The Economics of Supply Chain

Risk Management using @Risk

David Inbar & Steven Bechhofer
Minet Technologies
Palisade Risk Conference, London
April 14, 2010

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 A minor problem can have a devastating effect

Nokia
March ‘00
• Successfully
handles the crisis.
• Market share rises
from 27% to 30%.
Philips’s chip • Minimal loss.
Acute shortage
manufacturing Production
in chips for
plant shuts stopped for
Ericsson and
down following months
Nokia
a fire

Ericsson

• Fails to handles the

crisis.
• Market share down
from 12% to 9%.
• Total loss $400M.

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 Lecture Agenda

Part 1 – Supply Chain risk Management

Part 2 – The Economic Mitigation @risk Models

• The Supplier Number Model

•The Sourcing Model

• The Mitigation Prioritization Model

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 Part 1
Supply Chain risk Management

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 Supply chain model

Supplier's suppliers

Suppliers

The
Plants
Organization

Warehouse/
Distribution center

Customers

End customers

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 Possible risks

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 Why is Supply Chain risk management more important today?

1. Supply chain is more important.

2. Riskier.

3. Leaner.

4. Faster.

5. Noisier.
supplier

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 Risk management - Marketing aspect

• Do you have peace of mind?

• Do your supply chain partners have peace of mind?
• Do your customers have peace of mind?

An organization with the right risk management process can assure

peace of mind to his customers and supply chain partners.

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 Types of risks

Accidents Man Made

Force majeure Business failures

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 How events influence the supply chain

A B

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 Warning signs leading to an event

Warning signs
Almost
failure

failure

Almost
Event
failure

Almost
failure

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 Supply chain risks throughout the product life cycle

Wrong strategy

Wrong specification (wrong pricing)

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 Supply chain risks – Supplier vs. customer

• Faulty transmission function between suppliers and customers.

• Purchasing in the wrong currency

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 Supply chain risks throughout the product life cycle

Choosing an unsuitable supplier

• Will not keep the cost targets across time.
• Will not keep the production schedule.
• No capacity for ramp up.
• Supplier with high costs base.
• Supplier with a large Material Exposure Curve.
• Supplier with a small R&D budget.
• Supplier that uses obsolete technologies.

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 The risk management process

Input • Identification Output

•Analysis
•Mitigation (and
Information Lower
implementation) variability

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 Mitigation

Supply chain planning Preparation Event management

•Identifying constraints • BCP • BCP implementation

•Sharing//transferring risks • Practice • Attending to customers

•Improving existing • Organizational culture • Attending to

stakeholders
processes
• Event inquiry
•Contract with the supplier
•Procurement strategy
•Inventory strategy
•Modularity

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 Part 2 – The Economic Mitigation @risk Models

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 A) The Supplier Number Model

• Making a decision between the number of potential business partners can be

extremely important for the long-term success of a company
− Example: Toyota‘s choice of gas pedal unit supplier
• Potential Criteria for Scenarios which can be weighed against each other using
uncertainty:
− Price variation
− Quality (no. of potential Defects); yield loss
− Securit of supply
− Transcation cost

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 The Supplier Number Model

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 B) The Sourcing Model

• Strategic Sourcing is a key issue within Supply Chain Risk Management

• Sourcing decisions should take the contractual conditions and realistic

scenarios from a projected supplier relationship into account

• A quantitative risk assessment which applies multiple parameters with

variable risk values gives a better picture of possible scenarios hence
providing a basis for better sourcing decisions

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 The Sourcing Model

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 C) The Mitigation Prioritization Model

• Risks within the supply chain of any given project are variable and
uncertain in nature

• The ability to register and provide a dynamic overview of the effect of

these risks is key to developing a strategy to risk prioritization and risk
handling

• A model which documents the substance and variance of individual

project risks can provide a basis for important decisions effecting a
project‘s overall outcome

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 The Mitigation Prioritization Model

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 The Mitigation Prioritization Model

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