Global Supply Chain Management In a
Changing World Economic Environment
Vinod R. Singhal
College of Management
Georgia Institute of Technology
Atlanta, GA, 30332
E-mail: Vinod.singhal@mgt.gatech.edu
Instituto de Empresa - IE Business School
Madrid, Spain
1
Trends in supply chain management
 Globalization
 Increased leveraged
 Dispersion of risk
 Focus on efficiency
 High degree of interdependency
 High degree of uncertainty
2
Examples of effective risk management
The effective management of risk is one of the core
competencies that has made Lehman Brothers so
successful
 Bear Stearns was routinely described as “known
for its risk controls”.
3
What managers are saying about disruptions
 Second most important issues for SC executives
(IBM 2009)
 88% reported fragile supply chains (Aberdeen
2008)
 46% reported better supply chain risk management
is needed to ensure business continuity (AMR 2007)
 77% of executives noted increased concerns about
supply chain risks (McKinsey 2008 - relative to 65%
in 2006)
4
Obstacles to addressing risks
60
50
47
36
% of firms
40
36
30
18
20
14
10
6
0
Insufficent time
Inadequate
personnel
Insufficient
budget
Not a priority
Survey done by Harris Interactive in 2005.
No reason given
Not recognized
5
Agenda
• The financial consequences of supply chain
disruptions
- shareholder value
- stock price volatility
- profitability, sales, and costs
• Primary drivers of supply chain disruptions
• How to avoid and manage supply chain
disruptions?
6
Consequences of disruptions
 Lower Revenues
 Higher costs
 Poor asset utilization
 Excess inventory, inventory write-offs, stockouts
 Higher cost of capital/borrowing
 Shareholder lawsuits
 Management and personnel turnover
 Loss of reputation and credibility, negative publicity
7
Sample
 1000+ announcements of supply chain disruptions (production or
shipment delays) from Wall Street Journal and Dow Jones News
- Sun Microsystems delays shipments of workstations and
servers, Dow Jones News Service, December, 14, 2000.
- Sony Sees Shortage of Playstation 2s for Holiday Season”, The
Wall Street Journal, September 28, 2000.
- Boeing pushing for record production, finds parts shortages,
delivery delays, Wall Street Journal, June 26, 1997.
- Hershey will miss earnings estimate by as much as 10%
because of problems in delivering order, Wall Street Journal,
September 14, 1999.
8
Responsibility for disruptions
40
35
33.61
29.38
30
% of Firms
25
20
15
12.81
14.51
10
6.05
3.81
5
0
Internal
Customer
Supplier
Nature and
government
Other
combinations
None
provided
9
Reasons for disruptions
35
29.38
Number of firms (%)
30
25
21.64
20
15
10
8.94
8.823
8.46
4.11
5
3.26
0
Part
Ramp/rollOrder
shortages out problems changes by
customers
Production Development
problems
problems
Quality
problems
None
provided
10
Performance implications
• Stock price effects of disruption announcements
- the day before and day of the announcement
• Long-term effects (3 years) of disruptions on
- Stock returns
- Volatility
- Profitability
• Performance impacts estimated after adjusting for
the performance of benchmarks
11
Stock market reaction to disruption announcements
Portf olio Matched
Size Matched
-7.18
-7.17
Perf ormance
Matched
Industry Matched
Average shareholder return (%)
0
-2
-4
-6
-8
-6.81
-7.81
-10
12
Comparison with stock market reaction to other
corporate events
Operational events
Marketing events
Increase in capital expenditure
Increase in R&D expenditure
Effective TQM implementation
Internal corporate restructuring
Decrease in capital expenditure
Plant closing
Automotive recalls
1.0%
1.4%
0.7%
1.0%
-1.8%
-0.7%
-0.5%
Information technology events
IT Investments
1.0%
IT problems
-1.7%
Change in firm name
Brand leveraging
Celebrity endorsement
New product introduction
Affirmative action awards
0.7%
0.3%
0.2%
0.7%
1.6%
Financial events
Stock splits
3.3%
Open market share repurchase 3.5%
Proxy contest
4.2%
Increasing financial leverage
7.6%
Decreasing financial leverage -5.4%
Seasoned equity offerings
-3.0%
13
Average stock returns over different intervals
Year before
On
announcement
1st year after
2nd year after
Average shareholder return (%)
0
-1.77
-3
-6
-7.18
-9
-10.45
-12
-15
-13.68
14
Average stock returns over three years
Portfolio Matched
Size Matched
Performance
Matched
Industry Matched
Average shareholder return (%)
0
-10
-20
-30
-34.77
-40
-40.66
-32.21
-38.40
-50
15
Volatility changes
Annualized Equity Volatility (%)
75
70
65
Disruptions
Control Sample
60
55
50
-24
-20
-16
-12
-8
-4
1
5
9
13
17
21
Event Month
On average 21% increase in volatility
16
Broader perspectives
 S&P 500 has returned about 12% annually over the
last 15 years
 Major disruptions are associated with 35%
underperformance in stock returns
 One major disruption every 10 years – average
return of 9%
17
Profitability impacts of disruptions
Performance Measures
Operating Income
Return on Sales
Return on Assets
Percent change
0
-20
-40
-32.02
-35.82
-42.27
Mean
-60
Median
-80
-100
-120
-92.24
-107.43
-114.67
-140
18
Profitability impacts of disruptions
Sales
Cost
20
15
Percent change
10.66
10
4.29
5
0
-2.84
-5
Mean
Median
-6.92
-10
-15
-20
19
Summary
• Disruptions cause significant destruction in corporate
performance
• It does not matter who or what caused the disruption
– you still pay
• Small firms suffer more from disruptions
• Firms do not quickly recover from disruptions
20
Are supply chains more prone to disruptions
today
 Globalization
 Dispersion of supply chain risk
 Increased leveraged
 Focused on efficiency
 High degree of interdependency
 High degree of uncertainty
21
Why enough attention is not paid to the
possibility of disruptions?
• Consequences are not known
• Low frequency events
• Resource shortages
• Requires cross-functional effort
• Short tenure of managers
• You don’t get credit for fixing problems that never
happened
• You have not experienced one
22
Strategies for managing supply chain risks
 Reduce the frequency (probability) of disruptions
• Better forecasting
• Better planning
• Communicate, collaborate, and share
 Develop ability to predict disruptions (business intelligence)
• Select, define, and track key performance indicators
• Analyze disruptions to develop key leading indicators
• Track leading indicators
• Need visibility
23
Strategies for managing supply chain risks
 Elapsed time between the occurrence and detection of
disruptions
• Aim for zero elapsed time
• Real time visibility of the extended supply chain
• Event management systems
 Time it takes to resolve disruptions
• Quick resolution, prevent escalation and worsening
• A process for dealing/responding to disruptions
• Developing capabilities to react and respond
24
A framework for managing supply chain risks
 Identify the primary sources of supply chain risks.
 Estimate the likelihood (probability, frequency, or chances) of
the risk occurring.
 Estimate the financial consequences (impact) of risks.
 Prioritize risks based on likelihood and financial impact.
 Identify strategies and actions to mitigate the frequency
and\or financial consequences of supply chain risks.
 Review the risk management process and continuously
improve the process.
25
Debra Elkins: A framework for Business Interruption
Risk Analysis: GM Research Lab Paper
26
Likelihood/consequences of supply chain risks
 Estimate the likelihood of occurrence of risk
• Estimate the probability/frequency
• Qualitative assessment (point scale or
categories)
 Estimate the financial consequences
• Estimate the $ value of the risk
• Qualitative assessment (point scale or
categories)
27
Prioritizing risks
Catastrophic
Financial Impact
Significant
Monitor and address risk
mitigation strategies
Highest Priority for Risk
Mitigation
Effort and resources not committed
Moderate
Effort and resources
not committed
Active Management of Risk
Little
Remote
 Business Recovery Cost
Possible
Likely
Certain
Likelihood/frequency
 Business Recovery Speed
28
Proactively managing disruptions
• Organization culture
- Face reality
- Avoid denial
- Share the bad news
• Build capabilities to manage supply chain risks
29
Building capabilities to manage risks
• Anticipate
- turbo charge your imagination
- scenario anticipation
- risks faced by various organizations
• Plan
- estimate probability and financial consequences
- map the interdependencies
- contingency planning
- stress testing and practice
• Execute
- monitor and track
- quick deployment and response
30
Implications for managing supply chains
Traditional way – focus on efficiency
 New or alternate way – preserve value and avoid
value destruction
• Value of reliable, responsive, and robust supply
chain
• Prevention role of effective SCM
• Effective SCM buys insurance against value
destruction
31
Final Thoughts
• Managing supply chain risks should be a critical
issue for top management – provide leadership and
resources
• Firms need to develop capabilities for effectively
managing risks
• Ability to manage supply chain risks can determine
whether a firm can compete effectively
32
Final Thoughts
• Can you afford the risk of a major supply chain
disruption?
• What is the easiest way to create shareholder
value or make money? Stop losing it!
33
Back up Slides
•
34
A process for managing supply chain risks
 Identify the primary sources of supply chain risks.
 Estimate the likelihood (probability, frequency, or chances) of
the risk occurring.
 Estimate the financial consequences (impact) of risks.
 Prioritize risks based on likelihood and financial impact.
 Identify strategies and actions to mitigate the frequency
and\or financial consequences of supply chain risks.
 Review the risk management process and continuously
improve the process.
35
Categories of supply chain risks
 Natural disasters
 Inaccurate forecasts
 Supplier
• Poor Performance
• Long lead times
• Bankruptcy
 Customers
• Changing needs
• Variability in demand
• Bankruptcy
 Logistics
• Equipment shortages
• Congestion
• Accidents
• Regulations
 Internal risks
• Inflexible capacity
• Equipment breakdown
• Long lead times
 Procurement
• Long-term vs. short-term
• Squeeze prices
• Single sourced
 Supply chain structure
• Complexity
• Globalization
• Outsourcing
• Single sourcing
• Over concentration
• Lean supply chains
36
Categories of supply chain risks
 Labor
• Strikes\absenteeism
• Inflexible workforce
 Information technology
• Unreliable IT systems
• Non-integrated IT network
• Lack of timely information
 Macro-economic factors
• Exchange rate
• Interest rate
• Tax policies
• Credit squeeze
 Government/regulatory
• Security
• Rules and regulations
37
Debra Elkins: A framework for Business Interruption
Risk Analysis: GM Research Lab Paper
38
Likelihood/consequences of supply chain risks
 Estimate the likelihood of occurrence of risk
• Estimate the probability/frequency
• Qualitative assessment (point scale or
categories)
 Estimate the financial consequences
• Estimate the $ value of the risk
• Qualitative assessment (point scale or
categories)
39
Getting information about supply chain risks
 Information from your own organization
 Trade association and trade publications
 Conferences
 Internet, newspaper, and magazines
 Universities
 Experts and consultants
40
Prioritizing risks
Catastrophic
Financial Impact
Significant
Monitor and address risk
mitigation strategies
Highest Priority for Risk
Mitigation
Effort and resources not committed
Moderate
Effort and resources
not committed
Active Management of Risk
Little
Remote
 Business Recovery Cost
Possible
Likely
Certain
Likelihood/frequency
 Business Recovery Speed
41
Strategies for managing supply chain risks
 Contingency planning
• Analyze what could potentially go wrong
• Identify and analyze possible alternatives
• Develop plans – what to do, when, how, and who
• Assign responsibility and give authority
• Monitor the situation
• Execute the plan as needed
42
Strategies for managing supply chain risks
 Redundancy
• Extra inventory
• Extra capacity
• Backup systems
• Multiple suppliers
• Multiple sites
• Dedicated resource to products, processes
43
Strategies for managing supply chain risks
 Know your suppliers
• Two-way communication - build trust and
relationship with critical suppliers
• Set up a financial rating system – profitability,
cash flows, ownership structure, debt structure
• Set up an early warning system – quality,
capacity, delivery issues, financial issues
• Know your suppliers’ suppliers
• Interdependencies of your suppliers – same
customers, same industries, same shareholders
44
Strategies for managing supply chain risks
 Know your customers
• Two-way communication - build trust and
relationship with key customers
• Set up a financial rating system – profitability,
cash flows, ownership structure, debt structure
• Set up an early warning system – payment timing,
inventory
• Concentration of customer base
• Know your customers’ customers
• Other suppliers to your customers
45
Strategies for managing supply chain risks
 Visibility
• Aware of what is happening in supply chains
• Select key leading indicators of supply chain
• Monitor these indicators using appropriate benchmark
• Communicate deviations to appropriate levels
 Collaborate and cooperate with your supply chain partners
• Develop trust among supply chain partners
• Show that you are willing to collaborate
• Agree upfront on how to share the benefits
• Share information, joint decision making/problem solving
46
Strategies for managing supply chain risks
 Improve the accuracy of forecasts
• Long-term forecasts are less accurate than short-term
• Aggregate forecasts are easier than disaggregate
• Collect data from your supply chain partners
• Question the assumptions that go into building a forecast
 Reduce mean and variance of lead times
• Remove non-value added steps and activities
• Improve the reliability and robustness of processes
• Consider lead time issues in planning and forecasting
47
Strategies for managing supply chain risks
 Reduce the frequency (probability) of disruptions
• Better forecasting
• Better planning
• Communicate, collaborate, and share
 Develop ability to predict disruptions (business intelligence)
• Select, define, and track key performance indicators
• Analyze disruptions to develop key leading indicators
• Track leading indicators
• Need visibility
48
Strategies for managing supply chain risks
 Elapsed time between the occurrence and detection of glitch
• Aim for zero elapsed time
• Real time visibility of the extended supply chain
• Event management systems
 Time it takes to resolve the glitch
• Quick resolution, prevent escalation and worsening
• A process for dealing/responding to disruptions
• Developing capabilities to react and respond
49
Strategies for managing supply chain risks
 Flexibility
- Product design
- standardization
- modularity
- parts commonality
- Manufacturing
- flexible technology and capacity
- committed and uncommitted capacity
- standard processes
- cross-training
- Sourcing
- flexible contracts
- multiple sourcing
- supplier capabilities
- spot markets
50
Improving the supply chain risk management
process
 Have you done a post-mortem or review of your
risk management processes and framework?
 Have you evaluated the effectiveness of your
process?
 What worked and what did not?
 What can be improved?
 Have the key lessons been recorded for other
members of your firm to learn from?
51
Final Thoughts
 Managing supply chain risks should be a critical
issue for top management
 Top management should provide leadership and
resources for the organization to address supply
chain risk issues
 Firms need to develop capabilities for effectively
managing risks
 Ability to manage supply chain risks can determine
whether a firm can compete effectively
52
Other findings
 56% of the respondents indicated that they are
dealing with risks by focusing on risk prevention
and control rather than risk transfer
 Risk transfer options are limited and most of the
risks cited in the survey go beyond what any
insurance company can reasonably insure
53
Profitability impacts in the year after the disruption
Operating Income
Return on Sales
Return on Assets
5
0.94
0.1
Percent change
0
-5
-6.27
-6.36
-10
-4.62
Mean
Median
-15
-20
-18.09
54
Profitability impacts in the 2nd year after the disruption
Operating Income
Return on Sales
Return on Assets
5
Percent change
0
-5
-3.49
-10
-6.58
-8.32
-15
-20
Mean
-25
Median
-23.09
-25.44
-30
-35
-40
-36.19
55
A thought
• Without facts you are just another person with
an opinion
unless
you are at a level of the organization where your
opinion becomes fact
56