MANAGING RISK PDM
Professional Development
Meeting
[insert date]
Introductions – Instructor
Name
Company/Organization
Introduce
yourself!
Position
Background
Other Accomplishments
APICS Certifications
APICS Training
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MANAGING RISK
(RME1)
Supply Chain Risk Definition
What is supply chain risk?
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Supply Chain Risk Definition
The variety of possible events and their outcomes that
could have a negative effect on the flow of goods, services,
funds, or information resulting in some level of quantitative
or qualitative loss for the supply chain
APICS Dictionary, 14th edition
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Basic Concept of Risk Management
 Risk stems from uncertainty
 Risk must be evaluated relative to
or lack of full and timely
information
Very undesirable:
High risk and low
reward
Level of risk
High
its potential cost exposure and the
likelihood of occurrence
Y
X
Very desirable:
Low risk and high
reward
Low
Low
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Risk reward
High
What Are the Forms of Supply Chain Risk?
Supply
Process
Demand
Finance
Environment
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Disruptions caused by the inability of suppliers to deliver
on time, quality failure, financial failure, compliance failure
and channel complexity.
Disruptions caused by quality problems, inventory
shortages, late deliveries, capacity shortages, industrial
espionage and equipment breakdowns.
Disruptions caused by problems in distribution flows,
computer glitches, actions of competitors, security breaches
and product failures.
Disruptions caused by currency exchanges, recession,
financial failure and stock market crashes.
Disruptions caused by natural disasters such as
hurricanes, floods, wind, drought and earthquakes.
Supply Chain Risks Survey
63%
Natural disaster disruption
Inadequate relationship management
with customers or suppliers
Insufficient monitoring of supply chain
performance
Lack of information sharing with
suppliers and customers
Liability due to lapses in materials safety
Losses due to theft or other criminal acts
50%
42%
54%
14%
12%
40%
Partner underperformance
Supplier going out of business
40%
Other
7%
APICS 2011 Supply Chain Risk Challenges and Practices folio
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Why are These Risks Occurring?
Low cost country
sourcing
Risks due to long lead times, exposure to
political, security, regulatory and currency.
Outsourcing
Risks due to limits to supply chain visibility
and coordination.
Lean and just-intime
Supply base
rationalization
Risks due to stock outs, and disruptions due
to supply and delivery glitches.
Risks due to narrowing of the supplier base to
a single supplier.
Risks due to internal conflicts, cross-purpose
“Siloed” business
objectives and lack of communication.
processes
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Financial Impact of Supply Chain Disruptions
Operating
Income
Return on
Sales
Return on
Assets
Sales
Growth
107%
Drop
114%
Drop
93%
Drop
6.9%
Lower
Impact on
Shareholder
Value
Growth in Growth in
Cost
Inventories
10.66%
13.88%
Over 10%
Reduction
Source: Hendrick & Singhal, “The Effect of Supply Chain Disruptions on Long-Term Shareholder
Value, Profitability, and Share Price Volatility,” Chain Link Research, January 2011
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Key Principles of Risk Management
Supply chain disruptions have significant impact on company
business and financial performance.
Companies with mature supply chain and risk management
capabilities are more resilient to supply chain disruptions. They are
impacted less and they recover faster than companies with
immature capabilities.
Mature companies investing in supply chain flexibility are more
resilient to disruption than mature companies that do not invest in
supply chain flexibility.
Mature companies investing in risk segmentation are more resilient
to disruptions than mature companies that do not invest in risk
segmentation.
Companies with mature capabilities in supply chain and risk
management do better along all surveyed dimensions of operational
and financial performance than immature companies.
Source: MIT and PwC Research Study, “Supply Chain Risk Management,” 2013
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MANAGING RISK
Creating Resilient Supply Chains
Managing Organizational Resiliency
Failure
Assess the potential causes of and risks from failure
Plans to mitigate the
effects of failure
Recovering from the
effects of failure
Countermeasures to
failures
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Nissan Motor Company – Case Study
Disruptive Event: 9.0-magnitude earthquake in Japan
Result: 80% of Japanese auto plants suspended production
Nissan’s quick recovery strategy:
1. Nissan responded by adhering to the principles of its risk
management philosophy. It focused on identifying risks as early
as possible, actively analyzing these risks, planning
countermeasures and rapidly implementing them.
2. The company had prepared a continuous readiness plan
encompassing its suppliers including: an earthquake
emergency plan; a business continuity plan; and disaster
simulation training. Nissan deployed these advanced
capabilities throughout risk management and along the supply
chain.
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Nissan Motor Company – Case Study (cont.)
3. Management was empowered to make decisions locally without
length analysis
4. The supply chain model structure was flexible, meaning there
was decentralization with string central control when required.
This was combined with simplified product lines
5. There was visibility across the extended enterprise and good
coordination between internal and external business functions.
Source: William Schmidt and David Simchi-Levi, “Nissan Motor Company Led: Building
Operational Resiliency,” MIT Sloan Management: Case Number 13-150
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Controlling Risk Strategies
Prevent an event from occurring
Minimize the effects of an event
Prevention
Disruptive
Event
Recovery
Event
Management
Negative
Consequence
s
Isolate the affects of an event
Adapted from Nigel Slack and Michael Lewis, Operations Strategy, p. 477.
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High
Medium
Mitigate with preplanned
action or with a rapidly
devised action based on
previous experiences and
flexible processes.
Absorb in
normal
operations or
mitigate with
preplanned
action.
Internal
Frequency
Mitigate with
agile response
that may require
innovation and
originality.
Low
Magnitude of frequency and impact
Frequency and Impact of Supply Chain Risks
Impact
External
Source of supply chain disruption
Reference: Richard E. Crandall, “Perceptions of Peril,” APICS Magazine
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Natural
Basic Risk Responses
Avoidance
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Avoid existing activities that give rise to risk.
Acceptance
Accept the chance of a risk occurring because
of its low probability or benefit.
Transfer or
Share
Take action to reduce the likelihood or impact
related to the risk.
Mitigate
Take action to reduce the likelihood or impact
related to the risk.
Redundancy
Have back-up processes or resources in case
of failure.
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Risk Response Plans and Cost
Contingent action:
Preventive action:
Risk response that occurs
during or after a harmful risk
event; intent is to minimize
monetary, physical or
reputation damage.
Risk response that occurs before
a harmful risk event occurs;
intent is to reduce probability or
severity of the risk.
Risk event
Best-Cost Outcome
Cost of Occurrence
× Probability
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vs.
Cost of Response
Risk Mitigation and Response Attributes
Visibility
Event
detection
and alerting
Analytics
Simulation
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Capability for forward-looking, predictive views of
events occurring in the supply chain integrated into a
single system of the supply chain.
Capability to detect and trigger alerts based on the
anticipated impact of a disruptive event.
Capability to leverage analytics to model the event
and determine its impact and the impact of potential
response decisions and actions.
Capability to use “what-if” simulation to model
alternative mitigation strategies to ensure they
provide the best response.
Risk Mitigation and Response Attributes (cont.)
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Collaboration
Capability to merge teams into the evaluation
process to both validate the proposed strategy and
to propose key improvements.
Scenario
comparison
Capability of the risk team to make a joint decision
on which mitigation or resolution alternative best
meets organizational goals.
Prioritized
demand
Capability to decide which demands to satisfy and
then align the supply chain to execute this new
prioritization.
Integrated
S&OP
Capability to use S&OP to integrate all planning
layers and functions to review the effect of nearterm and long-term risk planning and simulation.
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Steps to Analyzing and Mitigating Risk
Visualize and
understand
risks
Explore all avenues of risks (suppliers, logistics,
environmental, etc.) affecting the company and
assess types and likelihood of risks occurring.
Measure and
prioritize
Score each risk factor and prioritize each according
to low and high likelihood of occurrence and
business impact.
Take action
Based on risk priority, develop an action plan. The
mitigation strategies must be modeled and tested
using robust, flexible “what-if” analysis capabilities.
Risks priorities will change. Both the risk and
Monitor, review, mitigation strategies need to be reviewed on a
and maintain regular basis to ensure new factors are included.
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Risk Response – Methodology
Generating
preventive
action plans for
each risk to be
mitigated
Assess
 Transportation failures
 Climate, weather
 Variability/quality
problems, incorrect
orders
 Loss of key asset/
supplier/customer
 Licensing, regulations
 Theft, vandalism, etc.
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Implementing
preventive
action plans
Preparing
contingency plans
Coordinating
and sharing
risks among SC
partners
Manage
implementation
projects…
Prepare
Share
 Assign roles
 Work with partners
 Set goals and
expectations
 Disseminate prioritized
plans and practice
them
 Ensure reliable roles
 Win project approval
and funding
 Research best
practices
 Exercise project
management
 Develop sourcing
alternatives
 Measure success
 Track shipments with
RFID and GPS
 Coordinate response to
crisis or problems
 Transfer risk on basis
of who in SC is best
able to respond
Risk Response – Methodology
Examples of Supply Chain Risk
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Examples of Preventive Action Plans
Failure of mode of transportation, such as a train
derailment, a power outage that closes down
pipeline pumping stations, operator strikes or
other disruptions.
Preventive maintenance of equipment and vehicles,
safety training, backup power supplies, extra
capacity at all plants, safety sock and maintenance
of good labor relations.
Harm to goods, facilities or markets caused by
adverse weather, fore floods, vandalism or terrorist
activities.
Insurance, geographical diversity, security systems
and guards, financial diversifications, GLS tracking
or transport vehicles,
Lead time variability, incorrect orders or quality
problems.
Safety lead time, counting or quality control at
receiving and supplier certification.
Loss of a key asset or supplier.
Understanding supplier’s organization and financial
solvency, contractually obligated backup suppliers,
redundant equipment and repair parts on hand.
Inadvertent noncompliance with regulations,
ordnances, licensing requirements and more.
Compliance audits, legal review of new regulations,
and supplier certifications.
Theft of real or intellectual property.
Security guards, item tagging and verification.
Failure of or dramatic change in patronage by an
important customer.
Diversification of customer base, CRM functions and
rewarding customer loyalty.
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Supply Chain Capabilities to Manage Risk
Agile
Execution
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Ability to rapidly adjust supply chain by increasing or
decreasing capacities, improving collaboration, formulating
supplier contingency plans and implementing advanced
technologies like predictive analytics.
Adaptable
Structure
Ability to create products, processes and systems that are
easily modified in response to channel conditions.
Visibility
Ability to sense, capture and analyze external and internal
data and turn it into usable business intelligence.
Flexible
Innovation
Ability to make design and development less rigid by
reducing changeover times, increasing interchangeability
and structuring ways to smoothly and rapidly rebalance
order management, production and warehousing in
response to changing conditions.
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Risk Management Maturity Levels
Level 5
Sustained
Sustained performance of risk management strategy
and processes for more than one year.
Level 4
Optimized
Flexible supply chain, partner risk strategy
alignment, quick response and adaptability.
Level 3
Proactive
Proactive risk management, use of quantitative tools,
business continuity plans, and use of sensors and predictors.
Level 2
Buffer Planning
Anticipatory risk planning, build capacity and inventory
redundancy, and basic risk governance.
Level 1
Initial
Ad hoc processes but not well-defined or documented.
Level 0
No recognition
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No risk management strategy in place.
Seven Enablers of Supply Chain Risk Maturity
Risk
governance
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Presence of appropriate risk management
structures, processes and culture.
Flexibility and
redundancy
Flexibility and redundancy in product, network
and process architectures to absorb disruptions
and adapt to change.
Channel
partner
alignment
Strategic alignment with supply channel partners
regarding risk plans and alternative course of
action.
Total supply
chain
integration
Presence of information sharing, visibility, and
collaboration of demand and supply parts of the
supply chain.
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Seven Enablers of Supply Chain Risk Maturity
(cont.)
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Internal
functional
alignment
Alignment and integration of risk plans and
activities on a strategic, tactical and operational
level.
Complexity
management
Ability to standardize, rationalize and simplify
supply chain complexities to remove or dampen
opportunities for disruptive events.
Data, models
and analytics
Development of intelligence and analytical tools
to support supply chain and risk management
functions.
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MANAGING RISK
Additional Resources
Resources to Learn More
 APICS Risk Folios
www.apics.org/riskfolios
 APICS Supply Chain Risk Management Seminar
www.apics.org/seminars
 APICS 2014
www.apicsconference.org
 APICS Risk Management Education Certificate
www.apics.org/risk
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Congratulations!
 Participation in today’s session
qualifies for one elective hour
(RME1) toward the APICS Risk
Education Certificate.
 Download the transcript to track
your progress and learn how you
can qualify for the remaining
hours at www.apics.org/risk.
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APICS Supply Chain Risk
Management Seminar
Thank you!