Supply Chain Risk Management

1.    Introduction

On March 17, 2000, lightning hit a power line in Albuquerque,New Mexico. The strike caused a massive surge in the surrounding electrical grid, which in turn started a fire at a local plant owned by Royal Philips Electronics, N.V., damaging millions of microchips. Scandinavian mobile-phone manufacturer Nokia Corp., a major customer of the plant, almost immediately began switching its chip orders to other Philips plants, as well as to other Japanese and American suppliers. Thanks to its multiple-supplier strategy and responsiveness, Nokia's production suffered little during the crisis. on contrast, Tdefon AB L.M. Ericsson, another mobile phone customer of the Philips plant, employed a single sourcing policy. As a result, when the Philips plant shut down after the fire, Ericsson had no other source of microchips, which disrupted production for months. Ultimately, Ericsson lost $400 million in sales.' (Ericsson has since implemented new processes and tools for preventing such scenarios (MIT Slaon Management Review. 2004).

Risk management practices, techniques and tools have been used extensively in the many different fields for years. The importance of supply chains tools and techniques used in optimizing it were developed more .During the last twenty-odd years, supply chain management practices have evolved toward more lean process approaches in order to reduce waste within the overall chain. Concepts such as just-in- time, virtual inventory, supplier evaluations, and reductions in the number of distribution facilities have reduced total supply chain costs, despite of the goal of these tools to optimise the supply it generated on the other side a higher risks on businesses

Businesses have witnessed many supply chain malfunctions due to supply and demand disruptions: the affected companies reported, on average, 14% increase in inventories, 11% increase in cost, and 7% decrease in sales in the year following the disruption.

Supply chain identified risks

External risks can be driven by events either upstream or downstream in the supply chain:

• Demand risks related to unpredictable or misunderstood customer or end-customer demand.
• Supply risks related to any disturbances to the flow of product within your supply chain.
• Environment risks that originate from shocks outside the supply chain.
• Business risks related to factors such as suppliers’ financial or management stability.
• Physical risks related to the condition of a supplier’s physical facilities.

Internal risks are driven by events within company control:

• Manufacturing risks caused by disruptions of internal operations or processes.
• Business risks caused by changes in key personnel, management, reporting structures, or business processes.
• Planning and control risks caused by inadequate assessment and planning, and ineffective management.
• Mitigation and contingency risks caused by not putting in place contingencies.

2.    Challenges facing supply chains

With outsourcing and off-shoring increasing the geographical dispersion of supply chains,

The attention on supply chains risks have increased due to increased disruptions.

For example, while global configurations of their supply chains provide access to cheap

Labour, raw materials and markets in emerging economies, companies are facing nowadays challenges in meeting variable lead teams, and fluctuating currencies , and greater delivery .A failure of any one element in a supply chain causes disruptions for potentially all partnering companies upstream and downstream (Biao Yanga and Ying Yang , 2010 ).

According to MANUJ AND MENTZER ,2008  they cited that The objective of supply chains is profit maximization (balance between productivity (efficiency) and profitability (effectiveness) (Mentzer and Firman 1994) to move

Moving of goods between nations and different places to enhance the whole profitability of organizations, the goods have to pass through different changing conditions, differences in economies, cultures, politics, infrastructure and competitive environment, Economic challenges include such considerations as transfer prices, tax rates, duties, exchange

Rates, Infrastructural differences such as availability of different transportation modes, air, sea or rail, and type of documentation; and the number and nature of intermediaries and facilitators (banks, warehouses, Transport agencies, etc.) All these circumstances need strategies and plans to mitigate the risks and disruptions.

The high variability and the need of resources create major challenges to reach high customer service levels, anticipated costs, and desired profitability. Political factors such as stability of government, law and order, and sanctions have implications for supply chain structure and related costs.  In sum, global supply chains have potentially more delay points, greater uncertainties, and hence the need for greater coordination, communication, and monitoring(MANUJ AND MENTZER ,2008  ).

However (Gautam Basu et al,, 2008) short listed risks that supply chains may face in the following points;

·         Increased chains of  outsourcing, which elongates end-to-end supply chains

·         Regulations and legislations imposed by government entities, complications of international trade

·         The increased levels of economies variability , thus results in additional variability in demand and supply and make it more difficult to accomplish demand supply balancing

·         The existence of short life products and the rapid rate of technological development, which increase inventory obsolescence.

·         Increasing of customers numbers who are seeking high service levels by requiring better on-time delivery, order fill rates and overall service level efficiencies.

·         capacity constraints, is also a major obstacle in meeting increased demand,

·         Natural disasters and external environmental events.

Supply chain risks can be categorized into different types; supply chain business risks can come from external environment, Business strategies and policies, Business process execution, People Analysis and reporting, Technology and data (Desheng Dash Wu and David Olson, 2010).

3.    Supply chain management risk theories

Supply chain risk can be broadly defined as an exposure to serious disturbance arising

within a supply chain affecting its ability to effectively serve the end customer market. (Abhijeet Ghadge1 et al, 2011).  According to Abhjjeet Ghage  Risk management in supply chain is driven by systemic interrelationships focusing at identification and reduction of risks not only at organization level but focusing on the entire supply chain. To manage global supply chain risk, companies need to follow a path from risk identification to strategies to deal with risks.( IlaManuj and John T. Mentzer ,2008)  in their literature they categorized  the uncertainties in logistics as strategic ,  tactical and operational  , also they mentioned that there are two critical factors affects the uncertainty of supply chain lead times and supplier reliability. According to (Janat Shah ,2008) literature Unlike the demand side, the firm has a greater control on the supply side and the uncertainty in the supply chain can be handled by choosing the appropriate partners in the chain however she mentioned that several events occurred in the past years decreased the importance of the supplier uncertainty , also she mentioned that companies need to focus on both demand uncertainty and supply chain disruptions, supply chain disruptions are events that have very little probability of occurrence but high impact on the supply chain performance. Supply chain risk management systems comprise the set of systems and processes used to manage supply chain disruptions Sharma Satyendra Kumar , 2009) . disruptions of the supply chain may occur due to  natural disasters , fire , machine breakdown , political instability , etc...

according to Sharma the risk management approach is to supplement planning and execution efforts that need to be conducted during real disruption situations by answering the following questions;

·         Strategy: Do I have the right supply chain structure that is aligned with my risk management objectives?

·         Tactical: Do I understand all potential risk events or deviations from the desired operating plan? And do I have the contingency plans in place, ready-to-go when these events happen?

·         Execution: Do I know when to put my alternative plan into action? And how do I learn from the experience to improve my reflexes for future events?

A straightforward approach for viewing supply chain risk management focuses on two fundamental aspects of a potentially disruptive event(Gautam Basu et al , 2008):

1. Probability (likelihood) of the event actually occurring

2. Impact (consequence) of the event on the supply chain, and subsequently the overall business

Today increasing the level of interdependencies between supply chains increases the levels of complexity of the supply chains and raises the risk of disruptions for the whole chain, any disruption that happen to any of the members of the supply chain may result in a sever disruption in the whole supply chain, risk in supply chain can be defined as uncertain varaotion or disruption which can impede flow of information and resources in the supply network. ( Putu Dana et al , 2007 ).

4.    Supply Chain Risk Management Frameworks

Supply chain risk management methods and frameworks have evolved in the last decades and developed over time , many tools today are used for estimating and calculating the estimated risks, these models are not limited to supply chain risks but , used in estimating risks in different fields (Gautam Basu et al. , 2008 ) categorized the supply chain risk models into four categories

a.       Deterministic analytical models, which include mathematical programming models (e.g. linear, nonlinear, integer, dynamic programming). Applications to supply chain include scheduling production, distribution planning, raw material sourcing, facility location, inventory level setting, replenishment timing and order quantity specification, and resource balancing.

b.      Stochastic analytical models, where at least one of the variables involves uncertainty, and is assumed to follow a particular probability distribution. Examples of supply chain applications include inventory and production management problems, where demand and yield are represented as random variables respectively.

c.        Economic models, which tend to be focused on buyer-supplier relationships. These models have a traditional base in determining the financial risks to either sellers or buyers, given various assumption

d.       Simulation models, which are (usually) data driven representations facilitated by sampling from specified probability distributions.

4.1. Scenario planning model

According to (Aman Deep and Samir Dani,2010 ) they used scenario planning model this model which was a commonly used in the mid 80’s , the scenario  planning model focuses three key levels , strategic , tactical and operational , each levels is  feeding into the other. The involvement in terms of team composition should Each stage has a set of input and output with the aim of developing a comprehensive scenario at the end; the following figures describes the scenario planning model;

At each levels of the scenario planning different teams are involved and different questions are actions are taken; on the strategic levels the involvement is for the top management, the questions that are asked at these stage are like;

·         What might the economic landscape look like in the next 5- 10 years?

·         What social/technological changes might affect the organisation in the future?

For the tactical levels the involvement is for seniors management in different departments production, sales, finance, etc... The questions that may be addressed here are like;

·         What will be the logistics structure be like?

·         What will happen to our number of production and distribution sites? Will it go up or down?

·         Where will be expanding internationally?

·         What issues might arise from these changes?

While on the tactical level the involvement is for middlemen in different department, sales, finance and etc.., the questions here are like;

·         Where will we be in the next one year?

·         What is happening to our key performance indicators?

·         Where do we think are our weaknesses?

This research indicated that scenario planning is important process for supply chain risk management, however the researchers concluded that The initial qualitative process has provided insights into the lack of strategic risk planning and the time lag in between scenario planning and risk management.

4.2.Supply chain risk assessment methodology

(Yang Chu and Brian Squire, 2010) introduced SCRA (supply chain risk assessment ) methodology. The methodology consists of eight major steps. The results of this analysis is a detailed information about the critical risks a firm may face  and their treatment actions and also help a firm Restructure its supply chains by analysing risks associated with key design variables.

According to the researchers The SCRA methodology helps supply chain professionals in understanding specific elements of managing risks and to understand key elements of managing supply chain.

4.3.Global Supply Chain Risk Management and Mitigation Model

(IlaManuj and John T. Mentzer ,2008)  developed model for supply chain risk management and mitigation  they concluded that This framework for global supply chain risk management provides three main benefits. First, it offers an integrated framework for managing global supply chain risk decisions with the aid of linked tables. This step-by step approach forces the decisions to move out of typical intuitive thinking and preset mental models. it provides an understanding of the constituents of risk, creates a risk profile, and uses the risk profile to generate a set of appropriate strategies in the context of global supply chain. This frame work is  5-step model as  follows;

·         Step 1 : Risk Identification

·         Step 2: Risk Assessment and Evaluation

·         Step 3: Selection of Appropriate Risk Management Strategies

·         Step 4; Implementation of Supply Chain Risk Management Strategy(s)

·         Step 5: Mitigation of Supply Chain Risks

4.4.Supply chain risk management process

(Janat Shah, 2008) developed a structured process oriented approach for the supply chain risk management, it consists of four steps;

a.      Identification of supply chain risks :

The identification of risks included complete  analysis of sources that may cause damages or disruptions in the supply chain

b.      Analysis and assessment of supply chain risks :

 Supply risk assessment evaluates the effect of risks on the company’s performance , it considers the probability of occurrence of unfavourable event and  its effect on the firm , one way of calculating this factor is multiplying the probability of occurrence by the estimated effect

c.       Constructing probability and impact matrix :

clearly identifying the risks and their classification in a way that help the company to priotarize its actions and take the right steps at the right time ; the proposed supply chain risk probability and impact matrix is as follows;

d.      Developing risk management plan:

Understanding supply risks through assessments will makethe companies able to take the appropriate action. The different possibilities for managerial action in supply risk management are:

·         Avoidance (eliminate):

·         Reduction (mitigate): Involves methods that reduce the severity of the loss or the likelihood of the loss from occurring

·         Transference (outsourcing or insure): Insurance, hedging, contracts and risk sharing plans.

·         Retention (accept and budget): Acceptance of risks through reserves for contingencies.

4.5.Postponement

(Biao Yang  and Ying Yang , 2010) suggested the use of postponement philosophy to reduce the risks of supply chain disruptions , the idea depends on postponing some activities that should occur until other actions occurs , for example companies don’t start full production until a guaranteed no. Of sales orders are already placed, this strategy gives a chance to change in the configurations of products to the last minute in case any disruptions happen to any of the suppliers and a replacement component should be used.

5.    Risk mitigation strategies

Unfortunately, there is no silver-bullet strategy for protecting organizational supply chains. Instead, managers need to know which mitigation strategy works best against a given risk. (MIT SLOAN MANAGEMENT REVIEW, FALL 2004 )

5.1.Dual Sourcing for Mitigating Supply Side Risks

The dual sourcing concept depends on having two suppliers. The first is a main supplier for fixed volumes with higher efficiency and low transaction costs, catering to the majority of requirements and the second, for flexible

Quantities, with lower and higher volume limits and who consequently charges a higher price (Janat Shah,2008)

5.2.Location of Secondary Source to Mitigate Supply Side Risks.

The decision to go for a second resource (place ) mainly depends on where will be the second location  For example it may not make much sense for a manufacturer in the US to locate both its sources in a single country or region from the point of view of maintaining steady supplies. In such a case, any disruption in the country or the regions will dramatically affect both places. Another concern may be the stability of the country where the vendor is located. A third issue is the spreading out of suppliers geographically so that a natural calamity does not have the same debilitating effect on all. (Janat Shah,2008)

5.3.Designing for risk

According to (Sharma Satyendra Kumar, 2009) he designed an implementation steps to help mitigating supply chain risks and they are as follows;

a.      State the risk management objective: Documenting the risk management objective helps provide the corner stone on how to cope with risk management strategies and the importance of it to the other cross functional areas. Start by asking some basic questions at a high level to create a vision for Risk Management:

·         Why are we doing this?

·         What is it that we want to protect ourselves against Disruptions?

·         What should we do? (Alternatives)

·         How long it will take to recover? (Time)

·         How much inventory do we need to carry to cover for disruptions? (Cost)

·         How will we know success? (Metrics)

b.       Determine the risk appetite: This step is about gaining a deeper understanding of what risks you want to protect yourself against.

·         It should be comprehensive: there is no standard set of risks or road map to tell about the risks you may encounter

·         It should be interactive: discussions and focus groups would be an effective way to realize the risks of the firm’s supply chain.

·         It should be iterative: The discussion format helps to evolve the questionnaire by verifying, adding, modifying, or deleting questions to get to the one that is right for you.

·         It should be both qualitative and quantitative: Since tolerance for risk varies by individual, there is an element of subjectivity to the exercise. The ability to capture these inputs across multiple respondents and "normalize" the answers for the group will require knowledge of data collection and analysis methods to accomplish this exercise.

c.       Define the Risk Management organization: The risk profile helps the executive team understand (at a high level) if there are indeed gaps in the current risk management strategy and subsequently create the appropriate organization that is tasked with closing these gaps. The organization chart should also identify the appropriate risk management counterparts in the partner organizations upstream and downstream in the supply chain.

d.      Perform the SWOT analysis: In addition to reviewing the data from the risk appetite survey, a SWOT analysis (Strengths / Weaknesses / Opportunities / Threats) can be an effective tool to help the members of the risk management team get aligned on a shared, high-level view of the risk management strategy.

e.       Design the optimal supply chain network: The final task in the strategy phase is to ensure that the supply chain network is designed to meet the stated risk management

5.4.Tailoring Risk Management Approaches Leading

The (MIT SLOAM MANAGEMENT REVIEW FALL 2004) wrote about tailoring risk management approaches according to requirements and the degree to trade off. Companies mitigate risk by building various forms of reserves, including inventory, capacity, redundant suppliers and responsiveness. Managers must take care about the cost to build a reserve and the trade off they would accept. Three key relationships influence this optimal balance.

The first relationship is the increasing cost of risk reduction. It means using of high levels of inventory to cover risks of demand increase. Costs are much more than covering a low level of risk.

The second relationship shows that pooling forecast risk, receivables risk or some other risk reduces the amount of reserve required for a given level of risk coverage. Thus, the required level of inventory needed to mitigate forecast risk decreases as it is pooled.

 The third relationship shows how the benefit of pooling once a company clearly understands its supply-chain risk, it can select the appropriate general mitigation approach and specific tailored strategy. (MIT SLOAM MANAGEMENT REVIEW FALL 2004).

6.    Conclusion

Supply chains are vulnerable, in part, because they have never been as extended as they are today. Companies must also increasingly manage stakeholder expectations about issues such as quality, environment, and health and safety of workers. Now the risk of disruption has further increased because of extreme business volatility.

Today supply chains are facing many challenges because of the globalization, extension of members in the supply chain, the new tools for optimizing operations like lean manufacturing , just-in-time , etc... , all these circumstances put the supply chain under great risks of nor meeting demands or losing money due to high conservative strategies.

Managing risks have been identified and analyzed using different techniques and methods, some of these methods depends on simulations and complicated computer software , other methods depend on trends and the markets analyses . The problem here is that there is no clear or a well identified approach for measuring the supply chain risks

Some researchers talked about the mitigation strategies for the supply chain risks, however there is lack of researches taking about this issue, and I see the reason behind that is there is no clear methods and tools to best evaluate the supply chain risks and hence there will be lack for mitigation tools.

7.    List of References

Abhijeet Ghadge, Samir Dani1 and Roy Kalawsky2 1School of Business and Economics, Loughborough University, Loughborough, UK, Supply Chain Risk Management An analysis of Present and Future Scope,2011

Aman Deep, Samir Dani, Scenario Planning In Supply Chain Risk Management, The 10th International Research Seminar on Supply Chain Risk Management,2010

Biao Yanga and Ying Yangb, Postponement in supply chain risk management: a complexity Perspective, International Journal of Production Research Vol. 48, No. 7, 1 April 2010, 1901–1912

Desheng Dash Wuab  and David Olsonc , Enterprise risk management: a DEA VaR approach in vendor selection, International Journal of Production Research Vol. 48, No. 16, 15 August 2010, 4919–4932

Gautam Basu, Mondher Ben-Hamida, Karen Butner, Eric Cope,Henry Dao,Léa Deleris, Jin Dong, Mary Helander, Kaan Katircioglu, Bonnie Ray, Jason Torpy, Supply Chain Strategy, Industrial Sector, Supply Chain Risk Management:A Delicate Balancing Act A multi-faceted view on managing risk in a globally integrated enterprise, IBM Global Business Services,2008

IlaManuj and  John T. Mentzer , Global Supply Chain Risk Management , Journal Of Business Logistics, Vol. 29, No. /, 2008

Janat Shah, Supply Chain Risk Management: Academic Perspective, IMRC 2008 Round Table

Sharma Satyendra Kumar, Risk Management in Supply Chains, Advances In Management Vol. 2 (11) November (2009)

Sunil Chopra and ManMohan S. Sodhi , Managing Risk To Avoid

Supply-Chain Breakdown, Mit Sloan Management Review Fall 2004

Yang Chu, Brian Squire, A Methodology For Identifying, Categorising And Prioritising Sources Of Supply Chain Vulnerability, The 10th International Research Seminar on Supply Chain Risk Management,2010