managing risk to avoid supply chain breakdown

8/11/2019 Managing Risk to Avoid Supply Chain Breakdown

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GROUP 3, SECTION A


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Case of Phillips Factory

FireCase

Philips produced radio frequency

chips for mobile phones inSemiconductor factory atAlbuquerque, NM.

Major customers : Nokia andEricsson

March 17, 2000 : Fire strikessemiconductor factory -All siliconstocks destroyed, products lineseverely impacted


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News of fire reached senior leadership

after 4 weeks

Philip informed Ericsson 3 days after

the fire- Ericsson moved into action

after 5 weeks

Started exploring other options of

supply

By that time, Nokia had taken over

remaining supply sources

Impact

USD 400 million in potential sales lost

Component shortage, incorrect

marketing, rigid product design caused

a loss of USD 1.68 Billion.

Company exits Cell phone market

3 days after the fire:

Nokia detected delays in incoming orders-

Philips reported a weeksshutdown at plant

Nokia sends engineers to plant: Denied

access by Philips

Nokia increases monitoring weekly to daily-

Philips confirms a delay of months.

Decisive response

Engaged other chip suppliers Immediate change in products design

Made other suppliers commit 5 day lead

time

One out of five components could not be

replaced - convinced Philips to provide this

components from China/Netherlandsfactory

Impact & Response


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Philips Factory fire :

InferenceRight Managerial Information

at the right time is crucial !

Disruptions in Informationflow can be catastrophic

Information flows are notalways automated

Proper Information flow isdependent on other factorssuch as people , processes aswell.


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DELAYS

Occurs when supplier cannot respond to changes indemands

Cause :

Poor-quality output at supplier plants High levels of handling or inspections during

border crossings

Changing transportation modes during shipping

Mitigate by :

Appropriately and economically place and size

capacity and inventory reserves Maintain excess flexible capacity in production

plants

Adequate levels of inventory

Example : Dell holds very little inventory of highvalue components in US but uses air transport to get

such parts from east


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RISK REWARD - DELAYS


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Disruptions

Disruptions to material flows :unpredictable and damaging.

In , February 1997 fire at a parts factory owned by Japanese manufacturerAisin Seiki Co. Ltd., a key supplier for Toyota, let to shut down productionat most of its Japanese plants.,

Immediately after the attacks of September 11, 2001, U.S. automanufacturers ran short of parts because transport trucks had been delayedat the Canadian border.

Holding inventory cost can get very high as it is incurred continually, theinventory would be used only in the rare event of a disruption.

Stockpiling inventory as a hedge against disruption also makes sense forcommodity products with low holding costs and no danger ofobsolescence.

For products with highholding costs and/or a high rate of obsolescence,usingredundant suppliers is a better strategy.


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Intellectual Property

Risks Cause: Todays supply chains

Less vertically integrated and more global

Competitors often outsource to the same

location

Mitigate by :

Bring, or Keep, some production in-house, or at

least under direct company control

Intellectual property limited to countries with

legal protection

Example: Cisco outsources all manufacturing

creates business processes that cannot be easily

replicated by a single manufacturer


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PROCUREMENT RISK

Unanticipated increases in acquisition costs

due to fluctuating exchange rates or supplier

price hikes

Cause :

Exchange-rate risk

Price increases by suppliers

Mitigate by :

Build global capacity, financial hedges

Long term contracts, redundant suppliers,

rarely maintain inventory

Example

Toyotas manufacturing plant allows to

cater one local market & one other market

across the world


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INVENTORY RISKCAUSE

Excess inventory and falling prices

Inventory risk hinges on three factors:

Value of product

Rate of obsolescence

Uncertainty of demand and supply.MITIGATION

Pooling Inventory

Creating common components across products

Postponing last stage of production until orders are in hand.

EXAMPLE

Amazon.com serves all its customers in US with inventoryhoused in a handful of warehouses.

Borders Books & Music supplies its customers with inventory in

several hundred stores.

Amazon warehouse pools demand large geographical area,

stable forecasts & lower total inventory.

Amazon achieves 14 inventory turns/year, which is 2 for

Borders.


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CAPACITY RISK

CAUSE Building excess capacity usually becomes a

strategic choice.

Excess (underutilized) capacity hurts financialperformance.

MITIGATION Making existing capacity moreflexible.

Flexibility is a form of pooling that allows useof the same capacity for a variety of products.

EXAMPLE Plants owned by Japanese truck manufacturer

Hino Motors Ltd. employ multiple assemblylines on which the number of workersdetermines line speed.

This flexibility lets Hino change production onany line by moving workers (capacity) to meetfluctuating demand.

Greatly reduces the excess capacity of workers


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SYSTEMS RISK

Cause :

Failure anywherecan cause failure everywhere due to highlynetworked information systems.

The greater use of more highly automated technology has thepotential to transform risks from manual processing errors tosystem failure risks

Mitigate By :

Robust backup systems and well-designed, well-communicatedrecovery processes that duplicate all data and transactions.

Such approaches helped securities firms recover quickly andconvincingly following the World Trade Center attacks in 2001.


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Forecast Risk

Cause :

Mismatch between a companys projections and actual demand.

Long lead times, seasonal demand, high product variety and smaller

product life cycles increase forecast error.

Mitigate By :

Adjusting pricing and incentives to decrease variation in orders.

Increase the visibility of demand information across the supply chain.

Selectively hold inventory by building responsive production and

delivery capacity.

Example:

Motorola practices responsive delivery each day when it flies in phones

from China in response to demand by customer Nextel Communications

Inc.

Dell also flies in high-value items from Asian suppliers on an as-needed

basis.


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Mitigation Strategies-

Impact


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What managers Should

Do??

StressTesting

Tailored RiskManagement


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Used to determine the stability of a given system or entity.

Identify key suppliers, customers, plant capacity, distribution centers &shipping lanes.

Survey locations and amounts of inventory : components, work-in-process & finished goods

Probe each potential source of risk- assess possible supply-chainimpacts & companys level of preparedness.

Helps company prepare for unforeseen events

Identify risk-mitigation priorities for the near, medium and long term.

STRESS TESTING


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STRESS TESTING

T il i Ri k M


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Tailoring Risk ManagementApproaches

Managers must keep a vigilant eye on the trade-offbetween the risk and the cost of building a reserve to

mitigate it. Three key relationships influence thisoptimal balance.

B l i S l Ch i


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Balancing Supply-ChainRisk/Reward Relationships


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Balancing Supply-Chain

Risk/Reward Relationships Thefirstrelationship is the increasing cost of risk reduction. This

simply means that using inventory to cover a high level of demandrisk costs much more than covering a low level of risk.

The secondrelationship shows that pooling forecast risk, receivablesrisk or some other risk reduces the amount of reserve required for agiven level of risk coverage.

The thirdrelationship shows how the benefit of pooling grows withthe level of risk covered: The benefit of pooling inventory is greatonly if the product has high forecast or inventory risk.

R l Of Th b F


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Rules Of Thumb ForTailored Risk Management


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Rules Of Thumb For TailoredRisk Management

When the cost of building a reserve is low, reservesshould be decentralized

When the cost is high, reserves should be pooled. Ifthe level of risk is low, focus on reducing costs. If therisk is high, focus on risk mitigation.

By tailoring reserves for all risk-mitigation strategies,

companies can maximize rewards for the same levelof risk, or lower risks for the same reward.


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managing risk to avoid supply chain breakdown

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