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