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Institut fr Logistik und Unternehmensfhrung Seminar Presentation

ANALYSIS OF GLOBAL SUPPLY CHAIN RISKS


Raman Sarin
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Srikanth Shetty Chiragkumar Maheshbhai Patel Prasanna Sundaresan Satish Kumar Tekkatte Gopal

OUTLINE
Introduction Some theory Strategies for risk management Proposed model Discussion of cases (validation) Conclusion

SUPPLY CHAIN DISRUPTIONS

Type of risks keep changing with political, economical, technological, social and other conditions. Lean Production and Global Outsourcing are suitable for Stable environments but in complex turbulent environment it is difficult to handle intricate supply chains of 21st century. Global sourcing and suppliers consolidation carry hidden cost (increased exposure to the risk of supply-chain disruption) Disruptions in important areas evaluate the vulnerability of global supply chains.
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FACTS

BP oil spill caused closure of gulf fishery and supply of sea-food. Loss of around 40 billion US dollar was estimated as per BPs estimation. Pandemic Disease in past (like H1N1, SARS) had paralyzed business of multinational companies. Unrest in middle east has caused oil price rise and companies can not rely on single source of oil supply and single mode of energy in future. Hurricane-Katrina in US made companies to reconsider depending on single port in high risk area and look for options in supply chain. Due to volcanic ash eruption in Iceland, air-traffic halted in North Europe. The airlines estimated $200 million loss per day. Two important sectors that felt the hardest global hits by Japan disaster are electronics/semiconductor and automobile supply chains.
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IMPORTANCE OF RISK MANAGEMENT IN


GLOBAL SUPPLY CHAIN

As per International Monetary Fund (2008), the growth of ratio of goods and services trade to GDP is from 42 to 62 percent (between 1980 and 2007).

(In 2008, CFO Research Services conducted a survey among senior finance executives in North America to examine their views on increase or decrease of their companys global sourcing activities over the next three years.)

COMPANYS PERFORMANCE DURING DISRUPTION


1. 2. 3. 4. 5. 6. 7. 8.

Preparation

The Disruptive Event First Response Initial Impact Full Impact Recovery

Recovery Preparation Long-Term Impact

In 2005, Yossi Sheffi and James B.Rice Jr. highlights eight different phases that give a view of impact of disruptive event on a companys performance and also the companys response.

STRATEGIES
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Globalization as a solution Resilience (Redundancy and flexibility) Controlling supply chain disruption risks Mitigate damage Risk assessment and Scenario planning Use of various company specific tools Communication systems
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OPTIMIZATION MODEL
Prepare to mitigate

React to recover

Risk recognition Frame work to detect recognized risk Scenario generation for different risk

Identification of risk Recognition of stakeholders Activate intensive communication Risk assessment Strategy development Quick implementation Frequent feedback Documentation of incidents and under taken steps
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Strategy under different risk scenario Implementation responsibility Update Assessment- Documentation

SELECTION OF MIX
a preparation coefficient of relative importance b reaction coefficient of relative importance

S selection mix P, R preparation and reaction respectively


Impact of disruption It is the extra cost that a company has to spend in order to deal with a disruptive event for which they are not prepared in order to sustain its performance to a level that would have been achieved if no disruption would have occurred. Cost of preparation It is the sum of all the cost that a company has to spend in order to mitigate the risk if it occurs in a period of time divided by frequency of a certain disruptive event estimated over the same period of time. Cost of prepared recovery It is defined as cost of preparation plus extra costs that are incurred in order to sustain its performance to a level that would have been achieved if no disruption would have occurred. It is equivalent of impact of disruption with no preparations.
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CASES FOR DISCUSSION

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Scenario 1: High Frequency ,Low Impact


Supply chain Disruption Product with minor damage

Case
Risk management strategy for this scenario Insurance cover for transport. Covers damage, and replacing cost. Does not cover time impact. There is a planned buffer in the delivery lead time.

Lead Time Delivery Time Buffer in lead time

Key points Damaged part is replaced /repaired at customer location. The cost impact is absorbed by the insurance cover. Time impact is absorbed by the buffer in delivery lead time shown in yellow

Cost Logistics cost Insurance cover

Model

Model Interpretation: Factor a is higher compared to the factor b. The strategy opted is the Prepare to Mitigate. Due to the high frequency of occurrence and the low impact after disruption the cost of prepared recovery is lower compared to the impact of disruption.

Comparison of case with the model: The strategy opted by the company in discussion is as per the model results. That is prepare to Mitigate.. The strategy falls under the ideal preparation case of our model resulting in minimum or no impact as shown in the graph . *Ref Interview 1 and 2 in Appendix section of report * Image source: Google images

Scenario 2: High Frequency ,High Impact


Supply chain Disruption Damaged product

Case
Risk management strategy for this scenario Action plan is put into place to replace the severely damaged product and meet the customer demand at the earliest. The Time impact is not covered by the insurance Key points The custom made product has high value hence a spare is not maintained. The product is repaired or replaced with a considerable time and cost impact. The time impact absorbed by the buffer lead time is negligible.

Lead Time Delivery Time Buffer time Time impact

Cost Logistics cost damage covered by insurance Cost impact

Model

Model Interpretation: Factor b is higher compared to the factor a. The strategy opted is the React to Recover. Due to the high frequency of occurrence and the High impact after disruption the cost of prepared recovery is very high compared to the impact of disruption.

Comparison of case with the model: The strategy opted by the company in discussion is as per the model results. That is react to recover. The strategy falls under the Normal preparation case of our model resulting in a noticeable impact as shown in the graph . *Ref Interview 1 and 2 in Appendix section of report * Image source: Google images

Scenario 3: Low Frequency ,High Impact


Supply chain Disruption New supplier development

Case
Risk management strategy for this scenario Since the occurrence is very low in such disruptions react to recover strategy is opted. In this scenario the company goes ahead to develop a new supplier . The company owns the design , plan , the intellectual property rights and other documents which reduces the time and cost impact in such scenarios.

Lead Time Delivery Time Safety stock Time impact

Cost Logistics cost Impact covered by owning the plan and IP rights for new supplier development Significant Cost impact

Key points A new supplier is identified. The process lines are installed and qualified. And finally the production for the critical part is resumed. With a significant time and cost impact.

Model

Model Interpretation: Factor b is higher compared to the factor a. The strategy opted is the React to Recover. Due to the low frequency of occurrence and the High impact after disruption the cost of prepared recovery is very high compared to the impact of disruption.

Comparison of case with the model: The strategy opted by the company in discussion is as per the model results. That is react to recover. The strategy falls under the No preparation case of our model resulting in a significant impact as shown in the graph . *Ref Interview 1 and 2 in Appendix section of report * Image source: Google images

Scenario 4: Low Frequency ,Low Impact


Supply chain Disruption

Case
Risk management strategy for this scenario Since the occurrence is very low in such disruptions react to recover strategy is opted. In this scenario the company decides for a alternative route or mode of transport which is not impacted by the disruption like in this case the sea route. These strategies are purely reactive and the success is based on the risk management team expertise and experience.

Lead Time Delivery Time Safety stock Time impact

Cost Logistics cost Re-routing cost Key points The part is shipped through a different mode of transport or route. There is a very small impact of time and money.

Model

Model Interpretation: Factor b is higher compared to the factor a. The strategy opted is the React to Recover. Due to the low frequency of occurrence the cost of prepared recovery is high compared to the impact of disruption.

Comparison of case with the model: The strategy opted by the company in discussion is as per the model results. That is react to recover. The strategy falls under the Total Reaction case of our model resulting in a minimal impact as shown in the graph . *Ref Interview 1 and 2 in Appendix section of report * Image source: Google images

CONCLUSION

Global supply chain risks always exists and a risk or a part of it can be addressed by preparation or reaction. Strategies for risk management changes from company to company with respect to the policies and priorities . Risk Mitigation plans changes according to competition, cost factors and frequency of probable disruptive event. The proposed Model does not ascertain any specific strategy that should be followed but only helps to obtain a blend of preparation and reaction strategies . React to recover strategy should be opted in case of unrecognised risks Companies usually follow React to recover strategy rather than Prepare to Mitigate strategy in case of Disruptive events that are difficult to predict and also involve high investment on preparation . React to recover strategy is directly influenced by time frame and impact of disruption , expertise and communication system.

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