Supply chain risk Harold Krikke
Jan 02, 2016
Supply chain risk
Harold Krikke
disruptions
What is supply chain risk?
An event that is certainconveys no supply chain risk!
Supply Chain RiskSupply Chain Risk
UncertaintyUncertainty Exposure / ImpactExposure / Impact
An event to which supply chain objectives are exposed conveys supply chain risk!
Positive(desirable)
consequences= Gain
Negative (undesirable)
consequences= Loss
Possible Event or Scenario (in the Future)
Supply chain network
OurOrganisation
Second TierSuppliers
First TierSuppliers
First TierCustomers
Second TierCustomers
Upstream Downstream
SELL SIDEBUY SIDE
Prim
ary
man
ufac
ture
rs
End
cus
tom
ers
INSIDE
SUPPLY CHAIN MANAGEMENT
OurOrganisation
Second TierSuppliers
First TierSuppliers
First TierCustomers
Second TierCustomers
Upstream Downstream
SELL SIDEBUY SIDE
Prim
ary
man
ufac
ture
rs
End
cus
tom
ers
INSIDE
SUPPLY CHAIN MANAGEMENTDown-streamUp-stream
Source: Harrison & van Hoek, 2002
Supply chain risk classification
Arise from downstream supply chain operations.
Demand Supply Process Catastrophic CSR
Arise from upstream supply chain operations.
Arise from the infrastructure a firm maintains for its operation processes.
A condition within a supply chain that, when detected, may provoke harmful stakeholder reactions due to perceived illegitimacy.
Arise typically from low probability–high impact events that have a severe impact in the area of occurrence.
Examples: Disruptions in the
outbound material flow
Outbound quality problems
Demand fluctuations
Examples: Disruptions in the
inbound material flow
Inbound quality problems
Opportunistic behavior by suppliers
Price fluctuations
Examples: IT failures Local human-
centered issues Trade barriers, e.g.,
tariffs or local content requirements
Examples: Social (e.g., working
conditions) Ecological (e.g.,
energy consumption, emissions)
Ethical (e.g., corruption)
Examples: Extreme natural
hazards Terrorism
Causes of vulnerability
· 7
Mitigation strategies
Minimize/prevent
Robustness: ability of a system to withstand uncertainty and disruptions in the environment• in engineering sciences design changes to cope with
varying circumstances
Resilience: ability of a system to re-establish steady state and to correct negative effects on the system after a disruption occurs • In materials sciences: the ability to recover its original shape
following a deformation
Risk transfer– Insurance is the most widely used form of risk transfer– Involves payment by one party (the transferor) to another (the transferee, or
risk bearer)
hult.edu
Sequence of events
RecoveryBusiness as usual
Time
Per
form
ance
obj
ectiv
e SC operation
Robustness
Reslience
Containment
RISK TRANSFER FROM RETAIL TO PRODUCER LEADS to increased profits for both.
Chen, F.Y. and Yano, C.A. (related demand uncertainty”, Management Science, Vol. 56 No. 8, pp. 1380–97. 2010)
Quan Zhu, Caniels, Krikke, 2015, under reviewPlayers after disruption and before?
LSP surge capacity, sharing investmentsSharing of information (in time)Operational integration
Stabilization
Pricingcf. Veverka 1999, Martha and Subbakrishna 2002
Dell changed its pricing strategy just in time to satisfy customers during supply shortage. After an earthquake hit Taiwan in 1999, several Taiwanese factories informed Apple and Dell that they were unable to deliver computer components for a few weeks. Apple encountered major complaints from customers after trying to convince its customers to accept a slower version of G4 computers. In contrast, Dell's customers continued to receive Dell computers without even noticing any component shortage problem. Instead of alerting their customers regarding shortages of certain components, Dell offered special price incentives to entice their online customers to buy computers that utilized components from other countries.
Case study: Nestlé
10http://businesscasestudies.co.uk/case-studies
Cost of disruption Analysis by of 827 supply chain disruptions at publicly traded firms
found:– Operating performance change:
107% drop in operating income (EBITDA) 114% drop in return on sales (ROS) 93% drop in return on assets (ROA) 7% lower sales growth 11% growth in cost 14% growth in inventories
– Share price change: 33-40% lower stock returns over a three year period 10.8% lower stock returns the first year
– Share price volatility (proxy of risk) change: 21-29% increase in share price volatilityAn Empirical Analysis of the Effect of Supply Chain Disruptions on Long-Run Stock Price Performance and Equity Risk of the Firm , Hendricks and Singhal, Product and Operations Management, 14-1, p.35-52 (2005)
Why is it not so simple?
source: Vermunt, 1993;1997, 2010, Krikke, 2004
Responsive
2000
1990
1980
1970
1960
speed
Price
Quality
Innovation& en service
Price
Quality
Service
Reliability
Price
Quality
Product quality
Price
efficiency
Price
Service
Quality
ServiceService
Innovative Innovative
Responsive
now
3Ps
Price
Quality
Service
Sustainable
Service
Innovative
Supply chain strategies
Ford: T-ModelDetroit, USA, 1908
Breakdown in single tasks Standardized Focus: Intra-organizational
Highly standardized products Focus on cost efficiency
Rigidity
Production/supply networks Customized Focus: Inter-organizational
Smart: fortwoHambach, France, 2008
Highly customized products Focus on differentiation (and cost)
Flexibility
New technologies
• 3D printing– Decentralize, shorten and simplify supply chain– Postpone production– Alternative production locations– Recycle
• Drones• Big data
– Forecast– Risk profiling
Warning signals financial distress
Distress
Default
Changes in ownership structure
Loss of key employees
Conflict in family-run businesses
Threat by financial investors
Strong influence of unions
Problems in the product portfolio
Dependence on few customers / suppliers
Extraordinarily high or low capital expenditures
Worsening of competitive position
Risks of M&A
Quality issues High inventory
levels Capacity issues Technical
problems
Trouble with plant utilization
Profit collapse Postponing
investments Cost explosion:
raw material, personal expenses, etc
Cost cutting programs
Short time work Further financial
requirements
Postponing payment obligations
Invitation to talks with banks and/or sub-suppliers
Requests for:o Change in
payment termso Financing of tools
Termination of trade credit insurances
StakeholderCrisis
Strategic Crisis
OperativeCrisis
RevenueCrisis
LiquidityCrisis
Source: Prof. Christoph Bode, Mannheim business school
http://www.3ders.org/articles/20150812-chinese-military-begins-using-part-production-library-for-3d-printing-replacement-parts.html
Wrap up• Variety of risk (sources)> disruptions• Vulnerability supply chains has grown• Connect risk mitigation to supply chain strategies
and new technologies also for business as usual• Threat or opportunity?• No easy answers
– Mutual dependencies remain– Energy & material supply, quality issues?– Geographical accumulation of risk
• Research limitations– Simulation based, Case specific– Little data