Vivekanand – 170Vyshak Vinod– 171Yashwanth J G – 172Yogesh babu P K - 173

SCC members have reported that less than half of enterprises have established metrics and procedures for assessing and managing supply risks and organizations lack sufficient market intelligence, process, and information systems to effectively predict and mitigate supply chain risks. 

From this need arose the Risk Management Project Team approved by the SCC to enhance the SCOR model. The objective is to help organizations avoid/minimize costs, mitigate supply chain disruptions by managing risk proactively and thus, offering a competitive edge. 

The session presents the outcome of a global multi-industry team that has worked passionately to integrate risk management into the SCOR model.

Abstract

3

Sup

plie

r pr

oces

ses

Product DesignDCOR

Custom

er processes

Supply Chain SCOR

Sales & SupportCCOR

Product Management

Supply-Chain

Supplier

Plan

Customer Customer’sCustomer

Suppliers’Supplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Internal or External Internal or External

YOUR COMPANY

Source

Supply Chain Operations Reference Model

PlanPlanPlanPlan

Return

SCOR defines supply chain as the integrated processes of Plan, Source, Make, Deliver and Return, spanning your suppliers’ supplier to your customers’ customer, aligned with Operational Strategy, Material, Work & Information Flows.

The SCOR Framework

Level 1 Level 2 Level 3 Level 4 Level 5

Scope Configuration Activity Workflow Transactions

Differentiates Business

Differentiates Complexity

Names Tasks Sequences Steps Links Transactions

Defines Scope Differentiates Capabilities

Links, Metrics, Tasks and Practices

Job Details Details of Automation

Framework Language

Framework Language

Framework Language

Industry or Company Specific Language

Technology Specific Language

S1Source

Stocked Product

S1Source

Stocked Product

Supply-ChainSource

Supply-ChainSource

S1.2Receive Product

S1.2Receive Product

Standard SCOR definitions Company/Industry definitions

EDIEDI

XMLXML

SCOR Hierarchy

Level 1 Level 2 Level 3 Level 4 Level 5

Scope Configuration Activity Workflow Transactions

CxOEvP, SVP

SVPVP

VP, DirectorLine Manager

ManagerTeam Lead

Team LeadIndividuals

Strategic Decision-Making

Line of BusinessManagement

Activities Management

Job Management TransactionManagement

EnterpriseSupply-ChainRequirements

OperationsStrategy

Fine-TuningOperations

AdjustingProcess Performance

TuningTechnologyPerformance

S1Source

Stocked Product

S1Source

Stocked Product

Supply-ChainSource

Supply-ChainSource

S1.2Receive Product

S1.2Receive Product

Standard SCOR program Company/Industry implementation

EDIEDI

XMLXML

Maps to Organizations

What is Supply Chain Risk Management?

The SCOR Model and Risk

Business Continuity Management (BCM), defined by the Business Continuity Institute as “a holistic management process that identifies potential impacts that threaten an organization and provides a framework for building resilience and the capability for an effective response that safeguards the interests of its key stakeholders, reputation, brand and value creating activities” (BCI, 2005).

Business Vulnerability, defined as an exposure to serious disturbances, arising from risks within the supply chain as well as risks external to the supply chain (Christopher, 2003). Vulnerability is a result of any weakness within a complex system that can seriously jeopardize its activities (Ayyub, 2003).

Enterprise Risk Management (ERM) as a set of coordinated actions about protecting and enhancing share value to satisfy the primary business objective of shareholder wealth maximization (Chapman, 2006).

Resilient enterprise meaning the ability of the company to recover quickly from a disruption (Sheffi, 2005).

The International Organization for Standardization (ISO, 2002) defines two of the essential components of risk:

1. losses (along with related amounts) and

2. uncertainty of their occurrence.

In the financial industry, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events (New Basel Capital Accord, 2006).

Risk Defined

Risk in general can be defined as a collection of pairs of likelihood (L) and outcomes / impact (O) of events.

The combination of all the (likelihood; outcome) pairs is called a risk profile.

Definitions of risk must also have a time dimension or a specific time horizon (day, month, year, etc.) and a specific perspective or view that defines the scope (boundaries, what’s not included, etc.).

Supply Chain Disruptions

Supply Chain Disruptions

• Any event that negatively impacts the intended functioning of the supply chain.

• Can be a rare event or frequent event that happens at a specific instance in time

• Internal (machine break down, fire, strike, product failure)• External (weather related, earthquake, etc.)

Discrete Events (yes/no)

Discrete Events (yes/no)

• Internal (performance metrics variability, warranty trends)• External (supply / demand shifts, economic factors) • Sometimes group into buckets

Continuous Events(a matter of degree)

Continuous Events(a matter of degree)

CustomersSuppliers(And outsourceManufacturing)

Suppliers’ Environment

Customers’ Environment

Organization

Organization’s Environment

Customer Facing

Supplier Facing

Internal Facing

Global Environment

Relationship RiskSupplier Performance Risk

Human Resource Risk Supply chain disruption risk Supplier Environment Risk

Market Dynamics RiskDisaster Risk

Political / Country RiskSupplier Financial Risk

Regulatory Risk

Financial Risk Distribution RiskRelationship Risk

Market RiskBrand / Reputation Risk

Product Liability RiskEnvironmental Risk

Political/ Country Risk

Operational RiskTechnical RiskFinancial Risk

Legal / Regulatory RiskEnvironmental Risk

HR / Health and Safety Risk

Political/ Country Risk

Supply Chain Risk Perspectives

• Supply chain risk management is the systematic identification, assessment, and quantification of potential supply chain disruptions with the objective to control exposure to risk or reduce its negative impact on supply chain performance.

Potential disruptions can either occur within the supply chain (e.g. insufficient quality, unreliable suppliers, machine break-down, uncertain demand etc.) or outside the supply chain (e.g. flooding, terrorism, labor strikes, natural disasters, large variability in demand etc.).

• Management of risk includes the development of continuous strategies designed to control, mitigate, reduce, or eliminate risk.

A Nintendo’s Wii has a chip designed by IBM, which may have been fabbed in New York, tested in Taiwan, stored in Hong Kong, aggregated in parts, and sent in kits to China for assembly.“

"They put all of their eggs with one supplier that had the best product at the lowest price“

"In the race to provide better quality at lower prices, manufacturers picked very narrow, optimized supply chains," 

Preventing supply chain disruption Controlling supply chain disruption Mitigating damage

Some of the quickest emergency assistance to victims of Hurricane Katrina did not come from the American Red Cross or FEMA. It came from Wal-Mart.

GM Halts Work at More Plants

Due to Strike at Parts Supplier

GM Halts Work at More Plants

Due to Strike at Parts Supplier

• United States experienced significant disruptions when borders and air transportation shut down after 9/11.

• United States experienced significant disruptions when borders and air transportation shut down after 9/11.

• Nokia production shut down due to supplier plant fire.

• Nokia production shut down due to supplier plant fire.

• Kobe earthquake resulted in computer memory shortage, impacting multiple companies

• Kobe earthquake resulted in computer memory shortage, impacting multiple companies

Supply chain risk management (SCRM) is a means for ensuring uninterrupted customer service.

The SCOR Model is a framework for modeling and managing supply chain processes, practices and performance. SCOR 9.0 will include Risk Management processes,

practices, and performance indicators. Using SCOR as a Risk Management foundation will

provide a better SCRM program. Faster implementation More comprehensive identification of potential risks Better application of SCRM best practices Better SCRM coordination with customers, suppliers,

and stakeholders.

Best Practices

Supply Chain Risk Management

Formal Risk Management

Visibility and Quantification

of Risk

Coordinated Risk

Management

Supply Chain Designed for

Risk

10 Best Practices under the following categories:

• Supply Chain Risk Management

• Supply Chain Risk Identification

• Supply Chain Risk Monitoring

• Supply Chain Risk Assessment

• RM Programs’ Coordination with Partners

• Sourcing Risk Mitigation Strategies

• Crisis Communication Planning

Configure to Reduce Risk :

• Supply Chain Business Rules

• Supply Chain Information

• Supply Chain Network

SCRM Best Practices

Supply Chain Risk Management (SCRM)

Systematic identifying, assessing, and resolving of potential disruptions in supply chain networks with the objective to reduce their negative impact on the network’s performance

Supply Chain Risk Identification

Creating of a list potential events that could disrupt or harm any aspect of the supply chain’s performance (more details included in exercises)

Supply Chain Risk Monitoring

Creating of a list potential events that could disrupt or harm any aspect of the supply chain’s performance (more details included in exercises)

Supply Chain Risk Assessment

– Quantifying risk to understanding of where the greatest risks may exist in order to prioritize resources for risk mitigation and management

– Measures include Likelihood and Impact (more details included in exercises)

Supply Chain Risk Management (SCRM)

Systematic identifying, assessing, and resolving of potential disruptions in supply chain networks with the objective to reduce their negative impact on the network’s performance

Supply Chain Risk Identification

Creating of a list potential events that could disrupt or harm any aspect of the supply chain’s performance (more details included in exercises)

Supply Chain Risk Monitoring

Creating of a list potential events that could disrupt or harm any aspect of the supply chain’s performance (more details included in exercises)

Supply Chain Risk Assessment

– Quantifying risk to understanding of where the greatest risks may exist in order to prioritize resources for risk mitigation and management

– Measures include Likelihood and Impact (more details included in exercises)

Risk Management Program’s Coordination with Partners

– Coordinating risk management with your supply chain partners by emphasizing cooperation among departments within a single company and among different companies of a supply chain to effectively manage the full range of risks as a whole

– Establishing a Risk Management Coordination Committee

Sourcing Risk Mitigation Strategies

Includes strategies to address source risks, for example multiple sources of supply, strategic agreements with suppliers

Crisis Communication Planning

Creating a plan for managing a crisis when it occursSome common components of a crisis communication plan include: Crisis definitions Crisis roles and responsibilities Crisis response operating procedures

Establishing business rules (e.g., customer priority, supplier priority, production routing, transportation routing, etc.) based on minimizing the risk to the supply chain

Supply Chain Business Rules

Managing supply chain information networks to minimize the risk to the supply chain. This includes information sharing with partners as well as internal locations. This helps all parties to be quickly informed of a real or potential disruption and respond quickly and appropriately to minimize the disruption impact.

Supply Chain Information

Supply Chain Network

Node locations, transportation routes, number of suppliers, number of production locations, etc. are all determined in a fashion that mitigates potential disruptions to the ability to deliver product and service to the end customer. This practice relies on the information collected through risk identification and risk assessment processes to identify nodes that are at a high risk of disruption due to the location of the node.

Phase Name Deliverable Resolves

Initial BUILD• Organizational Support• Risk Management Program Who is the sponsor?

I DISCOVER• Supply-Chain Definition• Supply-Chain Risk Priorities• Project Charter/Risk Program definition

What will the program cover?

II ANALYZE

• Scorecard• Benchmark• Competitive Requirements• Customer service requirements

What is the risk tolerance of your supply chain?

III ASSESS• Geo Map• Thread Diagram• Risk assessment

Initial Analysis – where and how big are the risks?

IV MITIGATE• Mitigation plans• Level 3, Level 4 Processes• Best Practices Analysis

Final Analysis – how will risk be eliminated or mitigated?

V IMPLEMENT

• Opportunity Analysis• Mitigation Definition• Deployment Organization• Monitoring and response programs

How to deploy mitigations?

Risk Management Implementation using the SCOR Model five phase approach.

26

Challenges for implementing a supply chain risk management program

supply chain risk management needs cross-functional participation, agreement and cooperation in order to succeed. This requires executive level commitment and active participation. Building this is a critical first step in the implementation process.

Organizational Support:

Before risk management activities can start, a decision must be made as to the approach and the strategy. The main guidelines for managing risks and the rationale behind them must be developed, documented and communicated.

Rules and strategies

Roles, Responsibility:

Clear roles and responsibility are critical for any process or program. Cross-functional, company wide responsibility and authority are critical for success. In addition, supply risk management adds new responsibilities to existing jobs. These must be clearly communicated, current skill levels of incumbents assessed and corrections made (training or replacement) as required.

Effective levels of funding are always a challenge in any company. The amount depends upon the scope of your program and how much detail is requirement.

Funding:

Supply ChainValue at Risk (VaR $)

Supply ChainEvent Risk (EVAR $)

Supply ChainEvent Risk (EVAR $)

By PSMDR

Supply ChainMitigation Cost($)

By PSMDR

Value at Risk (VAR $)By PSMDR &

individual performance metric

Mitigated Risk by Category ($)

By PSMDR & individual

performance metric& event category

Risk by Event (EVAR $)

By PSMDR & individual

event category

Mitigation Cost($)

By PSMDR and event

Internal Enabler Process and Data Quality measures

Supply ChainResidual Risk ($, %)

Total Supply ChainCosts ($)

Supply ChainValue at Risk (Gross VaR)

Supply ChainMitigated Risk ($, %)

By PSMDR

Supply ChainMitigation Costs ($)

Supply ChainValue at Risk (VAR $)

By PSMDR

Level 3

Level 2

Level 1

Value at Risk (VAR) = (P1 x I1) + (P2 x I2) P = percentage of total negative events; I = impact of event

Target

Event 1

Impact 1

P –

Prob

abili

ty(i.

e. 1

0 ou

t of

100

tota

l oc

curr

ence

s)

Event 2

Impact 2P2

T

I1

I2

Quantifies the value of potential disruptions in terms of both Probability (likelihood) and impact on the supply chain.

P1

Value-at-Risk (VaR)Value-at-risk is widely used by banks, securities firms, and trading organizations.

Test Meter

Strips

Care Kit

Bio World

Electronic Circuit Mfg.

Plastic Injection Molding Mfg. Assembly, Test

Pack Instrument Contractor

Plastic Roll Suppliers

(plain)

Adhesive Suppliers

Bottle and LidSupplier

(w/ desiccant)

12 pack of Strips in Bottles

Channel

CustomersPlastic Roll Suppliers(circuit)

ChannelCare Kit

Strips in Bottle

Meter and Core Kit

Chemical Suppliers

A,B,C

Case Study

ID Process Area

Risk Identification

Event Description

1 Source

Plastic Strip supplier shut down

by labor strike

The main plastic strip supplier has been in talks with their worker's union. The talks have broken down and the union has gone on strike, shutting down all operations and shipments for 30 days

2 Planout of stock

incidents with the distributors

The actual sales and distribution of kits is 50% higher than the forecast for the north eastern US. Distributors are out of stock leading to lost orders and emergency shipments from other regions. The Bio World plant is on over time and it will take 30 days to catch up.

3 Make Packing Equipment Failure

Product cannot be packaged automatically. Increase labor costs due to additional overtime to package the products manually.

4 DeliverIncreased delivery costs due to high

price of fuel

Higher delivery costs from Bio World to distributor resulting in higher costs per unit. Loss of competitive advantage as the low cost diabetes meter/strips.

Risk Identification

Risk Assessment

ID Process Area

Risk Identification Risk Assessment Risk Zone(H,M,L)

Event Annual Probability

(%)

Impact VaR

1 SourcePlastic Strip supplier shut

down by labor strike 10.0% $5,000 $500 H

2 Plan out of stock incidents with the distributors

25.0% $1,000 $250 M

3 Make Packing Equipment Failure

25.0% $300 $75 L

4 DeliverIncreased delivery costs due to high price of fuel

65.5% $400 $262 M

Total Risk Magnitude (VAR) = $1087

Note: All costs are in ‘000 $

Risk MitigationID Risk Mitigation Strategy

ImplementCost

New Prob(L)

New Impact (I)

New VARL * I

Original VAR

ROI

1

Plastic Strip supplier shut

down by labor strike

Identify suppliers that are unionized and assess their relationship with their union. Need

to certify back-up supplier and pay them an annual fee for stand by production capability.

$50 10.0% $1500 $150 $500 $300

2out of stock

incidents with the distributors

Maintain a central inventory at the Bio World plant equal to 2 weeks of 50% of demand for a

region. Include the distributors in S&OP meetings.

$100 5.0% $500 $25 $250 $125

3Packing

Equipment Failure

Follow a schedule of equipment retirement & replacement with new equipment.

$20 15.0% $10 $1.5 $75 $53.5

4

Increased delivery costs due to high price of fuel

Purchase oil futures to hedge against an increase in fuel costs.

$10 100% $1 $1 $262 $251

Total Mitigation Costs = $180 $178 $1087 $730

Note: All costs are in ‘000 $

Risk Mitigation – Action Plan

ID Mitigation Action Person Responsible

Status Due Date Risk(s) Addressed

1

Identify suppliers that are unionized and assess their relationship with their union. Need to certify back-up supplier and pay

them an annual fee for stand by production capability.

Supplier Liaison

Manager

Suppliers identified. Annual fee to be

negotiated.

End of Q2’08

Plastic Strip supplier shut

down by labor strike

2

Maintain a central inventory at the Bio World plant equal to 2 weeks of 50% of

demand for a region. Include the distributors in S&OP meetings.

Demand Planner

New inventory level defined for the product.

Done

out of stock incidents with

the distributors

3

Frequent maintenance of equipment. Follow a schedule of equipment retirement & replacement with new equipment.

Floor Manager

In Progress ImmediatelyPackaging equipment failure

4Purchase oil futures to hedge against an increase in fuel costs.

TBD

Risk Management Team working with Finance Dept to obtain person

responsible for mitigation action

End of Q3’08

Increased delivery costs dues to high price of fuel

THANK YOU