggering event Consequential situation

Supply chain risk

Source: Wagner and Bode (2008)


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Supply chain risk

Risk is a concept with a lot of different definitions

2 main perspectives:

Exposure to uncertainty (everyday usage e.g. it is risky to

drink and drive)

Outcome of an event (e.g. higher total costs and longer lead-times after a fire in a warehouse:

Risk = Probability * Consequences)

What can happen? (risk sources)

How likely is it that it will happen? (probability)

If it does happen, what are the consequences? (consequences)

Source: Jttner et al. (2003); Zsidisin and Ritchie (2008)


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Analysing supply chain risks

Firms commonly visualiseunforeseen and unwanted events

by means of a risk-matrix

A risk-matrix has 2 dimensions:

probability and consequences

(impact)

Problem: it relies heavily on risk

perception.

Source: Sheffi & Rice Jr. (2005)


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Risk perception

Depends on:

Time/moment

Experience/knowledge

Place

Risk attitude / appetite

Position

Possibilities to decide

Big bang or small incidents
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Supply chain risk sources

Source: Christopher & Peck (2004)

Where can risks originate from?

Environmental risk

Supply risk

Risks internal to the firm

Process risk Demand risk

Control risk

Supply risk Process risk Demand risk

Control risk


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Supply chain risk sources

Source: Christopher & Peck (2004)

Where can risks originate from?

Environmental risk

Supply risk

Risks internal to the firm

Process risk Demand risk

Control risk

Supply risk Process risk Demand risk

Control risk

Machine break-downEmployee strike

Order quantity policiesQuality control

Volatile customer-demandWrong order-forecast

Natural disastersPolitical instabilitySevere weather conditions

Bankruptcy of supplierQuality problems at supplierTransportation failure


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Supply chain disruptions

Supply chain disruptions are unplanned and unanticipatedevents that disrupt the normal flow of goods and materials within

a supply chain

Supply chain disruptions: the occurrence of risk

Consist of: a triggerand the situation that emerges afterwards.

Source: Craighead et al. (2007), Wagner and Bode (2008)

Time

Triggering event

Supply chain

riskOccurrence of risk

Consequential situation

Supply

chain

disrupt ion

Exposure to risk


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Iceberg of disruptions

Worldwide known disruptions

9/11, novel influenza H1N1

Region / country

Piracy, Foot and mouth disease, Q-fever

Individual (chain) disruptions

Fire, strikes

Disruptions that took place

but were not in the press

almost-disruptions

Big customer threatens to leaveInsolvable supplier saved frombankruptcy

Huge reservoir withpotential disruptions


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Most frequently occurring disruptions in 2008-2009

1. Sudden drop in customer demand

2. Quality issues at the supplier

3. Poor logistics performance of suppliers (delivery dependability)

4. Severe weather conditions

5. IT-infrastructure problems (hardware, software)



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Where did the disruptions come from?

Most of the disruptions that our company has to deal with.

6

41

41

243

0 50 100 150 200 250 300

No answ er

Originate from our company

Originate from the

environment (e.g. natural

disaster, legislative changes)

Originate from our

suppliers/customers and/or

the supply chain



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The disruption profile

Source: Sheffi & Rice Jr. (2005)


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What are the consequences of a disruption?

Higher costBad performanceLost salesLower profitsBankruptcy

Fear, dangerDamage to reputation

For whom?

The company itself

SuppliersCustomersSociety


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Toyota

Toyota recall Estimated costs US$ 2 billion

All cars checked and repaired

if needed

Biggest challenge now:

regaining confidence

Could also be an

opportunity

Source: Spitsnieuws 24 March (2010)


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Consequences of supply chain disruptions

Impact of disruptions on supply chain performance: Disruptions in the supply chain supply chain performancedecreases

Higher costs, lower delivery dependability, lower service level etc.

Impact of disruptions on stock-related metrics and financial-statement

metrics: 10% decrease in shareholder wealth (1 day before actual disruption

+ day of the disruption) 40% decrease in stock returns (observed 1 year before actual

disruption until 2 years after disruption)

107% drop in operation income 114% decrease in return on sales 93% drop in return on assets

Source: Hendricks and Singhal (2003, 2005a, 2005b) , Wagner and Bode (2008)

The consequences of disruptions are severe but are they the same

for all firms?


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The susceptibility of a supply chain towards the harm of aparticular supply chain disruption

The vulnerability of the supply chain is a function of the

characteristics of the supply chain. This means that the structure

of the supply chain is an antecedent of supply chain vulnerability.

Supply chain

disruption

Supply chain

risk

Supply chain

vulnerability

Source: Wagner and Bode (2008)


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Drivers of supply chain vulnerability

The characteristics of the supply chain structure Supply chainvulnerability drivers

Some examples: Complexity of the supply chain (global sourcing) Density (NL: dichtheid) of the supply chain Single sourcing (Nokia, Ericsson example) Lean and JIT production philosophies Centralisation of warehouse/manufacturing locations Dependency on suppliers / customers Dependency on IT-infrastructure, electricity etc.

It is about conscious decisions regarding how you design thesupply chain

Source: Craighead et al. (2007), Wagner and Bode (2008)


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Example: Density

Dutch Logistics Hotspots 2009 Main ports Amsterdam and Rotterdam

High density regions

Congestion (road, trains, waterways)

Proximity effect (power failure, flooding)

By using these high density regions leads to highervulnerability of supply chains

Source: TNO - Quick scan: overzicht van netwerk logistieke hot spots in Nederland (2009). Falasca et al. (2009)


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Example: Lean and JIT production philosophies

Leaning-down too far can cause higher costs for recovery of adisruption.

However, take care that Just-in-Time does not digresses to Just-

in-Case management

Source: Christopher and Rutherford (2004)


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One construct left

Supply chain risk

Supply chain disruption Supply chain vulnerability

Supply chains are becoming more vulnerable and increasingly

at risk ofdisruption. How can we manage this?

Supply chain risk management (and resilience)


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Supply chain risk management (SCRM)

Activities that firms may engage in to mitigate (i.e. make less severe)the probability of occurrence ornegative consequences of supply

chain disruptions.

Lots of frameworks available, but usually risk management consists of

3 general steps (ISO 31000):

Risk identification Identifying the risks and its characteristics

Risk assessment Ranking risks in terms of probability and consequences (quantifying)

Risk management

Treating the risks and implementing the chosen solution, monitoringthe impact of the risk management solution on the business

performance

Well that sounds pretty easy, doesnt it?Source: ISO 31000


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The problem of risk management:

Its an ostrich business!

Risk management is not sexy, no fun and it costs money.And the benefits are not even sure!


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5 most important barriers towards implementing SCRM

1. The benefits of SCRM are difficult to monetise

2. Focussing on achieving efficiency prevents implementing

SCRM

3. Fear of spreading important business information

4. Limited acceptance that risks go beyond company walls

5. Vulnerabilities of the business must remain secret



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Step 1+2: Risk identification and assessment

Focus and create awareness Create a cross-functional risk team

Determine potential risks (also unobservable

risks)

Assess (quantify) risks and rank

Methods

Brainstorming, elevator pitches

Risk-matrix

Failure Mode & Effect Analysis

(FMEA)

Source: Lammers, Ploos van Amstel and Eijkelenbergh (2009)


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Failure Mode and Effect Analysis (FMEA)

Method for looking at potential failure modes and its effectsdeveloped in the 1940s by the U.S. Army

1. Determine scope of analysis

2. Create a multi-disciplinary team

3. Describe processes4. Describe potential failures (risks)

5. Determine the expected Effects of these failures (scale 1-10)

6. Determine the Probability of the failure (scale 1-10)

7. Determine the ability ofDetection of the failure (scale 1-10)

8. Calculate Risk Priority Number (RPN = 5*6*7)

9. Choose target value RPN

10.Eliminate

11.Recalculate RPN and make cost-benefit analysisStep 3 of risk

management


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Film clip example of creating awareness and focus

Trade and wholesale firm for electronics and technical installation

material

Intermediary between 750 suppliers and 15,000 customers

280,000 SKUs - 90,000 items in stock

Logistics structure: 2 distribution centres, 24 transhipment points Daily: 60,000 order lines, 24hr delivery by 240 trucks to 9,000

delivery addresses

11 February 200809.00 am: normal bi-weekly logistics team

meeting


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Step 3: Risk management

Treating the risks by means of a strategy Five classic strategies (but there are others) Avoid eliminate possibility of event Reduce minimise probability of occurrence Transfer shift risk to third party (e.g. insurance) Retain bear risk and do nothing Exploit reduce the impact

Subsequently, perform cost-benefit analysisof risk treatment and keep monitoring

Source: DeLoach (2000), Husdal (2009)


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Cost-benefit analysis of risk management


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The only constant is change.

Heraclitus, 600 BC, Greek philosopher

It is not the strongest of the species thatsurvive, not the most

intelligent, but the ones most responsive to change.

Charles Darwin


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Resilienceneeded

Supply chain resilience

Buzzword in the context of SCRM Definition:

the supply chains ability to survive, adapt, recover and grow from adisruption in the face of turbulent change

Dutch synonym: veerkrachtigheid

It is about: having the ability to survive a major disruption andsubsequently recover, adapting to the changing environment.

Focusing on reducing the consequences of a major disruptions (insteadof predicting/estimating probability of occurrence)

Resilience originally was aimed at disruptions that You do not see coming High impact, low probability (HiLo) Affect several parts of the supply chain

Nowadays, an approach forsupply chain risk management

Source: Fiksel (2006), Sheffi and Rice Jr. (2005), Husdal (2009)


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How to become more resilient?

4 categories of measures to become more resilient Redundancy reserve resources (buffer inventories, slack in

the process, insurance policies), comes at an undesirable

premium

Flexibility capabilities (shift production from one plant to the

other, standardise processes, re-engineer products, product

postponement)

Transparency open communication with suppliers and

customers, knowledge of the current status of operations

(enablers: IT in the broadest sense, RFID, GPS, EDI etc.)

Collaboration effectively working together, sharing

(confidential) information (CPFR initiatives)

redundancy transparencyflexibility collaboration

Source: Sheffi and Rice Jr. (2005), Lammers, Ploos van Amstel en Eijkelenbergh (2009)


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Reconciling supply chain risk with supply chainmanagement

The supply chain of tomorrow must deliver varying degrees of sixoutcomes, depending on the customers needs:

Cost efficiency

Responsiveness

Security

Sustainability Resilience

Innovation

There could be other outcomes

e.g. Reliability

Adaptability, key to success

Source: Melnyk, Davis, Spekman and Sandor (2010)


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Summary

Supply chains are exposed to a wide range of risks that aredistinctive for each and every supply chain

Disruptions can have severe consequences, both tangible (highercosts, lost sales etc.) and intangible (reputation, fear etc.)

Supply chain risk management seeks to identify risks, assesstheir impact and subsequently mitigate these risks

Resilience is another perspective for risk management, focusingon reducing the consequences of a major disruption

Supply chain resilience is one of six outcomes that a modernsupply chain should have


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Suggested further reading

Asbjrnslett, B. (2008). Assessing the vulnerability of supply chains, In: Zsidisin, G., Ritchie, B. (Eds.), Supply

Chain Risk: A Handbook of Assessment, Management and Performance, New York: Springer, pp. 15-33

Chopra, S., Sodhi, M. (2004). Managing risks to avoid supply-chain breakdown, MIT Sloan ManagementReview, Vol. 46 No. 1, pp. 53-61

Christopher, M., Peck, H. (2004). Building the resilient supply chain, International Journal of LogisticsManagement, Vol. 15 No. 2, pp. 1-14

Craighead, C., Blackhurst, J., Rungtusanatham J., & Handfield, R. (2007). The severity of supply chaindisruptions: design characteristics and mitigation capabilities, Decision Sciences, Vol. 38 No. l, pp. 131-156

Khemani, K. (2007) Bringing rigor to risk management. Supply Chain Management ReviewVol. 11 No. 2, pp.67-68.

Peck, H. (2006). Reconciling supply chain vulnerability, risk and supply chain management. InternationalJournal of Logistics: Research and Applications, Vol. 9 No. 2, pp. 127-142.

Sheffi, Y., & Rice Jr., J.B. (2005). A supply chain view of the resilient enterprise, MIT Sloan ManagementReview, Vol. 47 No. 1, pp. 41-48

Vanany, I., Zailani, S., Pujawan, N. (2009). Supply Chain Risk Management: Literature Review and FutureResearch, International Journal of Information Systems and Supply Chain Management, Vol. 2 No. 1, pp. 16-33


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Thanks for your attention

Any questions?

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