Supply chains worldwide have been battling various risks and challenges for some time. Each challenge not only threatens to disrupt operations, but also may have a negative financial impact on business performance and prevent an organization from meeting the demands from stakeholders, customers, shareholders, and regulators.
Supply Chain Council 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. Does this sound like your organization?
f so, supply chain disruptions can be extremely costly. A disruption in your supply chain can cost millions of dollars in lost time, energy and resources. Their effects are both direct (e.g. halting production altogether) and indirect (e.g. on stock values). Taking steps to help reduce supply chain disruption is the only way to avoid these costs.
Proactive discovery and visibility of risks is the key to the prevention and management of supply chain disruptions.
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Preventing and Managing Supply Chain Disruptions
1. Preventing and Managing
Supply Chain Disruptions
Prepared and Presented by:
Thomas L. Tanel, C.P.M., CTL, CISCM, CCA
CATTAN Services Group, Inc.
2. “The three areas where companies
find that risk has increased most
are macro-economic uncertainty,
commodity price volatility, and
currency risk.”—Kairos Commodities
Risk Management Survey
3. Agenda Outline
I. Supply Chain Risk Concerns in A VUCA World
II. Risk, Drivers, Generators, and Amplifiers
III. Preventing Supply Chain Disruption
IV. SCRM Process Model
V. Risk Identification and Analysis
VI. Risk Threat Assessment and Criteria
VII.Risk Mitigation Methodology & Planning
VIII.SCCP and Due Diligence
5. Supply Chain Risk Management—
Strategic Imperative
"Risk management is a
strategic imperative for any
large company with a global
supply chain," says Scott
Singer, director of global
supply management at
United Technologies Corp.
5
7. Supply Chain Executives Face Increasing
Concerns about Mitigating Logistics Risk
• The World Economic Forum Report Global Risks 2012
• According to ChainLink’s research for 2012, companies
will increasingly turn to risk-reduction approaches.
• The New Supply Chain Advantage—Factory Mutual
Global report says “supply chains have been stretched
farther than they have ever been stretched in the past.”
8. II. Risk, Drivers, Generators, and
Amplifiers
“It ain’t what you do know
that gets you into trouble.
It’s what you know for
sure that just ain’t so.”—
Mark Twain
9. Most Common Supply Chain Risks I
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Financial instability, bankruptcy, or financial failure of a supplier
Fire, chemical spill, etc. at the supplier firm
Problems in electronically sharing information with suppliers
Suppliers incorrectly interpreting our requirements
Natural disasters or “acts of God” affecting suppliers’ operations
Political instability, terrorism, civil strife, or war affecting
suppliers’ operations
Reduced accuracy of forecasts and plans
Long physical distances between buyer and suppliers
Inability to influence /manage suppliers
Lack of alternative sources of supply
Labor availability, slowdowns, strikes, and quality of workforce
Health issues, disease, quarantines, and pandemics
Inadequate production capacity and poor logistics and
transportation infrastructure
Unanticipated spikes in demand
IT and communications network shortfalls
Political graft, bribery, and corruption
In-transit water damage, spoilage, and contamination
9
Source: CATTAN Services Group, Inc. Research
10. Most Common Supply Chain Risks II
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Inability of supplier to meet increases or seasonality in required volumes
Product or service quality issues
New or unproven product/process technology being used by suppliers
Transportation disruptions or terrorism infiltration with inbound supply
channels
Variability in transportation times with inbound supply channels
Port congestion gridlock and customs delays
Theft, piracy, pilferage, and hijacking
Possibility of suppliers putting your firm on allocation
Incoming product quality problems
Labor/management problems at suppliers
Currency rate and foreign exchange rate fluctuations
Material price fluctuation swings
Volatile fuel prices, extra surcharges, and energy shortages
Longer cycle times and increased inventory
Extra administration and additional costs for expediting, follow-up, and
premium freight
Unit of measure accounting and inventory discrepancies
Meeting SOX requirements and compliance costs
Government, trade, and regulatory actions
Power and electric grid disruptions, failures, brownouts, and blackouts
Source: CATTAN Services Group, Inc. Research
10
11. Supply Chain Risk Driver Generators
Supply chain risk is about any
threat of interruption to the
workings of the supply chain.
Risk may be generated as a result
of risk 'drivers' that are either
internal or external to the
organization’s supply chain.
External Drivers
Examples:
•S–Fire, chemical spill, etc. at the supplier firm
•D–Unanticipated spikes in demand
•E–Health issues, disease and pandemics
•O–Longer cycle times and increased inventory
•P–Product or service quality issue
Source: CATTAN Services Group, Inc.
Internal
Drivers
11
12. Supply Chain Disruption Amplifiers
The impact of supply chain disruptions increases when any of
the following product/process complexity parameters
increase in a given supply chain:
• Product complexity (number of parts, levels in bill of material,
difficulty in meeting specifications)
• Proprietary technology
• Value of product
• Quality requirements
• Supplier manufacturing capacity
• Uniqueness of parts
• Part size
Source: Supply Chain Research Consortium at North Carolina State University
12
13. Supply Chain Disruption Amplified
In their 2005 study of the financial effect of supply chain disruptions, Kevin
Hendricks, formerly of the University of Western Ontario, and Vinod
Singhal, of the Georgia Institute of Technology, revealed a significant
financial impact on performance, as operating income dropped by 107%,
return on sales by 115% and return on assets by 92%
13
16. How to Handle Disruptions in the
Supply Chain—Two Perspectives
Time
Disruptive Event Happens
Time
17. Risk Management in a Global
Economy—Survey Findings
• In one industry after another, supply chains
have been stretched farther than they have ever
been stretched in the past.
• Few have much experience managing supply
chain risk across oceans and continents.
• As organizations outsource or best cost country
source to developing countries, they
unknowingly take on greater exposure.
• While some of the best supply chain strategies
can help minimize costs and free you to focus on
core competencies, these same strategies also
may stretch your supply chain to the breaking
point and leave your organization vulnerable.
Source: The New Supply Chain Advantage—Factory Mutual Global
17
19. "As firms move to leaner
operating models and
leverage global sourcing
models, uncertainty in both
supply and demand is growing
along with supply chain
complexity," said Mark
Hillman, research director,
AMR Research. "As a result,
the need to manage risk,
specifically in supply chain, is
on the rise."
19
20. Risk Management Process
SCRM
Strategy &
Objectives
SCRM
Mitigation &
SCCP Risk
Avoidance
Source: CATTAN Services Group, Inc.
SCCP Risk
Management
Tools
SCRM
Assessment
of
Data Sources
SCMR—Supply Chain Risk Management
SCCP—Supply Chain Continuity Planning
20
21. Risk Management Flowchart—Example
Risk Identification
Risk Assessment
Threat
Expertise
Threat Assessment
Identify
Threat
Identify Material
or Service
Quantify Severity
Of Threat
• Supply Chain
• Critical Logistics
Components
Yes
Plan for
Change
• Alternate Sources
• Alternate Material
• Ease of Manufacture
or Service
• Multiplicity of Threats
Material/Service Assessment
Internal Customer Assessment
Quantify Internal
Customer Risk
Risk Mitigation
Business
Case
Quantify Criticality
Of Material/Service
Identify
Changes
Risk Too
High?
• Proprietary Infringement
• Theft and Hijacking Security
• Sole Source/Lack of Alternate
• Inbound Pipeline Visibility
• Incoming Quality Implications
• Forecast Demand Capacity
• Reverse Logistics
No
Implement
Change
Risk
Database
Process Assessment
Assess Sourcing Process
Measure
Results
New
Tools
Risk
Metrics
• Sources of Supply
• Policy & Procedures
• Supplier Base Information
• Market Intelligence
21
Source: CATTAN Services Group, Inc. adapted in part from the Risk Management Guide for DOD Acquisition
23. Supply Chain Risk Management (SCRM)
Process Model
1.
2.
Strategic Supply
3.
Chain Strategy and
Objectives
Risk Mitigation
Assessment
Risk Mitigation
Planning
Risk Mitigation
Plan
Implementation
Supply Chain
Risk Identification
and Risk Analysis
Supply Chain
Risk Assessment and Mitigation
Results
Risk Tracking and Supply Chain Continuity Plan
23
Source: CATTAN Services Group, Inc.
24. Strategic Supply Chain Objectives—
Example
Objective
A. Cultivate longterm relationships
Action Step
Date
A.1. Conduct a “Customer Rating by
Supplier Base” Survey.
01/
A.2.Implement a “Welcome Booklet”
Supplier Guide for use in the Purchasing
Department and establish a Supplier
Advisory Council (SAC).
05/
A.3.Communicate to our suppliers both our
mission and the
products/services/technology they
provide; include their successes and
results in supporting our long-term
business needs and the inherent risk.
01/ and
ongoing
A.4.Continue to hold quarterly “Supplier
Sourcing Group Day” meetings with our
suppliers.
Continue
24
Source: CATTAN Services Group, Inc.
25. “There needs to be a fundamental rethink of
management approaches. The still widespread
practice of focusing risk management systems on
observation and control of suppliers, and passing on
risks to upstream partners in the value-added chain,
has no future,” says Sven Marlinghaus, a partner at
BrainNet, and co-author of the study Risk
Management Reloaded — A Procurement Perspective.
“Nowadays, businesses that want to survive must
integrate their suppliers in a working partnership and
take an unobstructed view of the diversity and
interdependencies of risk factors that could endanger
security of supply.”
25
28. Benefits of Supply Chain Scenario Planning
• Encourage people to break their standard world views
• Forced to consider possibilities may not have had any experience
• Better able to understand the source of disagreements
• Brings together the views of different departments
• May serve as signposts that the scenario is unfolding
• Helps in proactively assessing consequences
• Can help develop early warning systems
31. Risk Identification
• The intent of risk identification is to answer the question
“what can go wrong?”
– Reviewing potential shortfalls against expectations, metrics, KPIs , and
KRAs and
– Analyzing negative trends
• Identify associated root causes, begin their documentation,
and set the stage for their successful management.
• The level of likelihood of each root cause is established
utilizing specified criteria.
31
32. SCM Is Managing Uncertainty
UnknownUnknown
U
n
k
n
o
w
n
/
K
n
o
w
n
Uncontrollable
1. Natural Disasters, Weather, & Epidemics
2. Energy and Fuel Price Swings
3. Supply Chain Compression & Reliability
4. Economic & Monetary Disruptions
5. Financial Viability of 3PLs & Carriers
6. Global Market Changes & Demand Shifts
7. Supply Chain Talent Brain Drain
8. Information & Communication Technology Change
9. Regulatory & Trade Environment
10. Panama Canal Expansion
KnownKnown
Controllable
32
33. Risk Analysis
• Risk has two critical elements: likelihood of
occurrence (probability) and severity of
impact or consequence (magnitude).
• The level and type of consequences of each
risk are established utilizing criteria such as
those described in the following slides.
33
34. Levels of Likelihood Criteria—Example I
Level
Descriptor
Description
A
The event is expected to occur
in most circumstances
B
Almost
Certain
Likely
C
Possible
The event should occur at some
time
D
Low
The event will probably occur in
most circumstances
The event may occur only in
exceptional circumstances
34
35. Levels of Likelihood Criteria—Example II
Descriptor Probability
Rank
Value
Highly Probable
>75%
High
5
Probable
>50%--<75%
Medium
High
4
Occasional
>25%--<50%
Medium
3
Remote
>10%--<25%
Medium
Low
2
Improbable
<10%
Low
1
35
36. Levels of Likelihood Criteria—Example III
Level
Likelihood
Approximate Probability
of Occurrence
1
Not Likely
~10%
2
Low Likelihood
~30%
3
Likely
~50%
4
Highly Likely
~70%
5
Near Certainty
~90%
36
37. Cranfield University’s Cranfield
Management Research Institute
Centre for Logistics and Supply Chain
Management defines supply chain
vulnerability as “an exposure to
serious disturbance, arising from risks
within the supply chain as well as risks
external to the supply chain.”
37
38. Recent Trends of Global Supply Chains
Expose Organizations to Increased Supply Risk
38
Source: World Economic Forum and Accenture Research
39. Severity of Consequence Criteria—Example I
Level Descriptor
4
Critical
3
Major
2
Moderate
1
Minor
Description
General failure in meeting
strategic supply chain
objectives
Significant shortfall in
meeting strategic supply
chain objectives
Does not meet more than
one strategic supply chain
objectives
Does not meet a strategic
supply chain objectives
39
40. Severity of Impact Criteria—Example II
Descriptor
Rank
Value
Catastrophic
High
5
Critical
Medium
High
4
Serious
Medium
3
Marginal
Medium Low
2
Negligible
Low
1
40
42. Risk Threat Assessment Guidelines
• To what degree is the threat information
CREDIBLE ?
• To what degree is the threat information
CORROBORATED ?
• To what degree is the threat SPECIFIC or
IMMINENT ?
• HOW GRAVE are the potential consequences
of the threat?
Source: CATTAN Services Group, Inc.
42
43. Risk Quadrant Continuum
HIGH
L O
i c
k c
e u
l o r
i f r
h e
o n
o c
d e
2
High
Likelihood
Low Severity
1
Low
Likelihood
Low Severity
LOW
4
High
Likelihood
High Severity
3
Low Likelihood
High Severity
Severity of Consequence or Impact
Source: CATTAN Services Group, Inc.
HIGH
43
44. Risk Mitigation Assessment Methodology
• Risk identification and valuation.
• Risk analysis, threat assessment, and vulnerability
assessment.
• Risk quantification of the likelihood of event
occurrence and the severity of impact or
consequence.
• Risk quantification ranking and priorities.
• Risk countermeasures and expected risk reduction.
Source: CATTAN Services Group, Inc.
44
45. Levels of Likelihood Criteria—Example II
Descriptor Probability
Rank
Value
Highly Probable
>75%
High
5
Probable
>50%--<75%
Medium
High
4
Occasional
>25%--<50%
Medium
3
Remote
>10%--<25%
Medium
Low
2
Improbable
<10%
Low
1
45
46. Severity of Impact Criteria—Example II
Descriptor
Rank
Value
Catastrophic
High
5
Critical
Medium
High
4
Serious
Medium
3
Marginal
Medium Low
2
Negligible
Low
1
46
47. Risk Identification to Risk Analysis
Risk Analysis Likelihood and Impact Framework
Source: Westec Advanced Productivity Exposition by Quality Plus Engineering
47
48. Risk Analysis to Risk Mitigation
Risk Analysis Likelihood and Impact Framework
Source: Westec Advanced Productivity Exposition by Quality Plus Engineering
48
49. Risk Analysis Assessment
• Risk assessment
for all the
suppliers uses a
red, yellow, green
chart.
• Risks in the red
receive a higher
level of
management
attention than
risks in the yellow
or green zones.
51. Risk Mitigation
• Having assessed all the risks and identified
those that require action, plans need to be
drawn up and responsibilities assigned to
control and mitigate these risks.
• Risks should be allocated to an owner, who is
responsible for managing them, possibly with
the help of other supply chain team members.
51
52. Risk Mitigation (Con’t)
• The allocation of risk should be dependent on
the assessment of the likelihood and
consequence of the risk and then the
identification of who is best able to control or
manage the risk.
• This is the most important aspect of any
significant purchase and something that we
should be involved in.
52
53. Risk Mitigation Planning
• The intent of risk mitigation planning is to
answer the question “what is our
approach for addressing this potential
unfavorable consequence?”
– Avoiding risk by eliminating the root cause
and/or consequence
– Controlling the cause or consequence
– Transferring the risk, and/or
– Assuming the level of risk and continuing on
the SC plan
“There is nothing more deceptive than an obvious fact”
53
Sherlock Holmes
54. Five Logistics Risk Management
Response Options
1. Infer logistical differences in a country’s
economic capability
2. Understand the bullwhip effect
3. Invest in redundancy
4. Increase velocity in sensing and responding
5. Create an adaptive supply chain community
58. Risk Management Response—
Sensing and Responding
• Speed in sensing and responding can help
the firm overcome unexpected supply
problems.
• Failure to sense could lead to…
• Example
59. Risk Management Response—
Adaptability
• The most difficult risk management method to
implement effectively.
• Requires all supply chain elements to share the
same culture, work towards the same
objectives and benefit from financial gains.
• Example
60. Five Global Logistics Risk
Management Response Strategies
• Speculative Strategy
• Hedge Strategy
• Flexible Strategy
61. Five Global Logistics Risk
Management Response Strategies
• Avoidance Strategy
• Postponement Strategy
62. Risk Mitigation Plan Implementation
• The intent of risk mitigation plan execution is to
ensure successful risk mitigation occurs.
• This provides a coordination platform with senior
management and all supply chain stakeholders.
• It directs the SCRM team to execute the defined risk
mitigation plan and to provide a reporting
mechanism for on-going monitoring.
62
64. Supply Chain Continuity Plan (SCCP)
• Increasing globalization is forcing
organizations to get a better handle on
the risks and interdependencies in the
supply chain.
• As the supply chains get leaner, there is
less ability for the supply chain to absorb
or “soak up” the shocks that occur.
• Increasing velocity and length of global
supply chains has left many with more
questions than answers.
64
65. Supply Chain Continuity Plan (Con’t)
• Does your organization have the
wherewithal to implement a robust
Supply Chain Risk Management (SCRM)
strategy?
• If not, do you feel that your organization is
flirting with disaster by not exploring and
investing in SCRM measures?
• SCMR is becoming an increasingly visible
multifaceted phenomenon! What are you
doing to mitigate it?
65
66. Thinking Through Supply Chain Risk—
Due Diligence
• Effective risk management includes activities
for risk identification, risk analysis, risk
handling, and risk monitoring.
• The unique nature of SCRM lies in the fact that
stakeholders and risks are distributed across
multiple, highly independent organizations.
• Proactive discovery and visibility of risks is the
key to effective risk management.
Source: Manage Your Supply Chain Risk-Society of Manufacturing Engineers
66
67. Thinking Through Supply Chain Risk—
Due Diligence (Con’t)
• Project managers will often observe that common
risks were effectively managed; it was the
unexpected risks that caused the biggest problems.
• In practical terms, the most effective approach for
addressing supply chain risk is for stakeholders
throughout the supply chain to work together to
identify potential risks and propose creative
solutions.
Source: Manage Your Supply Chain Risk-Society of Manufacturing Engineers
67
68. “But the sum and substance of risk
management is in the recognition of
variety. Surprise pursues us
relentlessly because we can never
have all the information we need for a
correct forecast every time. But life is
even harsher than that, for the
incomplete information we do have is
overwhelming, and getting more so all
the time.” says Peter Bernstein of the
Risk Analysis Center.
68
69. The Three Rules of Risk
1. Never risk more than
you can afford to lose.
2. Don't risk a lot to get
a little.
3. The odds matter.