supply chain risk management (guest lecture tilburg university march 2010)

Supply chain risk management & resilience

Guest lecture | Tilburg University | 31 March 2010

Robbert JanssenE-mail: [email protected]

31 March 2010Robbert Janssen, TNO | Supply chain risk management and resilience2

Outline

• Short introduction

• What is supply chain risk?• Why is it important?• Case: Nokia vs. Ericsson• Trends and developments in supply chain management• Supply chain risk and its sources • Risk perception• Supply chain disruptions• Supply chain vulnerability

• Supply chain risk management & resilience• How to manage and mitigate risks?

• Reconciling supply chain risk with supply chain management

• Time for questions


Introduction

• Robbert Janssen• Logistics & Operations Management

• Writing master thesis at TNO Mobility & Logistics, Delft• Topic: empirical investigation into supply chain risk management

and the vulnerability of supply chains

• Questionnaire with EVO and TLN, distributed to firms in the Netherlands

• +/- 325 responses• Some results in this presentation


Recent years…

Source: Yahoo Finance


Recent years….


Most important risks faced by multinational firms

Aon Global Risk Management Survey 2009• Survey among 550 multinational companies (> $ 1 billion

revenue)

1. Economic slowdown2. Regulatory / legislative change3. Business interruption risks4. Increasing competition5. Raw materials / commodity prices6. Damage to reputation7. Cash flow / liquidity risk8. Supply chain failure9. Third party liability10.Difficult to attract top talent

Supply chain risks mentioned three times in Top 10!


Risks in supply chains?


Natural disasters reported 1900-2008

Source: EM-DAT (2010)


“It does not happen to our company”

9


Risks in the supply chain – an exampleThe Albuquerque accident

• March 2000• Philips semi-conductor plant in Albuquerque, New Mexico, USA

• Sole-supplier of radio-frequency chips to Nokia and Ericsson

• Lightning strike lead to small fire in clean rooms at Philips plant• Sprinkler installation activated in clean rooms• It took 3 weeks before production was up and running again• After 6 months, production yields were only 50%• It took years before new equipment was delivered and installed


2 very different responses to the accident

• Did not recognise threat for weeks• When they tried to recover: entire

worldwide supply for RF-chips was committed to Nokia

• Outcome• Missed critical product introduction• Business interruption costs: $ 200

million (insurance paid)• Annual P/L statement: $ 400

million loss• Ceased making cell phones under

individual brand ( became Sony-Ericsson)

• Immediately recognised threat• Actively responding, sending 30

engineers to restore supply from Philips-plant

• Secured entire worldwide capacity of Philips-chips

• Actively searching for other suppliers all over the world

• Redesigning existing handsets to use different chips

• Outcome• Achieved sales targets• Increased market share

Source: Normann & Jansson (2003), Sheffi & Rice Jr. (2005)


Some developments and trends in supply chain management

• Globalisation and global sourcing• Longer, more complex supply chains• Volatile markets

• Strong focus on achieving efficiency and economies of scale• Lean, JIT-processes • Centralised distribution and manufacturing• Single-sourcing / reduction number of suppliers• Shorter lead-times and delivery cycles• Working capital optimisation

• Outsourcing and off-shoring non-core activities• Loss of control

Source: Christopher (2005), Husdal (2009)


What are the most important developments / trends that lead to increased risks in the Netherlands?

1. Reliance on IT-infrastructure

2. Increased dependency on customers

3. The economic downturn

4. Increased competition in the market place

5. Legislative changes (‘compliance’)

All these factors can have consequences for the supply chain

Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)


4 constructs that we need to deconstruct

Usually, research in the field of supply chain risk consists of 4 constructs

• Supply chain risk• Supply chain disruption• Supply chain vulnerability• Supply chain risk management (and resilience)

Source: Wagner and Bode (2008)


Supply chain risk

• Risk is a concept with a lot of different definitions

• 2 main perspectives:• Exposure to uncertainty (everyday usage e.g. “it is risky to

drink and drive”)• Outcome of an event (e.g. higher total costs and longer lead-

times after a fire in a warehouse: • Risk = Probability * Consequences)

• What can happen? (risk sources)• How likely is it that it will happen? (probability)• If it does happen, what are the consequences? (consequences)

Source: Jüttner et al. (2003); Zsidisin and Ritchie (2008)


Analysing supply chain risks

• Firms commonly visualise unforeseen and unwanted events by means of a risk-matrix

• A risk-matrix has 2 dimensions: probability and consequences (impact)

• Problem: it relies heavily on risk perception.

Source: Sheffi & Rice Jr. (2005)


Risk perception

• Depends on:

• Time/moment

• Experience/knowledge

• Place

• Risk attitude / appetite

• Position

• Possibilities to decide

• Big bang or small incidents


Supply chain risk sources

Source: Christopher & Peck (2004)

• Where can risks originate from?

Environmental risk

Supply risk

Risks internal to the firm

Process risk Demand risk

Control risk

Supply risk Process risk Demand risk

Control risk


Supply chain risk sources

Source: Christopher & Peck (2004)

• Where can risks originate from?

Environmental risk

Supply risk

Risks internal to the firm

Process risk Demand risk

Control risk

Supply risk Process risk Demand risk

Control risk

Machine break-downEmployee strike

Order quantity policiesQuality control

Volatile customer-demandWrong order-forecast

Natural disastersPolitical instabilitySevere weather conditions

Bankruptcy of supplierQuality problems at supplierTransportation failure


Supply chain disruptions

• “Supply chain disruptions are unplanned and unanticipated events that disrupt the normal flow of goods and materials within a supply chain”

• Supply chain disruptions: the occurrence of risk• Consist of: a trigger and the situation that emerges afterwards.

Source: Craighead et al. (2007), Wagner and Bode (2008)

Time

Triggering event

Supply chain risk

Occurrence of risk

Consequential situation

Supply chain

disruption

Exposure to risk


Iceberg of disruptions

Worldwide known disruptions9/11, novel influenza H1N1

Region / countryPiracy, Foot and mouth disease, Q-fever

Individual (chain) disruptionsFire, strikes

Disruptions that took place but were not in the press

‘almost-disruptions’Big customer threatens to leaveInsolvable supplier saved from bankruptcy

Huge reservoir withpotential disruptions


Most frequently occurring disruptions in 2008-20091. Sudden drop in customer demand

2. Quality issues at the supplier

3. Poor logistics performance of suppliers (delivery dependability)

4. Severe weather conditions

5. IT-infrastructure problems (hardware, software)



Where did the disruptions come from?

Most of the disruptions that our company has to deal with….

6

41

41

243

0 50 100 150 200 250 300

No answ er

Originate from our company

Originate from theenvironment (e.g. natural

disaster, legislative changes)

Originate from oursuppliers/customers and/or

the supply chain



The disruption profile

Source: Sheffi & Rice Jr. (2005)


What are the consequences of a disruption?

Higher costBad performanceLost salesLower profitsBankruptcy Fear, dangerDamage to reputation

For whom?

The company itselfSuppliersCustomersSociety


Toyota

• Toyota recall• Estimated costs US$ 2 billion

• All cars checked and repaired if needed

• Biggest challenge now: regaining confidence

• Could also be an opportunity

Source: Spitsnieuws 24 March (2010)


Consequences of supply chain disruptions

• Impact of disruptions on supply chain performance:• Disruptions in the supply chain supply chain performance

decreases• Higher costs, lower delivery dependability, lower service level etc.

• Impact of disruptions on stock-related metrics and financial-statement metrics:

• 10% decrease in shareholder wealth (1 day before actual disruption + day of the disruption)

• 40% decrease in stock returns (observed 1 year before actual disruption until 2 years after disruption)

• 107% drop in operation income• 114% decrease in return on sales• 93% drop in return on assets

Source: Hendricks and Singhal (2003, 2005a, 2005b) , Wagner and Bode (2008)

The consequences of disruptions are severe but are they the same

for all firms?


Supply chain vulnerability

• “The susceptibility of a supply chain towards the harm of a particular supply chain disruption”

• The vulnerability of the supply chain is a function of the characteristics of the supply chain. This means that the structure of the supply chain is an antecedent of supply chain vulnerability.

Supply chain disruption

Supply chain risk

Supply chain vulnerability

Source: Wagner and Bode (2008)


Drivers of supply chain vulnerability

• The characteristics of the supply chain structure Supply chain vulnerability drivers

• Some examples:• Complexity of the supply chain (global sourcing)• Density (NL: dichtheid) of the supply chain• Single sourcing (Nokia, Ericsson example)• Lean and JIT production philosophies• Centralisation of warehouse/manufacturing locations• Dependency on suppliers / customers• Dependency on IT-infrastructure, electricity etc.

• It is about ‘conscious’ decisions regarding how you design the supply chain

Source: Craighead et al. (2007), Wagner and Bode (2008)


Example: Density

• Dutch Logistics Hotspots 2009• Main ports Amsterdam and Rotterdam

• High density regions• Congestion (road, trains, waterways)• Proximity effect (power failure, flooding)

• By using these high density regions leads to higher vulnerability of supply chains

Source: TNO - Quick scan: overzicht van netwerk logistieke hot spots in Nederland (2009). Falasca et al. (2009)


Example: Lean and JIT production philosophies

• ‘Leaning-down’ too far can cause higher costs for recovery of a disruption.

• However, take care that Just-in-Time does not digresses to Just-in-Case management

Source: Christopher and Rutherford (2004)


One construct left

• Supply chain risk• Supply chain disruption• Supply chain vulnerability

Supply chains are becoming more vulnerable and increasingly at risk of disruption. How can we manage this?

• Supply chain risk management (and resilience)


Supply chain risk management (SCRM)

• Activities that firms may engage in to mitigate (i.e. make less severe) the probability of occurrence or negative consequences of supply chain disruptions.

• Lots of frameworks available, but usually risk management consists of 3 general steps (ISO 31000):• Risk identification

• Identifying the risks and its characteristics

• Risk assessment • Ranking risks in terms of probability and consequences (quantifying)

• Risk management • Treating the risks and implementing the chosen solution, monitoring

the impact of the risk management solution on the business performance

Well that sounds pretty easy, doesn’t it?Source: ISO 31000


The problem of risk management:

It’s an ostrich business!

Risk management is not sexy, no fun and it costs money.And the benefits are not even sure!


5 most important barriers towards implementing SCRM

1. The benefits of SCRM are difficult to monetise

2. Focussing on achieving efficiency prevents implementing SCRM

3. Fear of spreading important business information

4. Limited acceptance that risks go beyond company walls

5. Vulnerabilities of the business must remain secret



Step 1+2: Risk identification and assessment

• Focus and create awareness • Create a cross-functional risk team• Determine potential risks (also unobservable

risks)• Assess (quantify) risks and rank

• Methods• Brainstorming, elevator pitches• Risk-matrix• Failure Mode & Effect Analysis

(FMEA)

Source: Lammers, Ploos van Amstel and Eijkelenbergh (2009)


Failure Mode and Effect Analysis (FMEA)

Method for looking at potential ‘failure modes’ and its effects developed in the 1940s by the U.S. Army

1. Determine scope of analysis2. Create a multi-disciplinary team3. Describe processes4. Describe potential failures (risks)5. Determine the expected Effects of these failures (scale 1-10)6. Determine the Probability of the failure (scale 1-10)7. Determine the ability of Detection of the failure (scale 1-10)8. Calculate Risk Priority Number (RPN = 5*6*7)9. Choose target value RPN10.Eliminate11.Recalculate RPN and make cost-benefit analysis

Step 3 of risk management


Film clip – example of creating awareness and focus

• Trade and wholesale firm for electronics and technical installation material

• Intermediary between 750 suppliers and 15,000 customers• 280,000 SKUs - 90,000 items in stock• Logistics structure: 2 distribution centres, 24 transhipment points• Daily: 60,000 order lines, 24hr delivery by 240 trucks to 9,000

delivery addresses

• 11 February 2008 – 09.00 am: “normal bi-weekly logistics team meeting”


Step 3: Risk management

• Treating the risks by means of a ‘strategy’• Five classic strategies (but there are others)

• Avoid – eliminate possibility of event• Reduce – minimise probability of occurrence• Transfer – shift risk to third party (e.g. insurance)• Retain – bear risk and do nothing• Exploit – reduce the impact

• Subsequently, perform cost-benefit analysis of risk treatment and keep monitoring

Source: DeLoach (2000), Husdal (2009)


Cost-benefit analysis of risk management


• “The only constant is change.”– Heraclitus, 600 BC, Greek philosopher

• “It is not the strongest of the species that survive, not the most intelligent, but the ones most responsive to change.” – Charles Darwin


Resilience needed

Supply chain resilience

• “Buzzword” in the context of SCRM• Definition:

• “the supply chain’s ability to survive, adapt, recover and grow from a disruption in the face of turbulent change”

Dutch synonym: veerkrachtigheid• It is about: having the ability to survive a major disruption and

subsequently recover, adapting to the changing environment.• Focusing on reducing the consequences of a major disruptions (instead

of predicting/estimating probability of occurrence)

• Resilience originally was aimed at disruptions that• You do not see coming• High impact, low probability (HiLo)• Affect several parts of the supply chain

• Nowadays, an approach for supply chain risk management

Source: Fiksel (2006), Sheffi and Rice Jr. (2005), Husdal (2009)


How to become more resilient?

• 4 categories of measures to become more resilient• Redundancy – reserve resources (buffer inventories, slack in

the process, insurance policies), comes at an undesirable premium

• Flexibility – capabilities (shift production from one plant to the other, standardise processes, re-engineer products, product postponement)

• Transparency – open communication with suppliers and customers, knowledge of the current status of operations (enablers: IT in the broadest sense, RFID, GPS, EDI etc.)

• Collaboration – effectively working together, sharing (confidential) information (CPFR initiatives)

redundancy transparencyflexibility collaboration

Source: Sheffi and Rice Jr. (2005), Lammers, Ploos van Amstel en Eijkelenbergh (2009)


Reconciling supply chain risk with supply chain management

• The supply chain of tomorrow must deliver varying degrees of six outcomes, depending on the customers’ needs:

• Cost efficiency• Responsiveness• Security• Sustainability• Resilience• Innovation

• There could be other outcomes e.g. Reliability

• “Adaptability, key to success”

Source: Melnyk, Davis, Spekman and Sandor (2010)


Summary

• Supply chains are exposed to a wide range of risks that are distinctive for each and every supply chain

• Disruptions can have severe consequences, both tangible (higher costs, lost sales etc.) and intangible (reputation, fear etc.)

• Supply chain risk management seeks to identify risks, assess their impact and subsequently mitigate these risks

• Resilience is another perspective for risk management, focusing on reducing the consequences of a major disruption

• Supply chain resilience is one of six ‘outcomes’ that a modern supply chain should have


Suggested further reading

• Asbjørnslett, B. (2008). Assessing the vulnerability of supply chains, In: Zsidisin, G., Ritchie, B. (Eds.), Supply Chain Risk: A Handbook of Assessment, Management and Performance, New York: Springer, pp. 15-33

• Chopra, S., Sodhi, M. (2004). Managing risks to avoid supply-chain breakdown, MIT Sloan Management Review, Vol. 46 No. 1, pp. 53-61

• Christopher, M., Peck, H. (2004). Building the resilient supply chain, International Journal of Logistics Management, Vol. 15 No. 2, pp. 1-14

• Craighead, C., Blackhurst, J., Rungtusanatham J., & Handfield, R. (2007). The severity of supply chain disruptions: design characteristics and mitigation capabilities, Decision Sciences, Vol. 38 No. l, pp. 131-156

• Khemani, K. (2007) Bringing rigor to risk management. Supply Chain Management Review Vol. 11 No. 2, pp. 67-68.

• Peck, H. (2006). Reconciling supply chain vulnerability, risk and supply chain management. International Journal of Logistics: Research and Applications, Vol. 9 No. 2, pp. 127-142.

• Sheffi, Y., & Rice Jr., J.B. (2005). A supply chain view of the resilient enterprise, MIT Sloan Management Review, Vol. 47 No. 1, pp. 41-48

• Vanany, I., Zailani, S., Pujawan, N. (2009). Supply Chain Risk Management: Literature Review and Future Research, International Journal of Information Systems and Supply Chain Management, Vol. 2 No. 1, pp. 16-33

Thanks for your attention

Any questions?

supply chain risk management (guest lecture tilburg university march 2010)

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