Supply Chain Risk Management

SUPPLY CHAIN RISK MANAGEMENT

Risk, mitigation strategies and resilience of the SC

May 2017 | Marco Pimpo

Supply Chain Risk Management

SUPPLY CHAIN RISK MANAGEMENT

Risk, mitigation strategies and resilience of the SC

Summary:
Relevance of Supply Chain Risk Management
Risk in the supply chain - the example of purchasing
Concepts associated to Risk Management
Types of Risks and Mitigation Strategies
Decision making in Supply Chain Risk Management
May 2017 | Marco Pimpo
SCRM| Risk, mitigation strategies and resilience of the SC
Relevance of Supply Chain Risk Management
Supply chain vulnerability

What has disturbed our operations in the past?

Which vulnerabilities affect our supply chain?
What were the circumstances of the near misses in the past?
How would shortage of a given material affect us?
How would the forced shut down of a distribution centre affect us?
Could we withstand the loss of strategic supplier?
May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Relevance of Supply Chain Risk Management
Supply chain vulnerability

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC
Relevance of Supply Chain Risk Management
Characteristics of modern Supply Chains

globalisation
specialisation of production units
centralised distribution
supplier base reduction
trend towards production outsourcing
rewarding goal seeking regardless of added risks
May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Relevance of Supply Chain Risk Management

Quotas 05
Hurricanes
Floods
Blizzards
Post 9/11 etc.

Added visibility of SCR

Olympics
08

Subprime
Earthquakes Crisis
& Tsunamis

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC
Relevance of Supply Chain Risk Management

Fonte: McKinsey May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Risk in the supply chain - the example of purchasing
Kraljics matrix
Risk underlies product classification in High
Kraljics matrix
Portfolio-based models have buyer/supplier Leverage Strategic
power and dependence balances implied
Importance of
Relationships are characterised by purchasing
imbalance in bargaining power
Higher attention given to risk management Noncritical Bottleneck
in portfolio-based approaches in general

Low High
Risk Complexity of supply
market
May 2017 | Marco Pimpo
SCRM| Risk, mitigation strategies and resilience of the SC
Concepts associated to Risk Management
Risk ...the potencial occurrence of events associated with inbound supply that
can have detrimental effects on the firm... (Ganguly e Guin, 2007, p. 87)

Risk source ...environmental, organisational, or supply chain-related variables that

cannot be predicted with certainty and that impact on the supply chain
outcome variables... (Jttner et al., 2003, p. 200)

Risk mitigation ...methods which can be used to avoid, contain or prevent risk
consequences, which are negative impacts on the achievement of
strategy organisational goals (Li e Barnes, 2008, p. 255)

Risk management ...the process whereby decisions are made to accept a known or assessed
risk and the implementation of actions to reduce the consequences or
probability of occurrence... (Li e Barnes, 2008, p. 255)

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Concepts associated to Risk Management

The concept of Risk

Probability and Impact: two dimensions identified in the concept of Risk

Relevance of the characteristics of modern supply chains.

Tendency to increased frequency of natural catastrophes.

Two other dimensions have been added often: speed and frequency.

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC
Concepts associated to Risk Management

Concept of Risk
1.Degree of probability of occurrence
Two fundamental elements
2.Potential impact or cost

Concept of Risk Management

1.Risk identification

Phases of Risk Management process 2.Risk assessment

3.Decision and implementation of risk mitigation
strategies
4.Risk monitoring
May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Supply chain risk management process
1 - Profile supplier base

Identify each purchase item - draw its flow chart, from its remote origin
identifying each supplier (actual or potential).

Identify strategic materials - bearing in mind:

expenditure,

specifications,

number of suppliers,
consequences of stockout, etc.
May 2017 | Marco Pimpo
SCRM| Risk, mitigation strategies and resilience of the SC
Supply chain risk management process
1 - Profile supplier base (contin.)

Understand suppliers operation - role of structures visits; analysis of

different aspects of their operation:

cost control,
financial rigour of management,
operational processes,
robustness of SCM practices,
use of price control contract
long term goals, etc.
terms,

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Supply chain risk management process
2 - SC vulnerability assessment

Supply risks:
identify alternatives;
estimate replacement time; analysewhether legal
assess adequacy of safety stocks; environment can affect or estop
a new supplier/material;
check for alternative technology;
develop contingency plans, etc.
assess financial security of
supplier;
May 2017 | Marco Pimpo
SCRM| Risk, mitigation strategies and resilience of the SC
Processo de gesto do risco na cadeia de abastecimento
2 - SC vulnerability assessment (contin.)

Demand risks:
number and size of clients;
demand stability (or lack of);
frequency of new products;
obsolescence risk;
barriers to new competition, etc.
May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Supply chain risk management process
2 - SC vulnerability assessment (contin.)

Environment related risks :

political and social stability, etc.;
natural disasters; stability
of the (local) market
exchange rates; for productive factors, etc.

legal environment;

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC
Supply chain risk management process
2 - SC vulnerability assessment (contin.)

Process risks - risk inherent to each SC stage, p.ex.:

crops,

production,

chemical reactions during carriage/warehousing,

security, etc.

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Supply chain risk management process
3 - Assess the implications

Bearing all risks in mind, establish a priority scale, based on adequate

criteria.

Consider:
probability and duration of the disturbance;
possible impact in costs;
different scenarios, including a worst possible scenario;
possible alternatives their cost/benefit suitability.
May 2017 | Marco Pimpo
SCRM| Risk, mitigation strategies and resilience of the SC
Supply chain risk management process
4 - Identify risk mitigation and contingency strategies

Implement plans to reduce the probability.

Risk mitigation includes loss prevention and the development of acceptable
alternatives.

Define clear procedures with clear alert signs that trigger alternative
solutions.

Planning alternative solutions and calculating their cost reduces the cost of
risk mitigation.

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Types of Risks and Mitigation Strategies
Risks associated to Strategies...
Shortage Avoidance
Inaccurate forecast Control
Quality Dual sourcing
Exchange rates swings Hedging
Legal issues Local sourcing
Suppliers financial status Postponment
Security Security
Transit time Share
Suppliers opportunism Speculation
Survival Transfer
Tools and stock ownership Stock
Cultural issues
Oil price swings
Source: adapted from Manuj and Mentzer, 2008 and Jttner et al. 2003
Source: adapted from Manuj and Mentzer, 2008

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC
Supply chain risk management process
5 - Perform Cost/benefit analysis

Having identified mitigation stratagies a cost/benefit analysis must be

carried out for each alternative.

Analysis of return on investment - comparing investment on mitigation

with possible future loss.

Risk analysis and cost-benefit analysis should be cross-functional joint tasks

(technical dpt., quality dpt., commercial, financial, etc.).

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Supply chain risk management process
6 - Achieve management support and implement the plan

Create formal plan for risk prevention and mitigation.

Clearly identify risks and strategies.
Create calendar for verification of progress and revision of contingency
plans.

Engage top management on the process.

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC
Types of Risks and Mitigation Strategies
Different factors can be relevant in the decision process

Caracteristics of the industry.

Configuration of the supply chain.
Strategy adopted by the organisation.
Characteristics of the decision-maker.
The decisions impact on the performance goals of the decision-maker.
Actual risk and perceived risk may be very different.
May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Decision making in Supply Chain Risk Management
Dynamic nature of SCR

Global sourcing increased continuous and fast change in risk management.

Proper perception and management of risk are hampered by continuous
and fast change.

SCR has a strong contextual nature: it is directly linked to time and place
(e.g.: risk associated to suppliers financial condition, risk linked to oil price
swings, risk associated to cyber-attacks).

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC
Decision making in Supply Chain Risk Management
Dynamic nature of SCR

Internal Risks - more likely to be addressed with Control strategy.

External Risks - more likely to be addressed with Transfer/Share, Dual
sourcing or, ultimately, Avoidance strategies.

What can a strategy of risk transfer really achieve?

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

Decision making in Supply Chain Risk Management
Dynamic nature of SCR

The relevance of bargaining power:

1. Lack of bargaining power as a factor that increases risk (supplier using an
ABC logic)
2. Consolidation of purchasing volume as a strategy for risk management.
3. Some strategies may depende of having considerable bargaining power.

May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC
Decision making in Supply Chain Risk Management
Dynamic nature of SCR

Concept of Business Continuity has expanded from its original field of

disaster recovery strategies in IT.

Based on the setting up of a Business Continuity plan.

Best practices recommend:

(a)continuous practicing, simulation of different events, systematic revision of
contingency plans.
(b)careful consideration of the management of the post-event recovery
stage.
May 2017 | Marco Pimpo

SCRM| Risk, mitigation strategies and resilience of the SC

References and further reading
Brindley, C. (Ed. . (2004). Supply Chain Risk. (C. Brindley, Ed.). Aldershot: Ashgate.
Ganguly, K. K. ; Guin, K. K.(2007). A Framework for assessment of supply- related risk in supply chain. The Icfai Journal of
Supply Chain Management. IV 4. p. 86-98.
Jttner, U., Peck, H., & Christopher, M. (2003). Supply chain risk management: outlining an agenda for future research.
International Journal of Logistics Research and Applications, 6(4), 197210.
Kouvelis, P., Dong,, L, Boyabatli, O. & Li, R. (Eds.), The Handbook of Integrated Risk Management in Global Supply Chains.
Hoboken, NJ, USA: John Wiley & Sons
Li, X., & Barnes, I. (2008). Proactive supply risk management methods for building a robust supply selection process when
sourcing from emerging markets. Strategic Outsourcing: An International Journal, 1(3), 252267.
Manuj, I.; Mentzer, J. T. - Global supply chain risk management strategies. International Journal of Physical Distribution &
Logistics Management. 38:3 (2008). p. 192-223.
Ritchie, B., & Marshall, D.V. (1993). Business Risk Management. London, UK: Chapman Hall.
Tang, C. S., & Zimmerman, J. D. (2009b). Managing New Product Development and Supply Chain Risks- The Boeing 787
Case. Supply Chain Forum - An International Journal, 10(2), 7486.
Wu, T., Blackhurst, J., & (Eds.). (2009). Managing Supply Chain Risk and Vulnerability. (T. Wu & J. Blackhurst, Eds.). London:
Springer London
Zsidisin, G. & Ritchie, B. (Eds.), Supply Chain Risk: a Handbook of Assessment, Management, and Performance (p. 349). New
York: Springer.
May 2017 | Marco Pimpo
Supply Chain Risk Management

SUPPLY CHAIN RISK MANAGEMENT

Risk, mitigation strategies and resilience of the SC

Thank you!

pimpao@ua.pt

Marco Pimpo May 2017 | Marco Pimpo