managing risk to avoid supply chain breakdown
TRANSCRIPT
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GROUP 3, SECTION A
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Case of Phillips Factory
FireCase
Philips produced radio frequency
chips for mobile phones inSemiconductor factory atAlbuquerque, NM.
Major customers : Nokia andEricsson
March 17, 2000 : Fire strikessemiconductor factory -All siliconstocks destroyed, products lineseverely impacted
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News of fire reached senior leadership
after 4 weeks
Philip informed Ericsson 3 days after
the fire- Ericsson moved into action
after 5 weeks
Started exploring other options of
supply
By that time, Nokia had taken over
remaining supply sources
Impact
USD 400 million in potential sales lost
Component shortage, incorrect
marketing, rigid product design caused
a loss of USD 1.68 Billion.
Company exits Cell phone market
3 days after the fire:
Nokia detected delays in incoming orders-
Philips reported a weeksshutdown at plant
Nokia sends engineers to plant: Denied
access by Philips
Nokia increases monitoring weekly to daily-
Philips confirms a delay of months.
Decisive response
Engaged other chip suppliers Immediate change in products design
Made other suppliers commit 5 day lead
time
One out of five components could not be
replaced - convinced Philips to provide this
components from China/Netherlandsfactory
Impact & Response
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Philips Factory fire :
InferenceRight Managerial Information
at the right time is crucial !
Disruptions in Informationflow can be catastrophic
Information flows are notalways automated
Proper Information flow isdependent on other factorssuch as people , processes aswell.
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DELAYS
Occurs when supplier cannot respond to changes indemands
Cause :
Poor-quality output at supplier plants High levels of handling or inspections during
border crossings
Changing transportation modes during shipping
Mitigate by :
Appropriately and economically place and size
capacity and inventory reserves Maintain excess flexible capacity in production
plants
Adequate levels of inventory
Example : Dell holds very little inventory of highvalue components in US but uses air transport to get
such parts from east
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RISK REWARD - DELAYS
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Disruptions
Disruptions to material flows :unpredictable and damaging.
In , February 1997 fire at a parts factory owned by Japanese manufacturerAisin Seiki Co. Ltd., a key supplier for Toyota, let to shut down productionat most of its Japanese plants.,
Immediately after the attacks of September 11, 2001, U.S. automanufacturers ran short of parts because transport trucks had been delayedat the Canadian border.
Holding inventory cost can get very high as it is incurred continually, theinventory would be used only in the rare event of a disruption.
Stockpiling inventory as a hedge against disruption also makes sense forcommodity products with low holding costs and no danger ofobsolescence.
For products with highholding costs and/or a high rate of obsolescence,usingredundant suppliers is a better strategy.
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Intellectual Property
Risks Cause: Todays supply chains
Less vertically integrated and more global
Competitors often outsource to the same
location
Mitigate by :
Bring, or Keep, some production in-house, or at
least under direct company control
Intellectual property limited to countries with
legal protection
Example: Cisco outsources all manufacturing
creates business processes that cannot be easily
replicated by a single manufacturer
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PROCUREMENT RISK
Unanticipated increases in acquisition costs
due to fluctuating exchange rates or supplier
price hikes
Cause :
Exchange-rate risk
Price increases by suppliers
Mitigate by :
Build global capacity, financial hedges
Long term contracts, redundant suppliers,
rarely maintain inventory
Example
Toyotas manufacturing plant allows to
cater one local market & one other market
across the world
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INVENTORY RISKCAUSE
Excess inventory and falling prices
Inventory risk hinges on three factors:
Value of product
Rate of obsolescence
Uncertainty of demand and supply.MITIGATION
Pooling Inventory
Creating common components across products
Postponing last stage of production until orders are in hand.
EXAMPLE
Amazon.com serves all its customers in US with inventoryhoused in a handful of warehouses.
Borders Books & Music supplies its customers with inventory in
several hundred stores.
Amazon warehouse pools demand large geographical area,
stable forecasts & lower total inventory.
Amazon achieves 14 inventory turns/year, which is 2 for
Borders.
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CAPACITY RISK
CAUSE Building excess capacity usually becomes a
strategic choice.
Excess (underutilized) capacity hurts financialperformance.
MITIGATION Making existing capacity moreflexible.
Flexibility is a form of pooling that allows useof the same capacity for a variety of products.
EXAMPLE Plants owned by Japanese truck manufacturer
Hino Motors Ltd. employ multiple assemblylines on which the number of workersdetermines line speed.
This flexibility lets Hino change production onany line by moving workers (capacity) to meetfluctuating demand.
Greatly reduces the excess capacity of workers
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SYSTEMS RISK
Cause :
Failure anywherecan cause failure everywhere due to highlynetworked information systems.
The greater use of more highly automated technology has thepotential to transform risks from manual processing errors tosystem failure risks
Mitigate By :
Robust backup systems and well-designed, well-communicatedrecovery processes that duplicate all data and transactions.
Such approaches helped securities firms recover quickly andconvincingly following the World Trade Center attacks in 2001.
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Forecast Risk
Cause :
Mismatch between a companys projections and actual demand.
Long lead times, seasonal demand, high product variety and smaller
product life cycles increase forecast error.
Mitigate By :
Adjusting pricing and incentives to decrease variation in orders.
Increase the visibility of demand information across the supply chain.
Selectively hold inventory by building responsive production and
delivery capacity.
Example:
Motorola practices responsive delivery each day when it flies in phones
from China in response to demand by customer Nextel Communications
Inc.
Dell also flies in high-value items from Asian suppliers on an as-needed
basis.
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Mitigation Strategies-
Impact
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What managers Should
Do??
StressTesting
Tailored RiskManagement
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Used to determine the stability of a given system or entity.
Identify key suppliers, customers, plant capacity, distribution centers &shipping lanes.
Survey locations and amounts of inventory : components, work-in-process & finished goods
Probe each potential source of risk- assess possible supply-chainimpacts & companys level of preparedness.
Helps company prepare for unforeseen events
Identify risk-mitigation priorities for the near, medium and long term.
STRESS TESTING
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STRESS TESTING
T il i Ri k M
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Tailoring Risk ManagementApproaches
Managers must keep a vigilant eye on the trade-offbetween the risk and the cost of building a reserve to
mitigate it. Three key relationships influence thisoptimal balance.
B l i S l Ch i
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Balancing Supply-ChainRisk/Reward Relationships
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Balancing Supply-Chain
Risk/Reward Relationships Thefirstrelationship is the increasing cost of risk reduction. This
simply means that using inventory to cover a high level of demandrisk costs much more than covering a low level of risk.
The secondrelationship shows that pooling forecast risk, receivablesrisk or some other risk reduces the amount of reserve required for agiven level of risk coverage.
The thirdrelationship shows how the benefit of pooling grows withthe level of risk covered: The benefit of pooling inventory is greatonly if the product has high forecast or inventory risk.
R l Of Th b F
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Rules Of Thumb ForTailored Risk Management
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Rules Of Thumb For TailoredRisk Management
When the cost of building a reserve is low, reservesshould be decentralized
When the cost is high, reserves should be pooled. Ifthe level of risk is low, focus on reducing costs. If therisk is high, focus on risk mitigation.
By tailoring reserves for all risk-mitigation strategies,
companies can maximize rewards for the same levelof risk, or lower risks for the same reward.
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