Supply chain risk management

& resilience

Guest lecture | Tilburg University | 31 March 2010

Robbert Janssen
E-mail: [email protected]
 Outline

• Short introduction

• What is supply chain risk?

• Why is it important?
• Case: Nokia vs. Ericsson
• Trends and developments in supply chain management
• Supply chain risk and its sources
• Risk perception
• Supply chain disruptions
• Supply chain vulnerability

• Supply chain risk management & resilience

• How to manage and mitigate risks?

• Reconciling supply chain risk with supply chain management

• Time for questions

2 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Introduction

• Robbert Janssen
• Logistics & Operations Management

• Writing master thesis at TNO Mobility & Logistics, Delft

• Topic: empirical investigation into supply chain risk management
and the vulnerability of supply chains

• Questionnaire with EVO and TLN, distributed to firms in the

Netherlands
• +/- 325 responses
• Some results  in this presentation

3 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Recent years…

Source: Yahoo Finance

4 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Recent years….

5 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Most important risks faced by multinational firms

Aon Global Risk Management Survey 2009

• Survey among 550 multinational companies (> $ 1 billion
revenue)

• Economic slowdown
• Regulatory / legislative change
• Business interruption risks
• Increasing competition
• Raw materials / commodity prices Supply chain risks
• Damage to reputation mentioned three times
• Cash flow / liquidity risk in Top 10!
• Supply chain failure
• Third party liability
• Difficult to attract top talent

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 Risks in supply chains?

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 Natural disasters reported 1900-2008

Source: EM-DAT (2010)

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 “It does not happen to our company”

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 Risks in the supply chain – an example
The Albuquerque accident
• March 2000
• Philips semi-conductor plant in Albuquerque, New Mexico, USA
• Sole-supplier of radio-frequency chips to Nokia and Ericsson

• Lightning strike lead to small fire in clean rooms at Philips plant

• Sprinkler installation activated in clean rooms
• It took 3 weeks before production was up and running again
• After 6 months, production yields were only 50%
• It took years before new equipment was delivered and installed

10 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 2 very different responses to the accident

• Did not recognise threat for weeks • Immediately recognised threat

• When they tried to recover: entire • Actively responding, sending 30
worldwide supply for RF-chips was engineers to restore supply from
committed to Nokia Philips-plant
• Secured entire worldwide capacity of
• Outcome Philips-chips
• Missed critical product introduction • Actively searching for other suppliers
• Business interruption costs: $ 200 all over the world
million (insurance paid) • Redesigning existing handsets to use
• Annual P/L statement: $ 400 different chips
million loss
• Ceased making cell phones under • Outcome
individual brand ( became Sony- • Achieved sales targets
Ericsson) • Increased market share

Source: Normann & Jansson (2003), Sheffi & Rice Jr. (2005)
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 Some developments and trends in supply chain
management
• Globalisation and global sourcing
• Longer, more complex supply chains
• Volatile markets

• Strong focus on achieving efficiency and economies of scale

• Lean, JIT-processes
• Centralised distribution and manufacturing
• Single-sourcing / reduction number of suppliers
• Shorter lead-times and delivery cycles
• Working capital optimisation

• Outsourcing and off-shoring non-core activities

• Loss of control

Source: Christopher (2005), Husdal (2009)

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 What are the most important developments / trends that
lead to increased risks in the Netherlands?
1. Reliance on IT-infrastructure

3. Increased dependency on customers

5. The economic downturn

7. Increased competition in the market place

9. Legislative changes (‘compliance’)

 All these factors can have

consequences for the supply chain

Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)

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 4 constructs that we need to deconstruct
Usually, research in the field of supply chain risk consists of 4
constructs
• Supply chain risk
• Supply chain disruption
• Supply chain vulnerability
• Supply chain risk management (and resilience)

Source: Wagner and Bode (2008)

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 Supply chain risk

• Risk is a concept with a lot of different definitions

• 2 main perspectives:
• Exposure to uncertainty (everyday usage e.g. “it is risky to
drink and drive”)
• Outcome of an event (e.g. higher total costs and longer lead-
times after a fire in a warehouse:
• Risk = Probability * Consequences)

• What can happen? (risk sources)

• How likely is it that it will happen? (probability)
• If it does happen, what are the consequences? (consequences)

Source: Jüttner et al. (2003); Zsidisin and Ritchie (2008)

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 Analysing supply chain risks

• Firms commonly visualise

unforeseen and unwanted events
by means of a risk-matrix

• A risk-matrix has 2 dimensions:

probability and consequences
(impact)

• Problem: it relies heavily on risk

perception.

Source: Sheffi & Rice Jr. (2005)

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 Risk perception

• Depends on:

• Time/moment

• Experience/knowledge

• Place

• Risk attitude / appetite

• Position

• Possibilities to decide

• Big bang or small incidents

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 Supply chain risk sources

• Where can risks originate from?

Risks internal to the firm

Supply risk
Supply risk Process risk
Process risk Demand risk
Demand risk

Control risk
Control risk

Environmental risk

Source: Christopher & Peck (2004)

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 Supply chain risk sources
Machine break-down
Employee strike

• Where can risks originate from? Volatile customer-demand

Wrong order-forecast

Risks internal to the firm

Supply risk
Supply risk Process risk
Process risk Demand risk
Demand risk

Bankruptcy of supplier
Quality problems at supplier
Transportation failure Control risk
Control risk

Natural disasters
Political instability Order quantity policies
Quality control
Severe weather conditions Environmental risk

Source: Christopher & Peck (2004)

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 Supply chain disruptions

• “Supply chain disruptions are unplanned and unanticipated

events that disrupt the normal flow of goods and materials within
a supply chain”
• Supply chain disruptions: the occurrence of risk
• Consist of: a trigger and the situation that emerges afterwards.

Supply
chain
disruption

Triggering event

Consequential situation
Supply chain
Time
risk
Exposure to risk Occurrence of risk

Source: Craighead et al. (2007), Wagner and Bode (2008)

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 Iceberg of disruptions
Worldwide known disruptions
9/11, novel influenza H1N1

Region / country
Piracy, Foot and mouth disease, Q-fever

Individual (chain) disruptions

Fire, strikes

Disruptions that took place

but were not in the press

‘almost-disruptions’
Huge reservoir with Big customer threatens to leave
potential disruptions Insolvable supplier saved from
bankruptcy

21 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Most frequently occurring disruptions in
2008-2009
1. Sudden drop in customer demand

3. Quality issues at the supplier

5. Poor logistics performance of suppliers (delivery dependability)

7. Severe weather conditions

9. IT-infrastructure problems (hardware, software)

Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)

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 Where did the disruptions come from?

Most of the disruptions that our company has to deal with….

Originate from our

suppliers/customers and/or 243
the supply chain

Originate from the

environment (e.g. natural 41
disaster, legislative changes)

Originate from our company 41

No answ er 6

0 50 100 150 200 250 300

Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)

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 The disruption profile

Source: Sheffi & Rice Jr. (2005)

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 What are the consequences of a disruption?

Higher cost
Bad performance
Lost sales
Lower profits
Bankruptcy
Fear, danger
Damage to reputation

For whom?

The company itself

Suppliers
Customers
Society

25 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Toyota

• Toyota recall
• Estimated costs US$ 2 billion

• All cars checked and repaired

if needed

• Biggest challenge now:

regaining confidence
• Could also be an
opportunity

Source: Spitsnieuws 24 March (2010)

26 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Consequences of supply chain disruptions

• Impact of disruptions on supply chain performance:

• Disruptions in the supply chain  supply chain performance
decreases
• Higher costs, lower delivery dependability, lower service level etc.

• Impact of disruptions on stock-related metrics and financial-statement

metrics:
• 10% decrease in shareholder wealth (1 day before actual disruption
+ day of the disruption)
• 40% decrease in stock returns (observed 1 year before actual
disruption until 2 years after disruption)

• 107% drop in operation income

• 114% decrease in return on sales
• 93% drop in return on assets

 The consequences of disruptions are severe but are they the same
for all firms? Source: Hendricks and Singhal (2003, 2005a, 2005b) , Wagner and Bode (2008)
27 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Supply chain vulnerability

• “The susceptibility of a supply chain towards the harm of a

particular supply chain disruption”
• The vulnerability of the supply chain is a function of the
characteristics of the supply chain. This means that the structure
of the supply chain is an antecedent of supply chain vulnerability.

Supply chain Supply chain

disruption risk

Supply chain
vulnerability

Source: Wagner and Bode (2008)

28 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Drivers of supply chain vulnerability

• The characteristics of the supply chain structure  Supply chain

vulnerability drivers
• Some examples:
• Complexity of the supply chain (global sourcing)
• Density (NL: dichtheid) of the supply chain
• Single sourcing (Nokia, Ericsson example)
• Lean and JIT production philosophies
• Centralisation of warehouse/manufacturing locations
• Dependency on suppliers / customers
• Dependency on IT-infrastructure, electricity etc.

• It is about ‘conscious’ decisions regarding how you design the

supply chain

Source: Craighead et al. (2007), Wagner and Bode (2008)

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 Example: Density

• Dutch Logistics Hotspots 2009

• Main ports Amsterdam and Rotterdam
• High density regions
• Congestion (road, trains, waterways)
• Proximity effect (power failure, flooding)
• By using these high density regions  leads to higher
vulnerability of supply chains

Source: TNO - Quick scan: overzicht van netwerk logistieke hot spots in Nederland (2009). Falasca et al. (2009)
30 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Example: Lean and JIT production philosophies

• ‘Leaning-down’ too far can cause higher costs for recovery of a

disruption.
• However, take care that Just-in-Time does not digresses to Just-
in-Case management

Source: Christopher and Rutherford (2004)

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 One construct left
• Supply chain risk
• Supply chain disruption
• Supply chain vulnerability

 Supply chains are becoming more vulnerable and increasingly

at risk of disruption. How can we manage this?

• Supply chain risk management (and resilience)

32 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Supply chain risk management (SCRM)

• Activities that firms may engage in to mitigate (i.e. make less severe)
the probability of occurrence or negative consequences of supply chain
disruptions.

• Lots of frameworks available, but usually risk management consists of

3 general steps (ISO 31000):
• Risk identification
• Identifying the risks and its characteristics
• Risk assessment
• Ranking risks in terms of probability and consequences (quantifying)
• Risk management
• Treating the risks and implementing the chosen solution, monitoring
the impact of the risk management solution on the business
performance

 Well that sounds pretty easy, doesn’t it?

Source: ISO 31000
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 The problem of risk management:
It’s an ostrich business!

Risk management is not sexy, no fun and it costs money.

And the benefits are not even sure!

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 5 most important barriers towards implementing SCRM

2. The benefits of SCRM are difficult to monetise

4. Focussing on achieving efficiency prevents implementing

SCRM

6. Fear of spreading important business information

8. Limited acceptance that risks go beyond company walls

10. Vulnerabilities of the business must remain secret

Source: TNO-onderzoek: Risico’s en Kwetsbaarheden in Logistieke Ketens (2010)

35 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Step 1+2: Risk identification and assessment

• Focus and create awareness

• Create a cross-functional risk team
• Determine potential risks (also unobservable
risks)
• Assess (quantify) risks and rank

• Methods
• Brainstorming, elevator pitches
• Risk-matrix
• Failure Mode & Effect Analysis
(FMEA)

Source: Lammers, Ploos van Amstel and Eijkelenbergh (2009)

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 Failure Mode and Effect Analysis (FMEA)

Method for looking at potential ‘failure modes’ and its effects

developed in the 1940s by the U.S. Army

• Determine scope of analysis

• Create a multi-disciplinary team
• Describe processes
• Describe potential failures (risks)
• Determine the expected Effects of these failures (scale 1-10)
• Determine the Probability of the failure (scale 1-10)
• Determine the ability of Detection of the failure (scale 1-10)
• Calculate Risk Priority Number (RPN = 5*6*7)
• Choose target value RPN
• Eliminate
• Recalculate RPN and make cost-benefit analysis Step 3 of risk
management
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 Film clip – example of creating awareness and focus

• Trade and wholesale firm for electronics and technical installation

material
• Intermediary between 750 suppliers and 15,000 customers
• 280,000 SKUs - 90,000 items in stock
• Logistics structure: 2 distribution centres, 24 transhipment points
• Daily: 60,000 order lines, 24hr delivery by 240 trucks to 9,000
delivery addresses

• 11 February 2008 – 09.00 am: “normal bi-weekly logistics team

meeting”

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 Step 3: Risk management

• Treating the risks by means of a ‘strategy’

• Five classic strategies (but there are others)
• Avoid – eliminate possibility of event
• Reduce – minimise probability of occurrence
• Transfer – shift risk to third party (e.g. insurance)
• Retain – bear risk and do nothing
• Exploit – reduce the impact

• Subsequently, perform cost-benefit analysis

of risk treatment and keep monitoring

Source: DeLoach (2000), Husdal (2009)

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 Cost-benefit analysis of risk management

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 • “The only constant is change.”
– Heraclitus, 600 BC, Greek philosopher

• “It is not the strongest of the species that survive, not the most
intelligent, but the ones most responsive to change.”
– Charles Darwin

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 Supply chain resilience

• “Buzzword” in the context of SCRM

• Definition:
• “the supply chain’s ability to survive, adapt, recover and grow from a
disruption in the face of turbulent change”
Dutch synonym: veerkrachtigheid
• It is about: having the ability to survive a major disruption and
subsequently recover, adapting to the changing environment.
• Focusing on reducing the consequences of a major disruptions (instead
of predicting/estimating probability of occurrence)

• Resilience originally was aimed at disruptions that

• You do not see coming
• High impact, low probability (HiLo) Resilience
• Affect several parts of the supply chain needed
• Nowadays, an approach for
supply chain risk management

Source: Fiksel (2006), Sheffi and Rice Jr. (2005), Husdal (2009)
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 How to become more resilient?

• 4 categories of measures to become more resilient

• Redundancy – reserve resources (buffer inventories, slack in
the process, insurance policies), comes at an undesirable
premium
• Flexibility – capabilities (shift production from one plant to the
other, standardise processes, re-engineer products, product
postponement)
• Transparency – open communication with suppliers and
customers, knowledge of the current status of operations
(enablers: IT in the broadest sense, RFID, GPS, EDI etc.)
• Collaboration – effectively working together, sharing
(confidential) information (CPFR initiatives)

redundancy flexibility transparency collaboration

Source: Sheffi and Rice Jr. (2005), Lammers, Ploos van Amstel en Eijkelenbergh (2009)
43 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Reconciling supply chain risk with supply chain
management
• The supply chain of tomorrow must deliver varying degrees of six
outcomes, depending on the customers’ needs:
• Cost efficiency
• Responsiveness
• Security
• Sustainability
• Resilience
• Innovation
• There could be other outcomes
e.g. Reliability

• “Adaptability, key to success”

Source: Melnyk, Davis, Spekman and Sandor (2010)

44 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Summary

• Supply chains are exposed to a wide range of risks that are

distinctive for each and every supply chain

• Disruptions can have severe consequences, both tangible

(higher costs, lost sales etc.) and intangible (reputation, fear etc.)

• Supply chain risk management seeks to identify risks, assess

their impact and subsequently mitigate these risks
• Resilience is another perspective for risk management, focusing
on reducing the consequences of a major disruption

• Supply chain resilience is one of six ‘outcomes’ that a modern

supply chain should have

45 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
 Suggested further reading

• Asbjørnslett, B. (2008). Assessing the vulnerability of supply chains, In: Zsidisin, G., Ritchie, B. (Eds.),
Supply Chain Risk: A Handbook of Assessment, Management and Performance, New York: Springer, pp.
15-33

• Chopra, S., Sodhi, M. (2004). Managing risks to avoid supply-chain breakdown, MIT Sloan Management
Review, Vol. 46 No. 1, pp. 53-61

• Christopher, M., Peck, H. (2004). Building the resilient supply chain, International Journal of Logistics
Management, Vol. 15 No. 2, pp. 1-14

• Craighead, C., Blackhurst, J., Rungtusanatham J., & Handfield, R. (2007). The severity of supply chain
disruptions: design characteristics and mitigation capabilities, Decision Sciences, Vol. 38 No. l, pp. 131-156

• Khemani, K. (2007) Bringing rigor to risk management. Supply Chain Management Review Vol. 11 No. 2, pp.
67-68.

• Peck, H. (2006). Reconciling supply chain vulnerability, risk and supply chain management. International
Journal of Logistics: Research and Applications, Vol. 9 No. 2, pp. 127-142.

• Sheffi, Y., & Rice Jr., J.B. (2005). A supply chain view of the resilient enterprise, MIT Sloan Management
Review, Vol. 47 No. 1, pp. 41-48

• Vanany, I., Zailani, S., Pujawan, N. (2009). Supply Chain Risk Management: Literature Review and Future
Research, International Journal of Information Systems and Supply Chain Management, Vol. 2 No. 1, pp.
16-33

46 Robbert Janssen, TNO | Supply chain risk management and resilience 31 March 2010
Any questions?

Thanks for your attention