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Supply Chain Risk Guest lecture, LOG 711, 12.11.2008 Jan Husdal    jan.husdal@himolde.no    71214289
Outline <ul><li>What is (supply chain)  risk ? </li></ul><ul><li>What are typical  supply chain risks ? </li></ul><ul><li>...
Supply chain risk? Loss of goods Insurance? Loss of vehicle Replacement? Delayed delivery Brand reputation? Injured person...
Supply Chain  Trends   >>>   Consequences <ul><li>The trend towards  just-in-time  and  lean  practices  >>>  efficiency  ...
Supply Chain Risk - Piracy http://www.icc-ccs.org/
Why is supply chain risk important? <ul><li>Even a relatively small supply chain disruption caused by a  localized event  ...
Supply Chain Risk – an example <ul><li>An  ill-handled   supply chain disruption </li></ul><ul><ul><li>>>>  business dis-c...
What is risk? <ul><ul><li>Risk : </li></ul></ul><ul><ul><li>-  exposure  to the chance of injury or loss </li></ul></ul><u...
The risk concept <ul><li>Risk is an ambiguous  concept . </li></ul><ul><li>There are many definitions of risk, depending o...
Risk analysis <ul><li>A commonly used method for risk analysis is by plotting unforeseen or unwanted events in a  risk mat...
Proactive versus Reactive Asbjørnslett, B E and Rausand, M (1997)  Assess the vulnerability of your production system . Re...
Business risks  <ul><li>Externally-driven  or environmental risk - external factors, competitors, customers, regulations <...
Supply Chain Risk Jütner, U., Peck, H. and Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for Fu...
Supply chain risk sources 1/2 <ul><ul><ul><li>Internal to the focal firm </li></ul></ul></ul><ul><ul><ul><li>External to t...
Supply chain risk sources 2/2 <ul><li>Sources of risk can be broadly categorized along  three different levels:  </li></ul...
Types of supply chain risk 1/2 <ul><li>Network (Supply Chain) Risks </li></ul><ul><li>Supply  Risks - disruption of supply...
<ul><li>Environment Risks </li></ul><ul><li>Macro  Risks - economic shifts, recession, labour costs, exchange rates, custo...
Risk Management Strategies Avoid Transfer Reduce Retain Deloach, J (2000)  Enterprise-Wide Risk Management: Strategies for...
Supply Chain Risk Management <ul><li>Supply chain risk management can be described as the  intersection  of supply chain m...
Supply Chain Risk Management Strategies <ul><li>Avoidance - exiting a market (or product) or delay entering a market (or p...
Supply Chain Risk Management Strategies <ul><li>Control - vertical and lateral integration of suppliers and business partn...
Supply Chain Disruptions Sheffi, Y. (2005)  The Resilient Enterprise - Overcoming Vulnerability for Competitive Advantage ...
<ul><li>Different supply chain characteristics will result in different ways a suply chain disruption is handled. </li></u...
Supply Chain Disruptions 3/3 <ul><li>Resilient  organisations   </li></ul><ul><li>Resilient  supply chains </li></ul>Mc Ma...
<ul><li>Supply Chain Design A supply chain is more likely to be severely impacted if there is </li></ul><ul><ul><li>supply...
Supply Chain Vulnerability 1/2 <ul><li>Which parts of the supply chain are most important? (”Criticality”) </li></ul><ul><...
Supply Chain Vulnerability 2/2 <ul><li>Prioritize  earnings drivers </li></ul><ul><li>Identify  critical infrastructure  t...
Supply Chain Risks and Drivers Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown.  MIT Sloan M...
Supply Chain Risks and Drivers Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown.  MIT Sloan M...
Selecting the right strategy Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown.  MIT Sloan Man...
Tailored Risk Mitigation 1/2 Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown.  MIT Sloan Man...
Tailored Risk Mitigation 2/2 Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown.  MIT Sloan Man...
Manage supply chain risk 1/2 <ul><li>Understand  the supply chain </li></ul><ul><ul><li>view it from end to end, from supp...
Manage supply chain risk 2/2 <ul><li>Allow  network visibility </li></ul><ul><ul><li>don't be afraid to share information....
Summary <ul><li>Supply Chains are exposed to  a variety of risks  that are unique to each supply chain. </li></ul><ul><li>...
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Supply Chain Risk

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Lecture on supply chain risk

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Supply Chain Risk

  1. 1. Supply Chain Risk Guest lecture, LOG 711, 12.11.2008 Jan Husdal  jan.husdal@himolde.no  71214289
  2. 2. Outline <ul><li>What is (supply chain) risk ? </li></ul><ul><li>What are typical supply chain risks ? </li></ul><ul><li>How to manage supply chain risks? </li></ul>
  3. 3. Supply chain risk? Loss of goods Insurance? Loss of vehicle Replacement? Delayed delivery Brand reputation? Injured personell Hiring and training? Weather conditions Detour?
  4. 4. Supply Chain Trends >>> Consequences <ul><li>The trend towards just-in-time and lean practices >>> efficiency rather than effectiveness . </li></ul><ul><li>The trend towards reducing costs (at almost any cost) >>> globalization of supply chains, more complex and vulnerable . </li></ul><ul><li>The trend towards economies of scale >>> centralized distribution and manufacturing >>> lower costs but at the same time less flexibility . </li></ul><ul><li>The trend towards outsourcing non-core business activities >>> loss of control of the supply chain when it is most needed . </li></ul><ul><li>The trend towards consolidation of suppliers (intentional and incidental mergers and acquisitions) >>> increased potential for supply failure . </li></ul>Christopher, M. (2005) Managing risk in the supply chain . In: Christopher, M. (Ed.) Logistics and Supply Chain Management. 3rd ed., Prentice Hall, pp. 231-258.
  5. 5. Supply Chain Risk - Piracy http://www.icc-ccs.org/
  6. 6. Why is supply chain risk important? <ul><li>Even a relatively small supply chain disruption caused by a localized event may have consequences across the global economic system . </li></ul><ul><li>Globalization, offshoring and outsourcing leads to >> “no” control over causes to events in the supply chain. >> “only” control over consequences of events in the supply chain. </li></ul>World Economic Forum (2008) Hyper-optimization and supply chain vulnerability: an invisible global risk? In: Global Risks 2008 – A Global Risk Network Report, REF: 090108, World Economic Forum, Switzerland. http://www.weforum.org/pdf/globalrisk/report2008.pdf
  7. 7. Supply Chain Risk – an example <ul><li>An ill-handled supply chain disruption </li></ul><ul><ul><li>>>> business dis-continuity </li></ul></ul><ul><li>A well-handled supply chain disruption </li></ul><ul><ul><li>>>> business continuity </li></ul></ul>Norrman and Janson (2004) Ericsson’s proactive supply chain risk management after a serious sub-supplier accident . International Journal of Physical Distribution and Logistics Management, Vol 34, No 5, pp. 434-456
  8. 8. What is risk? <ul><ul><li>Risk : </li></ul></ul><ul><ul><li>- exposure to the chance of injury or loss </li></ul></ul><ul><ul><li>- hazard or dangerous chance </li></ul></ul><ul><ul><li>- chance of loss </li></ul></ul><ul><ul><li>- degree of probability of such a loss </li></ul></ul>Aven, T. (2002) Foundations of Risk Analysis : A Knowledge and Decision-Oriented Perspective, John Wiley & Sons.
  9. 9. The risk concept <ul><li>Risk is an ambiguous concept . </li></ul><ul><li>There are many definitions of risk, depending on their specific application and on their situational context . </li></ul><ul><li>Risk denotes the precise probability of specific eventualities . </li></ul><ul><li>Technically, risk has no value, so these eventualities can be beneficial or adverse (i.e. financial risk). </li></ul><ul><ul><li>RISK = Probability * Consequences </li></ul></ul>
  10. 10. Risk analysis <ul><li>A commonly used method for risk analysis is by plotting unforeseen or unwanted events in a risk matrix . This can be done qualitatively , where probabilities and impacts are subjective values (e.g. low/high and minor/major),or quantitatively , where probablities and impacts are objective values (e.g. frequency and cost in $$$). </li></ul>Norman, A. and Lindroth, R. (2004) Categorization of Supply Chain Risk and Risk Management . In: Brindley, C. (Ed.) Supply Chain Risk. Ashgate, pp. 14-27.
  11. 11. Proactive versus Reactive Asbjørnslett, B E and Rausand, M (1997) Assess the vulnerability of your production system . Report NTNU 97018. Norwegian University of Science and Technology NTNU, Department of Production and Quality Engineering, Trondheim, Norway. Tomlin, B. (2006) On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks . Management Science, Vol. 52, No. 5, pp. 639-657 Ritchie, B. and Brindley, C. (2004) Risk Characteristics of the Supply Chain – A Contingency Framework . In: Supply Chain Risk. Ed. Brindley, C. , Ashgate Publishing, pp. 28-42,197-202 Mitigative actions address risk sources. Contingent actions address risk consequences.
  12. 12. Business risks <ul><li>Externally-driven or environmental risk - external factors, competitors, customers, regulations </li></ul><ul><li>Internally-driven or process risk - operations and processing </li></ul><ul><li>Decision-driven or information risk - insufficient or erroneous decision support </li></ul>De Loach, J. W. (2000) Enterprise-wide Risk Management: Strategies for linking risk and opportunity , Financial Times/Prentice Hall In order to understand suply chain risk it is useful to first look at business risks in general.
  13. 13. Supply Chain Risk Jütner, U., Peck, H. and Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for Future Research. International Journal of Logistics: Research and Applications, Vol. 6 , No. 4, pp. 197-210. Supply Chain Risk can be viewed as a 4-fold construct: Risk sources . Consequences of the risk sources. Risk drivers that turn risks into consequences. Strategies to address the risks.
  14. 14. Supply chain risk sources 1/2 <ul><ul><ul><li>Internal to the focal firm </li></ul></ul></ul><ul><ul><ul><li>External to the focal firm </li></ul></ul></ul><ul><ul><ul><li>Internal to the supply chain </li></ul></ul></ul><ul><ul><ul><li>External to the supply chain </li></ul></ul></ul>Peck, H. (2003) Supply Chain Resilience . UK Department of Transport/ Cranfield University, Carnfield, UK. <ul><li>Risks can be seen as internal or external to the focal firm , and be seen as internal or external to the supply chain : </li></ul><ul><li>Process risk </li></ul><ul><li>Control risk </li></ul><ul><li>Supply risk </li></ul><ul><li>Demand risk </li></ul><ul><li>Environment al risk </li></ul>
  15. 15. Supply chain risk sources 2/2 <ul><li>Sources of risk can be broadly categorized along three different levels: </li></ul><ul><li>Organization al risk </li></ul><ul><li>Network risk </li></ul><ul><li>Environment al risk </li></ul>Jütner, U., Peck, H. and Christopher, M. (2003) Supply Chain Risk Management: Outlining an Agenda for Future Research. International Journal of Logistics: Research and Applications, Vol. 6 , No. 4, pp. 197-210.
  16. 16. Types of supply chain risk 1/2 <ul><li>Network (Supply Chain) Risks </li></ul><ul><li>Supply Risks - disruption of supply, inventory and schedules, incoming delays </li></ul><ul><li>Operation al Risks - failure or breakdown of operations, changes in technology </li></ul><ul><li>Demand Risks - variations in demand </li></ul><ul><li>Security Risks - theft, counterfeiting, terrorism, piracy, infrastructure breakdown </li></ul>Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management . Journal of Business Logistics, Vol. 29 , No. 1, pp. 133-155
  17. 17. <ul><li>Environment Risks </li></ul><ul><li>Macro Risks - economic shifts, recession, labour costs, exchange rates, customs </li></ul><ul><li>Policy Risks - actions and sanctions of governments, shifts in legislation </li></ul><ul><li>Competition Risks - uncertainty about competitors’ moves and actions </li></ul><ul><li>Resource Risks - lack of human resources, capital or technology </li></ul>Types of supply chain risk 2/2 Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management . Journal of Business Logistics, Vol. 29 , No. 1, pp. 133-155
  18. 18. Risk Management Strategies Avoid Transfer Reduce Retain Deloach, J (2000) Enterprise-Wide Risk Management: Strategies for Linking Risk & Opportunity. Financial Times Management/ Prentice Hall. Before we look at strategies for managing supply chain risk, let us look at general strategies for managing risk
  19. 19. Supply Chain Risk Management <ul><li>Supply chain risk management can be described as the intersection of supply chain management and risk management. 1 It has a collaborative and structured approach, and is included in the planning and control processes of the supply chain, to handle risks which might affect the achievement of the supply chain goals . 2 </li></ul>1 Paulsson, U. (2004) Supply Chain Risk Management . In : Brindley, C. (ed): Supply Chain Risk. Ashgate Publishing Limited, pp.79-99. 2 Kajüter, P. (2003) Risk Management in Supply Chains . In: Seuring, S Müller, M., Goldbach, M., Schneidewind, U. (eds.) Strategy and Organization in Supply Chains, Physica, Heidelberg, pp. 321-336.
  20. 20. Supply Chain Risk Management Strategies <ul><li>Avoidance - exiting a market (or product) or delay entering a market (or product) </li></ul><ul><li>Postponement - delay commitment of resources to maintain utmost flexibility </li></ul><ul><li>Speculation - assuming risk to gain competitive advantage </li></ul><ul><li>Hedging - globally dispersing your portfolio of suppliers, customers and facilities </li></ul>Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management . Journal of Business Logistics, Vol. 29 , No. 1, pp. 133-155
  21. 21. Supply Chain Risk Management Strategies <ul><li>Control - vertical and lateral integration of suppliers and business partners </li></ul><ul><li>Transferring/sharing risk - outsourcing, offshoring, contracting </li></ul><ul><li>Security - identifying and protecting against unwanted penetration </li></ul>Manuj, I. and Mentzer, J. T. (2008) Global Supply Chain Risk Management . Journal of Business Logistics, Vol. 29 , No. 1, pp. 133-155
  22. 22. Supply Chain Disruptions Sheffi, Y. (2005) The Resilient Enterprise - Overcoming Vulnerability for Competitive Advantage , MIT Press Warning? What happens to supply chain performance during an unforeseen event?
  23. 23. <ul><li>Different supply chain characteristics will result in different ways a suply chain disruption is handled. </li></ul><ul><li>A resilient supply chain is impacted, but it is able to come back to a stable state, although not necessarily to where it was before the disruption. </li></ul><ul><li>In business setting the ability to survive (resilience) is more important than regaining stability (robustness) </li></ul>The difference between Robustness, Flexibility and Resilience Supply Chain Disruptions
  24. 24. Supply Chain Disruptions 3/3 <ul><li>Resilient organisations </li></ul><ul><li>Resilient supply chains </li></ul>Mc Manus, S. et al (2007) Resilience Management – A Framework for Assessing and Improving the Resilience of Organisations . Research Report 2007/01, Resilient Organisations, New Zealand. www.resorgs.org.nz Resilient organizations
  25. 25. <ul><li>Supply Chain Design A supply chain is more likely to be severely impacted if there is </li></ul><ul><ul><li>supply chain density </li></ul></ul><ul><ul><li>supply chain complexity </li></ul></ul><ul><ul><li>node criticality </li></ul></ul><ul><li>Supply Chain Mitigation Capability A supply chain is less likely to be severely impacted if there is </li></ul><ul><ul><li>adaptive capacity (recovery capability) </li></ul></ul><ul><ul><li>information sharing/ visibility (warning capability) </li></ul></ul>Supply Chain Design vis-a-vis supply chain disruptions Craighead, C. W., Blackhurst, J., Rungtusanatham, M. J. & Handfield, R. B. (2007) The Severity of Supply Chain Disruptions: Design Characteristics and Mitigation Capabilities . Decision Sciences, Vol. 38, No. 1, pp. 131-156. Factors (risk drivers) that can aggravate or lessen supply chain disruptions:
  26. 26. Supply Chain Vulnerability 1/2 <ul><li>Which parts of the supply chain are most important? (”Criticality”) </li></ul><ul><li>What can we do if something happens? (”Preparedness”) </li></ul><ul><li>Not being prepared is the biggest risk (”Passive Acceptance”). </li></ul>
  27. 27. Supply Chain Vulnerability 2/2 <ul><li>Prioritize earnings drivers </li></ul><ul><li>Identify critical infrastructure that affect the earnings drivers </li></ul><ul><li>Locate vulnerabilities in the critical infrastructure </li></ul><ul><li>Model scenarios for the vulnerabilities </li></ul><ul><li>Develop responses to the scenarios </li></ul><ul><li>Monitor, detect and respond to potential disruptions as soon as possible </li></ul>Preparing for Evil , Harvard Business Review, April 2003, pp. 109-115
  28. 28. Supply Chain Risks and Drivers Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46 , No. 1, pp. 53-61.
  29. 29. Supply Chain Risks and Drivers Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46 , No. 1, pp. 53-61.
  30. 30. Selecting the right strategy Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46 , No. 1, pp. 53-61. Which strategy works best against which risk?
  31. 31. Tailored Risk Mitigation 1/2 Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46 , No. 1, pp. 53-61.
  32. 32. Tailored Risk Mitigation 2/2 Chopra, S. and Sodhi, M. (2004) Managing Risk To Avoid Supply Chain Breakdown. MIT Sloan Management Review, Vol. 46 , No. 1, pp. 53-61.
  33. 33. Manage supply chain risk 1/2 <ul><li>Understand the supply chain </li></ul><ul><ul><li>view it from end to end, from supplier to end customer. </li></ul></ul><ul><li>Improve the supply chain </li></ul><ul><ul><li>can you simplify and reduce complexity and variability? </li></ul></ul><ul><li>Identify critical paths </li></ul><ul><ul><li>what are the bottlenecks and key nodes/links? </li></ul></ul><ul><li>Manage the critical paths </li></ul><ul><ul><li>make contingency plans. </li></ul></ul>Christopher, M. (2005) Managing risk in the supply chain . In: Christopher, M. (Ed.) Logistics and Supply Chain Management. 3rd ed., Prentice Hall, pp. 231-258.
  34. 34. Manage supply chain risk 2/2 <ul><li>Allow network visibility </li></ul><ul><ul><li>don't be afraid to share information. </li></ul></ul><ul><li>Establish a supply chain continuity team </li></ul><ul><ul><li>make it cross-functional </li></ul></ul><ul><li>Work with suppliers and customers </li></ul><ul><ul><li>are your suppliers and customers aware of their own vulnerabilities? </li></ul></ul>Christopher, M. (2005) Managing risk in the supply chain . In: Christopher, M. (Ed.) Logistics and Supply Chain Management. 3rd ed., Prentice Hall, pp. 231-258.
  35. 35. Summary <ul><li>Supply Chains are exposed to a variety of risks that are unique to each supply chain. </li></ul><ul><li>These risks are related to actions and events that are inside and outside of the supply chain. </li></ul><ul><li>Supply Chain Risk Analysis seeks to identify these risks, their sources and driver s, and their impact on the supply chain. </li></ul><ul><li>Supply Chain Risk Management seeks to establish mitigative and contingent strategies for how to deal with the identified risks and their potential impact on the supply chain. </li></ul>
  36. 36. Thank you

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