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Supply chain risk management
Institute of Transport and Logistics Studies
ITLS5250
Foundation in Global Logistics
10.1 Key concepts in supply chain risk management
Supply chain risks and disruptions today
– What is the current health of global supply chains?
– What are some supply chains disruptions we are currently facing?
The goal of supply chain risk management
– The threat
– Risks can make good supply chains perform very poorly
– Dealing with the threat
– Supply chain risk identification
– Supply chain risk mitigation
– The end goal
– Robust, resilient supply chains
Categories of supply chain risk
– Supply risk
– Process risk
– Demand risk
– Corporate-level risk
Regular verses abnormal supply chain risks
– Regular risks and delays
– Arise frequently
– Each incident is small, but a big problem in aggregate
– Abnormal risks and disruptions
– Less frequent than regular risks
Probability may be hard to ascertain
Easier to dismiss or ignore
– But are regularly occurring somewhere to businesses and supply chains
– Often very large in magnitude
Correlation of risks
– Risks might be:
– Fully independent
– Correlated in some way
– Correlation may occur:
– Geographically (e.g. natural disaster)
– Due to some wider event (e.g. pandemic)
– Might impact:
– Supply, e.g. industry cluster impacted by natural disaster
– Demand, e.g. customer base all impacted by a recession
– Process, e.g. high oil price affects all transportation
– Broad mitigation strategy: diversification
Upside and downside risks
– Downside risk
– Something gets worse
– Upside risk
– Something gets better
– But may produce own challenges
10.2 Types of risk
Supply risk: supplier failure
– Supplier might go bankrupt
– Abnormal risk
– Example: Apple, GT Advanced Technologies, and sapphire glass
– GT to provide Apple exclusive supply of sapphire glass
– Large prepayment given by Apple
– GT filed for bankruptcy
– Apple left without valuable new product
feature in the very competitive
smartphone market
Supply risk: cost
– Price hikes
– Fluctuating exchange rates
– Downside and upside risk
– E.g. if we enter a long term contract, spot price may drop over the term
– Number of suppliers
– Price hikes more likely with single supplier
– But more suppliers may compromise economies of scale
Supply risk: compromised supply
– Tampering
– Food and pharmaceuticals are vulnerable
– E.g. needles in strawberries in Australia,
September 2018
– Counterfeiting
– E.g. premium wines
– Questionable provenance
– What is it and where did it
come from?
– E.g. impure honey
Other supply risks: quality, communication, coordination,
delays, etc
– Supplier might not deliver the right product, or at the right time
– Particularly problematic for complex products with high levels of component
interdependency
– Example: Boeing 787
– Over budget and behind schedule
– Technical problems with some suppliers that led to delays
– Quality issues, e.g. batteries
– Coordination and communication problems
– Regular and abnormal risk
Process risk: design
– Faulty design or production, deceptive reporting
– Recalls and legal settlements can be hugely expensive
– Example: General Motors ignition switch defect
– Loss of control of engine and brakes
– Knowledge of the risks for some time
– Fix rejected in 2005 on cost grounds
– 5+ million car recall, hugely expensive
– $900 million fine, various lawsuits
Process risk: long development time
– Most likely for complex products
– In the interim:
– Cannot meet demand
– Demand may change
– Competition may increase
– Example: COVID vaccines
Process risk: transportation
– Disruptions to transportation networks
– What geographic area is covered?
– Weather
– Ash clouds, snow storms, etc
– Crime
– Piracy, theft, etc
– Congestion
Process risk: yield
– How much production output for given input
– Uncertainty in output?
– Reduced output?
– Particularly common with new production processes
Demand risk: economic cycles and demand shocks
– Slowdowns
– Recessions
– Depressions?
– Often wide scale impacts on demand
Demand risk: forecasting
– May be too high or too low
Stockouts
Inventory costs and reduction in revenue
– Information distortion
– Shortages over-ordering, pushing up forecasts
– Promotions and incentives not accounted for
– Bullwhip effect
Demand risk: change in technology and consumer preference
– Longer term changes in supply:
– Technological frontier
– Research and development (R&D) of industry and competitors
• Example: Apple - new/refined market segments like tablets and
smart phones
– Longer term changes in demand:
– Consumer preference changes
– Often influenced by developments in supply
– Risk of obsolescence
– Uncertainty about which innovations will succeed
Demand risk: supply chain visibility – by customers/the public
– Customer visibility into the supply chain could influence their demand
– Workplace conditions
– Regular workplace conditions (e.g. Nike factories)
– (Ab)normal workplace events (e.g. factory fires in Bangladesh)
– Animal welfare
– E.g. Live cattle exports from Australia to Indonesia
– Supplier welfare
– E.g. Supermarket chain pricing pressure on dairy farmers
Corporate-level risk: supply chain visibility – by supply chain
partners
– More partners less (or harder) visibility and control
– Example: once again, Boeing 787
– Poor communication of demand or inventory levels downstream
– Can result in gaming of the system
Corporate-level risk: IT systems risks
– Particularly vulnerable when new systems are introduced
– Security issues and virus disruptions
– Example: WannaCry ransomware
Corporate-level risk: intellectual property (IP)
– Outsourcing may be low cost, but IP may be stolen
– Can be especially damaging when knowledge or tooling is utilized by
suppliers
– Long term implications for profitability
