Proactive planning for catastrophic events in supply chains

-Shriram Prabhu S & Shanmukha Sreenivas P

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Journal of Operations ManagementA.Micheal Knemeyer, Walter Zinn, Cuneyt Eroglu

Shriram Prabhu.S Shanmukha

Sreenivas.P

Proactive planning for catastrophic events in supply chains


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SUPPLY CHAIN


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Risk Categorization scheme

No Minor Medium Serious Catastrophic

Business Impact

Pro

bab

ilit

y

Very High

High

Medium

Low

Very Low

Catastrophic

Events


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Primary focusProactive planning for a catastrophic event and not how to respond once a catastrophe occurs .

Prevention is better than cure !!!!


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Conceptual framework for Risk analysisRisk

Assessment &

Vulnerability Analysis

Risk perception

Risk Manageme

nt Strategies

Continuous Evaluation


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Process of proactive planning1)Identify key locations and

threats

4)Select counter measures for each location

3)Evaluate alternate countermeasures for each

location

2)Estimate probabilities and potential loss for each

location


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Step 1a: Identify key locationsA location is considered key if interruption of

its operations results in a major disruption in the flow of goods in the supply chain.

One methodology used for the same is supply chain mapping.


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Supply chain mappingA visual representation of goods, information,

processes, and money flows that occur throughout a supply chain, both upstream and downstream.


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Why supply chain mapping?Supply chains must now compete against

other supply chainsSupply chains are a points of strategic

advantageMaps highlight inefficienciesProvide a methodology for analyzing

processes


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Step 1b: Listing of threatsOnce key locations are identified , a list of

potential threats to each location should be established.

Possible sources – Public sources, Insurance companies.


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Step 2a: Estimation of probabilitiesIn this step, we estimate probabilities for

each potential catastrophe for each key location

Simulators are used typically. These use historical data as input.


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Scheme of a Simulator

Policy Conditions

Damage Estimation

Exposure Data

Local Intensity

Calculation

Event Generation

Insured Loss calculation


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Step 2a: Contd. The probability distributions for different

potential catastrophes are convolved to produce a consolidated probability distribution for each key location

Point estimates are generated by looking at hypothetical loss values.

Disruption Analysis Network DA_NET Wu et al. (2007)This paper presents a network-based modelling methodology to determine how changes or disruptions propagate in supply chains and how those changes or disruptions affect the supply chain system.


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Model outputKey location

Catastrophe 1

Catastrophe 2

Catastrophe 3

Overall

KL 1 X.XXX Y.YYY Z.ZZZ A.AAA

KL 2 B.BBB C.CCC D.DDD E.EEE

These point estimates are probability values


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Scheme of a Hurricane Simulator

Policy Conditions

Past data, prev damages

Exposure Data

Local wind fields, distance from coast..etc

Exp no. of hurricanes in a season,,hurricane size,centralpressure,w

ind speed

Total exposure of an insurance company

(not dealt here)


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Step 2b: Estimate loss

We estimate loss from a catastrophic event.We should consider total impact of the loss of

the facility on the supply chain.

Effect on revenue and

cost

Potential loss of market share

Loss of customer trust


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Possible lossesHuman resourcesProduct/InventoryPhysical assetsPublic infrastructureInformationFinancialHelfrich and Cook (2002)


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Approach with lossesLook at quantifiable losses at first.

Use managerial discretion and know how to estimate qualitative items


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Potential Loss functionPLK = PK LK

Where, PK is the probability estimate of a catastrophic event impacting key location K LK is the estimated loss incurred if catastrophic event occurs at location K


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Step 3: Evaluate CountermeasuresTo manage risk we make use of a

catastrophic risk management matrix.

It shows the probability estimate of a catastrophic event against the estimated loss exposure for each of the firm’s key locations.


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Catastrophic risk management Matrix

•Managers prepare and implement counter measures to mitigate risk from ‘C’ Events

•Managers accept the risk as potentially less costly than counter measures

•Managers prepare and implement counter measures to mitigate loss & risk from ‘C’ Events

•Managers prepare and implement counter measures to mitigate loss from ‘C’ Events

Loss Mitigatio

n

Risk & Loss

Mitigation

Risk Mitigatio

n

Risk & Loss

Acceptance

Proability

Est

imate

d l

oss

fro

m t

he c

ata

stro

ph

ic e

ven

t

Lower Higher

Low

er

Hig

her


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Considerations For each counter measure consider the followingCost of the countermeasure.Effect on PK i.e. quantum of reduction of PK.

Effect on LK i.e. increase in Loss if catastrophe occurs in spite of the countermeasure.


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Model OutputKey location

Counter measure

Investment

CostRs / Year

Reduction in PK

Loss L K

Change in PLRs/Year

Ignore those countermeasures whose cost exceeds decrease in PL


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ImplementationImplementation team needs to decide the

frequency of this exercise.Organizational commitment and zest to this

complex process is vital


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Proactive planning for catastrophic events in supply chains

Leadership & Management

sshanmukha sreenivas

cuneyt eroglushriram

key locationsimulators

asupply chain

key locationsa location

key locationpoint estimates

thesupply chain system

supplychainssupply chains