RMI 2302
Module 9: Organizational Risks:
Strategy & Supply Chain
Module 9:
Organizational
Risks:
Strategy and
Supply Chain
Learning Objectives
• Define strategic risk and its role in the global financial
crisis.
• Define an adaptive strategy.
• Identify the four areas strategy should incorporate.
• Compare the different organizational strategies of a
group of companies .
• Recall the tradeoff between efficiency and redundancy
with respect to supply chain.
• List the four benefits of modeling supply chain risks.
• Recall the relationship between a company’s business
model and its supply chain risks.
• Outline the supply chain disruption caused by the
COVID-19 pandemic and efforts to reduce risks in the
future.
• Identify the risks and rewards associated with global
shipping supply chain routes.
• Strategic Risks: Potential losses
(variation) from poor business
decisions.
Recall from
Module 8:
Strategy Risks
• Product mix
• Supplier choice
• Financing options
• Many decisions fall under
“strategy”, if any of them are
wrong/faulty => strategic risk.
• Include reputational risk under
strategic risk, but it is often a
separate classification.
Strategy and
Organizations
• Strategy is a long range plan for
achieving something/reaching a
goal.
• Strategy should make companies
more:
• Competitive
• Alert to their circumstances
• Resilient
• It may be getting harder to do
because of the “fiercening of
capitalism.”
• Mistakes in strategy can be severe.
• Things you should know:
Strategy and the
Global Financial
Crisis
• How does our mortgage system work?
• What is Fannie Mae / Freddie Mac
• What is a conforming mortgage?
• What is mortgage securitization?
• What are credit default swaps?
• Questions to Think About:
• Did strategy cause the crisis?
• Was strategy thrown aside with the
mortgage crises and resulting financial
markets meltdown?
• Did companies forgo long-term strategy
for quick profits?
Strategy and the
Global Financial
Crisis (Cont’d)
• While strategy probably did not
cause the crisis, it did nothing to
avert it either.
• There were widespread failures of
regulation.
• There was a systemic breakdown in
accountability and ethics.
• Problems
Problems with
Strategy and a
Solution
• Competitive advantage time
shortened.
• Positional volatility of leaders
• How “cool” is Facebook?
• Solution
• Need for adaptive strategy.
• Instead of developing one strategy
based on “analysis, prediction and
deduction,” create a set of “optimal
conditions” for the continuous
emergence of superior strategies.
What does
Strategy Need to
Incorporate?
• Risk
• Boundaries
• Corporate Purpose
• Environment
Risk
• Understand that systemic risk is
real.
• Contingencies need to be modeled
(How can the organization be
resilient?).
• Organizations need to balance the
trade-off between efficiency and
redundancy/excess capacity.
Boundaries
• Market definitions/segments?
• What activities should we pursue?
• How broad should our scope be?
• What are our core competencies?
Corporate
Purpose
• “Shareholder value is a result, not a
strategy.”
• Must consider contribution of all
stakeholders.
• Must define corporate purpose:
• Stability
• Growth
• Employees
Environment
• What type of growth is
sustainable?
• Strategic must consider:
• Demographic trends
• Consumption trends
ERM & Strategic
Risks
• Strategic risks are extremely
difficult to evaluate, quantify, and
manage.
• Often those who come up with the
strategies have a difficult time
identifying what would cause those
strategies to fail.
• Causes of failed strategies include:
• Big picture: financial,
macroeconomic, & geopolitical risks
• Small picture: under-appreciated
competitive threats
Corporate
Strategy:
Harley-Davidson
Example
• Focused on taking “opportunistic
risks” while maintaining brand
equity.
• Understanding, monitoring, and
managing the risk is imperative.
• Defined 16 strategic risks.
What do you think of when you
think Harley-Davidson?
Corporate
Strategy:
Molson Coors
Example
• Strategy group produces shortterm, medium-term, and long-term
strategies.
• What risks threaten achieving
those goals? Examples include
taxation and international
regulation.
• Selling alcohol - country and state
level regulations can vary.
• Sin taxes and implications of these
taxes.
Corporate
Strategy:
Haverty’s
Example
• Selling furniture driven by
disposable income. Recent
recession hurt business more than
the company thought it would.
• Lead to development of more
sophisticated means of tracking
economy.
• Evaluate 30 economic variables to
predict future sales.
Supply Chain:
Overview
• Key question is what events can
cause a material disruption to an
organization’s supply chain?
• Many companies have moved to
“just in time” delivery, reducing the
need to store excessive amounts of
stock which can be costly.
• How can supply chain risks be
identified and managed better?
• There is a real trade-off between
efficiency and potential disruption.
Supply Chain:
Definition
• Think about how an organization
goes from raw materials to
finished products on the market
(a chain of events).
• From Wikipedia: A supply chain
is a system of organizations,
people, activities, information,
and resources involved in
moving a product or service
from supplier to customer.
Supply Chain:
Process
• Planning
• Sourcing
• Manufacturing
• Delivery
• Customer Service & Reverse
Logistics
Definition:
Supply Chain
Risk
• Anything that can interrupt the
ultimate product delivery
(anywhere along that supply
chain).
• Risk management has often relied
on looking at historical data to
estimate frequency and severity
of future losses.
• Works well for “common” supply
chain problems.
• Not so well for rare occurrences.
Solution:
Model/Analytics
• Develop a model that focuses on
time to recovery (TTR) of the
supplier (estimated); and
• Company exposure to that
supplier, risk exposure index
(REI) (estimated).
Model Structure
• Take out one supplier at a time.
• Using their estimated TTR, make
the adjustments needed to the
rest of our supply chain to keep
getting the product to market
for that duration.
• Determine how much it would
cost. REI, (lost profitability).
• Plot the results to see risk
exposure to each supplier.
Benefits of
Model Approach
• Methodical approach does not
forget about small, low-cost
commodity suppliers which can
have a large impact.
• Other benefits of this approach:
• Identifies hidden exposures.
• Avoids the need for predictions
about rare events.
• Reveals supply chain
dependencies and bottlenecks.
• Promotes discussion and
learning within the
organization.
Supply Chain
Example #1:
Chipotle
• 6 outbreaks of food-borne
illness (E. Coli, norovirus, &
Salmonella).
• 514 sick in 14 states reported
(usually a 10% reporting rate).
• Stock drops 40%, same store
sales down 30% in December,
44% drop in profits.
• Numerous lawsuits.
• Unable to identify the source of
the outbreaks in 50% of the
cases.
Chipotle’s Business Model:
Chipotle’s
Strategy vs
Supply Chain
• Fresh produce (network of
hundreds of farmers).
• Meat without antibiotics.
• Locally sourced food and food
with integrity.
• Fresh food - not frozen or
centrally cooked.
• Problem - Hard to Manage
Chipotle’s
Acceptable
Tradeoffs
• Local cooking – more variation.
• 2000 locations, adding 200 per
year on average.
• Gets harder, not easier as volume
increases.
• Real Tradeoffs
• Efficiency vs. redundancy.
• Centralized freezing/cooking,
quality control vs. local, fresh
(never frozen) quality ingredients.
Supply Chain
Example #2:
COVID-19
• Global Shutdown
• Demand Shifts
• Cost Increases
• Examples:
• Semiconductors
• Toilet paper
• Address Vulnerabilities Regularly
• Supply Chain Changes
COVID-19
Lessons Learned
• Likely reduction in just-in-time
manufacturing.
• Dependency on semiconductor
chips may make companies
consider efficiency vs.
redundancy/backups.
• Vendor Relationships
• Role of the Chief Supply Chain
Officer
Supply Chain
Example #3: Global
Supply Chain
Shipping
• Increased Middle East Conflicts
• Shipping Costs increasing
Global Supply Chain
Shipping: Value of
International Trade
• Delivery delays
• Direct property loss
• Increased security expenses
• Increased insurance premiums
• Risk Reduction
• Alternate routes (added
time/cost)
• Increased naval presence
• Reduce tensions in Middle East