Chapter3dp&c3-1

“Education in Pursuit of Supply Chain Leadership”

Chapter 3

Chapter3dp&c

Crafting Business and Supply Chain Strategies

Chapter3dp&c3-2

Learning Objectives

• Understanding strategic business dynamics

• Exploring the corporate strategic model

• Defining the corporate mission statement

• Detailing the enterprise strategic hierarchy

• Exploring the five generic operating strategies

• Detailing business unit strategies

• Reviewing the strategic decision components

• Discussing channel design issues

• Discussing production strategy choices

Chapter3dp&c3-3

• Exploring the concept of strategic fit

• Reviewing the key supply chain metrics

• Detailing the balance scorecard approach to performance management

• Defining supply chain risk management

• Discussing the forms of supply chain risk

• Reviewing supply chain risk management analysis tools

• Detailing basic risk responses

• Outlining the supply chain risk maturity model

• Reviewing supply chain management and resiliency

Learning Objectives (cont.)

Chapter3dp&c3-4

Inventory Management Basics

Chapter 3Crafting Business and Supply Chain

Strategies

Defining Business Strategy

Chapter3dp&c3-5

Strategic Dynamics

Customers

Value

Products Services

Operations Management

Dynamic

Marketplace

BusinessStrategy

Tactics andOperations

DeliverySystems

ExternalEnvironment

InternalEnvironment

Chapter3dp&c3-6

External Environmental Scanning

Enterprise

Economic features

Competitive environment

Business prospects

Actions of competitors

Marketplace forces

Business partner

environment

Market position

Chapter3dp&c3-7

Strategic Group Mapping

Few localities Many localitiesGeographic Coverage

Lo

wH

igh

Pric

e/Q

ualit

yThe size of the circles approximates revenues

Taco Bell

Ted’s Montana

Grill

Panera,Chipolte

White Castle

Cheese-cake

Factory,Houlihan’s

Ruth’s Christ

McCormick & Schmick

McDonald’s,Burger King,

Wendy’s

Subway,KFC

Chapter3dp&c3-8

Internal Environmental Scanning

Enterprise

Success of internal

strategies

Determine performance

measurements

Benchmarking functional strategies

Strength of resources and competencies

Strength of company value

chain

Strength of supply chain

strategy

Chapter3dp&c3-9

Corporate Strategic Model

Enterprise Vision/Mission

Enterprise Objectives

Corporate Strategy

External Environmental

Scanning

FunctionalStrategies

Internal EnvironmentalScanning

Chapter3dp&c3-10

Defining the Corporate Mission

The set of guiding principles, driving

forces, and ingrained attitudes that

help communicate goals, plans, and

policies to all employees and that are

reinforced through conscious and

subconscious behavior at all levels of

the organization.

Chapter3dp&c3-11

Mission Statement Examples

To build shareholder value by delivering pharmaceutical and healthcare products, services and solutions in innovative and cost effective ways. We will realize this mission by setting the highest standards in service, reliability, safety and cost containment in our industry. (AmerisourceBergen, a pharmaceutical distributorship)

We are a market-focused, process-centered organization that develops and delivers innovative solutions to our customers, consistently outperforms our peers, produces predictable earnings for our shareholders, and provides a dynamic and challenging environment for our employees. (Ashland, a chemical, distribution and refinery company)

Chapter3dp&c3-12

Mission Statement Examples (cont.)

At Microsoft, our mission and values are to help people and businesses throughout the world to realize their full potential. We consider our mission statement a promise to our customers. We deliver on that promise by striving to create technology that is accessible to everyone—of all ages and abilities. Microsoft leads the industry in accessibility innovation and in building products that are safer and easier to use. (Microsoft)

Chapter3dp&c3-13

Mission Statement Examples (cont.)

Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App Store, and is defining the future of mobile media and computing devices with iPad. (Apple)

Chapter3dp&c3-14

Enterprise Strategic Hierarchy

Corporate Strategy

Functional Business Unit

Strategy

Business Unit Operating Strategy

Business Unit Strategy

Risks andUncertainties

ConstraintsOpportunities

Enterprise Objectives

Chapter3dp&c3-15

Strategic Framework

Supply Chain Strategy

Corporate Strategy Market Strategy Competitive Values Process DecisionsChannel Network

Configuration

Competitive differentiation

Marketing plan Price Make-to-stock Single echelon

Profit plan Product life cycles Quality Assemble-to-order Multiple echelon

Asset planProduct range, volume, mix

Delivery Make-to-orderUse of 3rd party intermediates

Earnings plan Distribution strategy Image Outsourcing intensity Postponement strategy

Capital budgets Service goals Reliability Collaborative intensityIntensity of channel dependence

Order customization/ configurability

FlexibilityResource/capacity management

Intensity of channel integration

Use of technology enablers

Product designLean/demand-driven/ agility

Basic service outputs definition

Service Cost improvement Globalization

Globalization Risk management

Chapter3dp&c3-16

Porter’s Five Competitive Strategies

Low-cost provider

Broad differentiation

Best-cost provider

Focused low-cost provider

Focused differentiation

Competing by offering low production and distribution costs to capture competitive price leadership and win market share

Competing by offering some product or service that is unique and highly valued by a broad base of customers

Competing by blending products with high differentiation with a lower cost than what competitors can match

Competing by offering products and services to a well-defined, but narrow market segment and under-pricing competitors by using operations with lower production, services, and distribution costs

Competing by offering highly differentiated products with customized attributes to a well-defined, but narrow market segment

Chapter3dp&c3-17

Five Generic Operating Strategies

Inbound logistics

Associated with the acquisition, movement, and storage of materials, components, and products into the business

OperationsAssociated with the conversion of production inventories into finished goods

Outbound logistics

Associated with the movement of finished goods through the distribution channel

Marketing and sales

Associated with marketing and product sales

Service Associated with pre- and post-sale services

Chapter3dp&c3-18

Inventory Management Basics

Chapter 3Crafting Business and Supply Chain

Strategies

Crafting the Supply Chain Strategy

Chapter3dp&c3-19

Business Unit Strategies

Business Unit B Strategy

Corporate Strategy

Business Unit A Strategy

Business Unit C Strategy

Marketing/ Sales

Strategy

Engineering/ Design

Strategy

Financial Strategy

Supply Chain

Strategy

Human Resources Strategy

Chapter3dp&c3-20

Supply Chain Strategic Value

Operating cost reduction

Includes supply chain efficiency in old and new markets, response time to react, risk plans, and suppliers willing to take favorable terms

Increasing revenues

Includes differentiation from the competition with value-added services and increasing customer loyalty

Differentiated service

capabilities

Includes customer value of on-time, dependable delivery; quick response; flexibility in executing schedule and order changes; and influencing the customer's purchasing decisions

Strategic supplier

engagement

Includes strength of collaborative relationships, strength of supplier loyalty, product development cycle time reduction, on-schedule product introduction, and fast production ramp up

Long-term equity

improvement

Ability to grow the company's equity in the eyes of the marketplace

Chapter3dp&c3-21

SCM Strategic Journey

Supply Chain ResourcesFeedback

DrivesSupply Chain ProcessesFeedback

Drives

Business Strategy

Supply Chain Network

Feedback

DrivesSupply Chain Strategy

Drives

Feedback

Segment business into supply chains, determine performance

Optimize network for strategic performance requirements

Manage processes towards strategic network goals

Continuously align resources to meet process goals

Chapter3dp&c3-22

Stages of Supply Chain Strategy

Functional Internal Integration

External Collabor-

ation

Dynamic, Adaptive

Operations focus

Linkage of internal

logistics functions

Integration of SCM functions

and linkage with business

strategy

SCM strategy acts as a driver of

corporate strategy

Internal logistics optimization

SCM operations assist in competitive advantage

SCM operations create competitive advantage

OperationsExecution

Increasing SCM Strategic Impact

Inc

rea

sin

g S

tra

teg

ic Im

pa

ct

Stage 1

Stage 2

Stage 3

Stage 4

Supportive of business

strategy

Drives business strategy

Chapter3dp&c3-23

Supply Chain Strategy Performance

AttributesConsists of the attributes that describe the performance of supply chain resources

Drivers

Consists of the fundamental activities performed by supply chain resources that enable it to drive competitive advantage for the business

MeasurementsConsists of the performance metrics that indicate the success of the supply chain strategy

Chapter3dp&c3-24

SCOR® Performance Attributes

Reliability Ability to perform tasks as expected

ResponsivenessSpeed at which a supply chain provides products and services to the customer

AgilityAbility to respond to marketplace changes to gain or maintain competitive advantage

CostsThe cost of operating supply chain resources. Costs include labor, materials, transportation, and management

Asset management

Ability to efficiently utilize supply chain assets to support demand

Chapter3dp&c3-25

Barnes and Noble Performance ExamplePerformance Attributes B&N Retail Sales B&N Online Sales

Reliability

Store hours meet expectations Availability of product Friendly staff Returns accepted

Order filled 100% Deliveries arrive in quoted time Orders arrive without damage Returns accepted

Responsiveness

Short cycle time to acquire, merchandise, and sell

High product turns Speedy customer checkout Speedy inbound delivery

Same-as competition or faster delivery time Short delivery from special and used books

partners Fast and easy order entry, shopping cart,

and payment

Agility

Ability to quickly rebalance store inventory imbalances

Short cycle time for deliveries from supplying warehouse network

Ability to use multiple sources of supply

Quick shipment of any product from any warehouse or partner at lowest cost

Costs

Maintain low cost using selective stocking strategy

Reducing store cost of goods Reducing costs to source Reducing costs to return

Maintain low cost using selective stocking strategy

Reducing costs to source Reducing costs to deliver Reducing costs to return

Asset Management Efficiency

Fast cash-to-cash cycle High return on store assets and operating

costs Low total supply chain asset costs High return on working capital

Fast cash-to-cash cycle Low total supply chain asset costs High return on working capital Low technology costs Centralization of stocking points and

inventories

Chapter3dp&c3-26

Strategic Decision Components

Supply Chain

Strategy

Customer Focus

TechnologyChannel Design

Inventory

Business Unit Strategy

TransportationSourcing

Chapter3dp&c3-27

Order Winners and QualifiersMarket criteria Description

Price

Based on the nature of the product and its position in the product life cycle, competitiveness my depend on price-sensitivity. In high margin markets, price is not an order winner. However, in low margin markets, price is an order-winner. The supply chain's role in this type of market is to improve on order qualifying criteria while reducing costs to keep prices low while increasing margins. Supply chain strategy focuses on accelerating delivery speed and reliability, increased product variety, and low-cost distribution.

Product

If the firm is a manufacturer, products can be made-to-stock, made-to-order, assembled-to-order, or engineer-to-order. The main criteria in the selection of one of these strategies is cost and delivery time. For example, for a make-to-stock choice the supply chain strategy must establish the number of levels in the distribution network, how many facilities are needed, use of third party services for storage and delivery, and the efficient management of inventories and transportation.

QualityWhile quality has pretty much become an order qualifier, the supply chain must deliver the level of quality matched to the customer strategy. For example, manufacturing must produce products that conform with competitive specification.

Cost reduction

An important market strategy is keeping costs as low as possible to keep prices low and margins high. A typical list of activities to be performed by the supply chain includes eliminating waste, improved product design, quality at the source, process redesign, lean production control systems, setup reduction, overhead reduction, and the involvement of the workforce in cost reduction efforts.

Product rangeA key marketplace differentiator is the depth and breadth of a firm's product range. As companies increasingly incorporate customer preferences into product design, supply chain must be prepared to source, produce, and distribute an increasing number of product variations and assortments.

e-Business

A decision to move to the Internet for sourcing and sales opens a new window for the utilization of supply chain resources. The supply chain will have to migrate to a new set of performance measurements that accentuate short delivery cycles, consolidation of ship-from warehouses, small shipping quantities, facility locations that reduce delivery time, standardized pricing and costing, use of channel intermediaries, and changes to stocked inventories.

Chapter3dp&c3-28

Channel Design Issues

Channel planners must decide what role each facility is to play in the supply chain strategy. Included are decisions regarding what processes, inventories, and transportation functions are to be performed by each channel node

Effective channel network design requires balancing efficiency with responsiveness. As the number of supply chain facilities are reduced and inventories consolidated, supply chain efficiency increases

Decisions regarding the number and location of facilities are very critical since they represent a long-term commitment

Availability of capacity determines the types and capacities of supply chain resources needed to meet strategic performance targets

Chapter3dp&c3-29

Production Strategy Structure Choices

“Hard “ Structure Choices

Plant. Two factors: the location of manufacturing plants (cost and qualitative factors) and the focus of process design (products, equipment, technologies, volumes, and markets

Process choice. Decision to use job shop, batch, mass, or continuous production processes and the implementation of advanced information technologies

Capacity. Decision to pursue a lead, lag, tracking, or outsourced capacity strategy

Vertical integration. Decision as to how far the firm wishes to assume ownership of activities in the supply side (backward integration) or into the channel distribution side (forward integration) of the supply chain

Chapter3dp&c3-30

Production Strategy Structure Choices

“Soft “ Structure Choices

People. Staffing and personnel-related decisions must be coordinated with process-choice decisions and other structural considerations

Organization. Can be either centralized or decentralized depending on the level of manufacturing planning and control

Quality systems. Quality is a requirement not an option. Decisions regarding level of inspection, process measurement and improvement, process control, and design for

Technology systems. Implementation of shop floor controllers, automated and web-based data collection, MES, EDI, and RFID

MPC systems. Implementation of ERP, APS, SCM, forecasting, and lean techniques

Chapter3dp&c3-31

Transportation Strategy – Trade-Offs

Impact of Channel StructureGenerally, the more inventory is centralized in a few locations the higher the transportation costs. Barnes & Nobles example: retail incurs only inbound transportation costs to replenish store inventories. The online business, on the other hand, incurs both inbound and outbound transportation costs. Outbound cost will be extremely high due to the many small shipments using premium delivery services

Cost of Customer ResponsivenessFor high responsiveness, such as McMaster-Carr Supply Company, the cost of transportation will be very high. Using fast modes of transportation increases efficiency and customer responsiveness. A strategy of temporal aggregation, whereby delivery is delayed in order to combine orders into larger shipments, responsiveness will decline but so will transportation costs.

Chapter3dp&c3-32

Basic Supply Chain Strategy Matrix

Performance Attribute Customer Focus Channel Design Sourcing Inventory Transportation Technology

Relaibility

Responsiveness

Agility

Costs

Asset Management

Strategic Performance Drivers

Chapter3dp&c3-33

Strategic Supply Chain Matrix at Apple

Performance Attribute Customer Focus Channel Design Sourcing Inventory Transportation Technology

Reliability

High product differentiation and quality, high service content (High)

Retail stores close to major markets (High)

Close supplier partnerships (Medium)

100% inventory availability, minimize obsolescence (High)

Use of 3rd party parcel post for online delivery (Low)

Easy to use online ordering (High)

ResponsivenessStore availability, quickly online sales delivery (High)

Facilities enable quick delivery of online sales (High)

Short restocking cycles (Medium)

Forecasting accuracy, push and pull replenishment (High)

Short cycle times for online deliveries (High)

Easy to use online order follow-up and returns (Medium)

AgilityProduct availability (High)

Quick distribution of new products to all channels (Medium)

Utilize global supply chain, close linkage of R&D (High)

Reduce channel inventory rebalancing (Low)

Optimization of inbound and outbound transportation modes (Medium)

Total information systems (Low)

CostsHigh cost for store inventory availability (High)

Locate online warehouses in low-cost areas (Medium)

Outsourcing to reduce production costs (High)

Pricing that optimizes profits, high retail store turnover (Low)

High cost for outbound online delivery (Medium)

World-class online ordering and order management technologies (Low)

Asset ManagementConvenient store locations (Medium)

Control cost for retail facilities, high utilization of online facilities (Medium)

Close alignment of inventory with demand (Low)

Optimization of replenishment and online ordering technologies (Low)

Strategic Performance Drivers

Chapter3dp&c3-34

Concept of Strategic Fit

Mar

ket

req

uir

emen

ts

Supply Chain Performance Drivers

X

Y

Line of strategic fit

Z

Chapter3dp&c3-35

Supply Chain Metrics – Reliability

Metric Description

Perfect order fulfillment

The percent of orders meeting delivery performance (all items and quantities at the specified delivery time) with complete and accurate documentation and no delivery damage. Calculation: Total perfect orders / total number of orders.

% of orders delivered in full

The percent of orders in which all of the items received by the customer match the quantities ordered. Calculation: Total number of orders delivered in full / Total number of orders delivered.

Delivery performance to customer commit date

The percent of orders that are received by the customer on the originally scheduled due date. Calculation: Total number of orders delivered on the original commit date / Total number of orders delivered.

Documentation accuracy

The percent of orders with accurate documentation supporting the order, including packing slips, bills of lading, etc. Calculation: Total number of orders delivered with accurate documentation / Total number of orders delivered.

Perfect condition The percent of orders delivered in an undamaged state that meet specification, have the correct configuration, and are faultlessly installed. Calculation: Total number of orders delivered in perfect condition / Total number of orders delivered.

Chapter3dp&c3-36

Metric Description

Order fulfillment cycle time

The average actual cycle time consistently achieved to fulfill customer orders. The metric spans the time for each individual order from the moment of order receipt until delivery and acceptance by the customer. Calculation: Sum of actual cycle times for all orders delivered / total number of orders delivered.

Source cycle time The average time it takes to purchase items selected for replenishment. Calculation: Order release date / various scheduling, receiving, payment cycle times.

Make cycle time The average time it takes to produce (make-to-stock, make-to-order, engineer-to-order) items for replenishment. Calculation: Order release date / various scheduling, production, testing, packaging, staging, put-away cycle times.

Delivery cycle time The average time to deliver products. Calculation: Total number of orders delivered with accurate documentation / Total number of orders delivered.

Perfect condition The percentage of orders delivered in an undamaged state that meet specification, have the correct configuration, and are faultlessly installed. Calculation: Total number of orders delivered in perfect condition / Total number of orders delivered.

Supply Chain Metrics – Responsiveness

Chapter3dp&c3-37

Supply Chain Metrics – Agility

Metric Description

Upside supply chain flexibility

The number of days required to achieve an unplanned sustainable targeted percent increase in flexibility in delivered quantities without a significant increase in cost per unit. Increase in percent of increased delivered quantity flexibility includes raw materials, production, quantity delivered, return of raw materials to suppliers, and return of finished goods from customers. Calculation: The least time required to achieve the unplanned sustainable percent increase when considering Source, Make, and Deliver. For example, if it requires 60 days to increase delivery by 5 percent, the upside supply chain flexibility would be 60 days.

Upside supply chain adaptability

The maximum sustainable percentage increase in adaptability of delivered quantities achieved in a targeted number of days. The metric includes quantity of raw materials, production, quantity delivered, return of raw materials to suppliers, and return of finished goods from customers. Calculation: Supply chain adaptability is the least resource sustainable when considering Source, Make, Deliver, and Return components.

Downside supply chain adaptability

The maximum sustainable percentage reduction of ordered quantities at a targeted number of days prior to delivery without inventory or cost penalties. Reduction in percent of ordered quantities without penalties includes raw materials, production, and quantity delivered. Calculation: None identified.

Supply chain value at risk

The probability of supply chain failures and their financial impact on supply chain functions (e.g. Plan, Source,, Make, Deliver, and Return). Calculation: VAR ($) = VAR ($) Plan + Source + Make + Deliver + Return.

Chapter3dp&c3-38

Supply Chain Metrics – Cost

Metric Description

Total supply chain management cost

The sum total of the costs required to execute SCOR Plan, Source, Make, Deliver, and Return processes. Calculation: Total sales minus profits - administrative costs.

Cost of goods sold

The costs association with the procurement and production of supply chain inventories. The cost of goods sold calculation is composed of direct costs (materials, labor, and machine operations) and indirect costs (overhead). Calculation: Direct materials costs + direct labor (and machine) costs + indirect costs involved in procurement and production processing.

Supply chain risk mitigation costs

The costs associated with managing non-systemic risks arising from non-predictable disruptions in the marketplace caused by such events as natural disasters, the competition, marketplace tastes, and technology. Calculation: Sum of costs to mitigate disruptions in SCOR Plan, Source, Make, Deliver, and Return processes.

Chapter3dp&c3-39

Supply Chain Metrics – Asset Management

Metric Description

Cash-to-cash cycle time

The total time it takes for cash to flow back into the company after it has been spent on resources needed for production or finished goods stocking. The longer it takes to convert cash spent on production resources and accounts receivables, the more net working capital is required. Measurement is determined by converting into days the value of stocked inventories and the number of days outstanding for accounts payable and receivable. Inventory days are added to receivables days outstanding and then subtracted from days payable outstanding. Calculation: Inventory days of supply + days receivables outstanding - days payables outstanding.

Return on supply chain fixed assets

Measures the return on capital invested in supply chain fixed assets. The measurement must first determine the supply chain revenue, cost of goods sold, and supply chain administrative costs. This amount is then divided by the supply chain fixed assets to determine the supply chain return on assets. Calculation: (Supply chain revenue - cost of goods sold - supply chain administrative costs) / supply chain fixed asset.

Return working capital

A measurement that determines the size of the investment in supply chain fixed and variable assets relative to the supply chain's working capital position. Measurement is determined by monetizing supply chain profit and dividing it into the supply chain working capital position. Calculation: (Supply chain revenue - cost of goods - supply chain administrative costs) / (Inventory plus accounts receivable - accounts payable)

Chapter3dp&c3-40

Balanced Scorecard Approach

Financial results

Return on capital employed, asset utilization, profitability, and growth

Customer Viability of the value proposition

Business processes

Effectiveness of the quality, flexibility, productivity, and costs accumulated by each business process

Innovation and learning

Core competencies and skills, access to strategic information, organizational learning and growth

Chapter3dp&c3-41

Balanced Scorecard – Steps

Step 1: Formulate strategy and build consensus

Each channel partner defines their supply chain strategic objectives and understand where the strategies of each network participant converge or diverge

Step 2: Select metrics in alignment with the supply chain strategy

The performance measurements selected should support the four scorecard perspectives: financial results, customer, business processes, and innovation and learning

Step 3: Integrate and communicate the metrics

The general statements of desired performance must be disaggregated into detailed, understandable, and actionable metrics

Step 4: Drive the organization to maintain and optimize desired results

Ensures that the metrics detailed at the strategic and operational level of the supply chain scorecard are performed

Chapter3dp&c3-42

SCM Balanced Scorecard – Example

Supply Chain Objective: Increase Channel Flexibility

Measurement Strategic Theme Strategic Objective Strategic Measure

FinancialIncreased SupplyChain Flexibility

Channel cost reduction Increased profit marginsRevenue growthHigh return on assets

Increased cash flowReduced channel inventoryImproved fixed asset utilization

CustomerPerception of flexible response to customers

Customers drive product finalizationService individualizationIncreased product variety

Flexibility and agility of the supply channelAbility to deliver customized solutions

Business Processes

Postponement and value-added strategies

Increased synchronizationIncreased communicationFast flow of inventoriesMulti-purpose facilities

Channel finished goods reductionIncreased inventory turnsProcessing efficiencies and utilizationsOptimize transportationWarehouse storage reduction

Innovation and Learning

Increased material handling and processing capabilities

Increasing core competenciesMotivating workersSkilling workers

Employee surveyPersonal balanced scorecardTotal supply chain competency available

Chapter3dp&c3-43

Defining Supply Chain Risk Management

The variety of possible events and their

outcomes that could have a negative

effect on the flow of goods, services,

funds, or information resulting in some

level of quantitative or qualitative loss for

the supply chain

APICS Dictionary

Chapter3dp&c3-44

Sources of Supply Chain Risk

Low-cost country sourcing

Industrialized nations have eager sought to reduce their labor costs by relocating operations to low-cost countries

OutsourcingOutsourcing has moved direct control and critical competencies out of the hands of manufacturers and invested it with third-part suppliers

Lean supply chains

The leaner the supply chain grows, the more it is exposed to unforeseen risks that normally are absorbed by product and process buffers

Supply base rationalization

Single-sourcing can result in buyers not having a viable supply alternative if disaster strikes their sole supplier

“Siloed” business

processes

Poor organizational structures, adversarial corporate cultures, lack of communication and sharing of plans, and others all contribute to dysfunctional organizations and are as real a threat to company survival

Chapter3dp&c3-45

Basic Concept of Risk Management

• Risk stems from uncertainty or lack of full and timely information

• Risk must be evaluated relative to its potential cost exposure and the likelihood of occurrence

Leve

l of

risk

Risk rewardLow High

Low

HighVery undesirable:High risk and low reward

Very desirable:Low risk and high reward

Y

X

Chapter3dp&c3-46

What Are the Forms of Supply Chain Risk?

Supply

Process

DemandDisruptions caused by problems in distribution flows, computer glitches, actions of competitors, security breaches, and product failures

EnvironmentDisruptions caused by natural disasters such as hurricanes, floods, wind, drought, and earthquakes

Disruptions caused by the inability of suppliers to delivery on time, quality failure, financial failure, compliance failure, channel complexity

FinanceDisruptions caused by currency exchanges, recession, financial failure, stock market crashes

Disruptions caused by quality problems, inventory shortages, late deliveries, capacity shortages, industrial espionage, and equipment breakdowns

Chapter3dp&c3-47

Supply Chain Risk Mapping – Simple Example

Source Make Deliver Sell

Business

Plant 2

Plant 3

Plant 1

Outsource Plant

DC 1Whse 3

DC 2 Whse 4

Whse 1

Whse 2

Whse 5

Whse 6

Customers

1

2

3

3

4

5

5 6

6 7

8

5

9

5

8

Risks:1 – financial stability2 – lead times3 – quality

4 – government stability5 – labor/strikes6 – capacity

7 – weather8 – cyber threats9 – competition

6

Chapter3dp&c3-48

SCRM Analysis Tools

Value at Risk (VAR)

Time to Recovery

Resiliency Index

The estimated time it will take for an organization to recover from a disruption anywhere in the global supply chain

A composite rating of how resilient a firm is relative to the various risks the business is exposed to on a global basis

Risk converted to monetary value by multiplying the probability of risk times the financial exposure

Statistical Process Tools

Application of quality management tools to risk analysis

“Heat” MapsGraphical tools to visually illustrate risk situations

Chapter3dp&c3-49

VAR – Sales and Product Exposure Example

VAR for a mid-western plant with:

•Sales exposure of US$450MM per year

•Product exposure of US$700MM per year

VAR calculation: Exposure x Probability of OccurrenceExamples: VAR Tornado/Hurricane = 450MM X 5% = 23MM

VAR Fire = (450MM x 12%)/2 = 27MMVAR Product quality = (700MM x 15%)/4 = 26MM

RiskExposure (US$MM)

Time-to-Recovery (Months)

Probability VAR (US$MM) Comments

Tornado/Hurricane 450$ 12 5% 23$ Total plant shutdown

Fire 450$ 6 12% 27$ Partial plant shutdown

Earthquake 450$ 12 1% 4.50$ Low probability

Product Quality 700$ 3 15% 26$ Quality review and retooling

Chapter3dp&c3-50

Heat Map – Japanese Earthquake (2012)

A

B

C

D

E FG

H

I

J

K

L

Very high risk suppliers

A

High risk suppliers

B D

Medium risk suppliers

C E

Low risk suppliers

G H

F

I J K

L

Chapter3dp&c3-51

Template for a SCRM Strategy

SCRM

PolicyPrevention/ Education

StrategyPrevention/ Response

PartnershipRisk Sharing & Recovery

InformationDetection/ Monitoring

Chapter3dp&c3-52

Controlling Risk Strategies

Prevention Recovery

Negative Consequences

Event Management

Disruptive Event

Prevent an event occurring

Isolate the affects of an event

Minimize the affects of an event

Chapter3dp&c3-53

Basic Risk Responses

Exiting activities giving rise to risk

Taking action to reduce the likelihood or impact related to the risk

Having back-up processes or resources in case of failure

Avoidance

Transfer or Share

Redundancy

Accept the chance of a risk occurring because of its low probability or benefitAcceptance

Taking action to reduce the likelihood or impact related to the riskMitigate

Chapter3dp&c3-54

Supply Chain Risk Redundancies

Approach StrategiesIncrease capacity

Build low-cost, decentralized capacity for predictable demand and centralized capacity for unpredictable demand

Acquire redundantsuppliers

Multiple suppliers for high-volume and reduced number of suppliers for low-volume products. Centralize low-volume products in a few flexible suppliers

Increase responsiveness

Select cost over responsiveness for commodity products. Select responsiveness over cost for short life-cycle products

Increase inventory

Decentralize inventory of predictable, lower-value products. Centralize inventory of less predictable, higher-value products

Increase flexibility

Select cost over flexibility for predictable, high-volume products. Select flexibility for low-volume, unpredictable products. Centralize flexibility in a few locations if it is expensive

Aggregatedemand

Aggregate customer order management and shipping as unpredictability grows

Increase capability

Select capability over cost for high-value, high-risk products. Select cost over capability for low-value commodity products. Centralize high capability in flexible source

Chapter3dp&c3-55

Supply Chain Risk Response Methodology

Assess…• Transportation

failures• Climate, weather• Variability/quality

problems, incorrect orders

• Loss of key asset/ supplier/customer

• Licensing, regulations• Theft, vandalism, etc.

Generating preventive action plans for each risk to be mitigated

Implementing preventive action plans

Manageimplementationprojects…• Set goals and

expectations• Win project

approval and funding

• Exercise project management

• Measure success

Preparing contingency plans

Prepare…• Assign roles• Disseminate

prioritized plans and practice them

• Research best practices

• Develop sourcing alternatives

• Track shipments with RFID and GPS

Coordinating and sharing risks among SC partners

Share…• Work with partners• Ensure reliable

roles• Coordinate

response to crisis or problems

• Transfer risk on basis of who in SC is best able to respond

Chapter3dp&c3-56

SCRM Maturity Model

Supply Chain Visibility

Supply Chain “Sense and Respond”

Supply Chain Risk

Management

Sustainable Supply Chain

Competitive Advantage

Sup

ply

Cha

in M

atur

ity

Visibility

Predictability

Resiliency

Sustainability

Chapter3dp&c3-57

Enhancing SCRM Maturity

Look at risk management across the supply chain

Do you have current supply chain risk plans from your key partners?

Examine your supply chain strategy

Does the company supply chain strategy contain risk management, and if so is it still in alignment with today’s risks?

Keep supply chain risk contingency planning current and relevant

Are time-to-recover plans and estimates realistic?

Identify risk root causes and rank them by priority

What enablers, dependencies, or practices cause risks to become more probable? Have risks been prioritized and identified for reduction or elimination across the supply chain?

Chapter3dp&c3-58

Supply Chain Management and Resiliency

Agile execution

Ability to rapidly change configurations and capacities, leverage collaborative relationships, formulate effective contingency plans, and implement technologies

Adaptable channel

structures

Use of highly adaptable products, processes, and systems easily modified to counter disruptive events without compromising on operational efficiencies

Visibility

Deployment of demand-gathering, planning, and execution technologies that reveal events as they actually occur

Flexible innovation

Increasing companies abilities to respond to possible disruptions includes making product design and process development less rigid

Chapter3dp&c3-59

Chapter 3

End of Session

“Education in Pursuit of Supply Chain Leadership”

Chapter3dp&c