Fire Case Philips produced radio frequency chips for mobile phones in Semiconductor factory at Albuquerque, NM. Major customers : Nokia and Ericsson March 17, 2000 : Fire strikes semiconductor factory -All silicon stocks destroyed, products line severely impacted
News of fire reached senior leadership after 4 weeks Philip informed Ericsson 3 days after the fire- Ericsson moved into action after 5 weeks Started exploring other options of supply By that time, Nokia had taken over remaining supply sources Impact USD 400 million in potential sales lost Component shortage, incorrect marketing, rigid product design caused a loss of USD 1.68 Billion. Company exits Cell phone market
3 days after the fire: Nokia detected delays in incoming orders- Philips reported a weeks shutdown at plant Nokia sends engineers to plant: Denied access by Philips Nokia increases monitoring weekly to daily- Philips confirms a delay of months. Decisive response Engaged other chip suppliers Immediate change in products design Made other suppliers commit 5 day lead time One out of five components could not be replaced - convinced Philips to provide this components from China/Netherlands factory Impact & Response
Philips Factory fire : Inference Right Managerial Information at the right time is crucial ! Disruptions in Information flow can be catastrophic Information flows are not always automated Proper Information flow is dependent on other factors such as people , processes as well.
DELAYS Occurs when supplier cannot respond to changes in demands Cause : Poor-quality output at supplier plants High levels of handling or inspections during border crossings Changing transportation modes during shipping Mitigate by : Appropriately and economically place and size capacity and inventory reserves Maintain excess flexible capacity in production plants Adequate levels of inventory Example : Dell holds very little inventory of high value components in US but uses air transport to get such parts from east
RISK REWARD - DELAYS
Disruptions Disruptions to material flows :unpredictable and damaging. In , February 1997 fire at a parts factory owned by Japanese manufacturer Aisin Seiki Co. Ltd., a key supplier for Toyota, let to shut down production at most of its Japanese plants., Immediately after the attacks of September 11, 2001, U.S. auto manufacturers ran short of parts because transport trucks had been delayed at the Canadian border. Holding inventory cost can get very high as it is incurred continually, the inventory would be used only in the rare event of a disruption. Stockpiling inventory as a hedge against disruption also makes sense for commodity products with low holding costs and no danger of obsolescence. For products with high holding costs and/or a high rate of obsolescence, using redundant suppliers is a better strategy.
Intellectual Property Risks Cause : Todays supply chains Less vertically integrated and more global Competitors often outsource to the same location Mitigate by : Bring, or Keep, some production in-house, or at least under direct company control Intellectual property limited to countries with legal protection Example : Cisco outsources all manufacturing creates business processes that cannot be easily replicated by a single manufacturer
PROCUREMENT RISK Unanticipated increases in acquisition costs due to fluctuating exchange rates or supplier price hikes Cause : Exchange-rate risk Price increases by suppliers Mitigate by : Build global capacity, financial hedges Long term contracts, redundant suppliers, rarely maintain inventory Example Toyotas manufacturing plant allows to cater one local market & one other market across the world
INVENTORY RISK CAUSE Excess inventory and falling prices Inventory risk hinges on three factors: Value of product Rate of obsolescence Uncertainty of demand and supply. MITIGATION Pooling Inventory Creating common components across products Postponing last stage of production until orders are in hand. EXAMPLE Amazon.com serves all its customers in US with inventory housed in a handful of warehouses. Borders Books & Music supplies its customers with inventory in several hundred stores. Amazon warehouse pools demand large geographical area, stable forecasts & lower total inventory. Amazon achieves 14 inventory turns/year, which is 2 for Borders.
CAPACITY RISK CAUSE Building excess capacity usually becomes a strategic choice. Excess (underutilized) capacity hurts financial performance. MITIGATION Making existing capacity more flexible. Flexibility is a form of pooling that allows use of the same capacity for a variety of products. EXAMPLE Plants owned by Japanese truck manufacturer Hino Motors Ltd. employ multiple assembly lines on which the number of workers determines line speed. This flexibility lets Hino change production on any line by moving workers (capacity) to meet fluctuating demand. Greatly reduces the excess capacity of workers
SYSTEMS RISK Cause : Failure anywhere can cause failure everywhere due to highly networked information systems. The greater use of more highly automated technology has the potential to transform risks from manual processing errors to system failure risks
Mitigate By : Robust backup systems and well-designed, well-communicated recovery processes that duplicate all data and transactions. Such approaches helped securities firms recover quickly and convincingly following the World Trade Center attacks in 2001.
Forecast Risk Cause : Mismatch between a companys projections and actual demand. Long lead times, seasonal demand, high product variety and smaller product life cycles increase forecast error. Mitigate By : Adjusting pricing and incentives to decrease variation in orders. Increase the visibility of demand information across the supply chain. Selectively hold inventory by building responsive production and delivery capacity. Example: Motorola practices responsive delivery each day when it flies in phones from China in response to demand by customer Nextel Communications Inc. Dell also flies in high-value items from Asian suppliers on an as-needed basis.
Mitigation Strategies- Impact
What managers Should Do?? Stress Testing Tailored Risk Management
Used to determine the stability of a given system or entity. Identify key suppliers, customers, plant capacity, distribution centers & shipping lanes. Survey locations and amounts of inventory : components, work-in- process & finished goods Probe each potential source of risk- assess possible supply-chain impacts & companys level of preparedness. Helps company prepare for unforeseen events Identify risk-mitigation priorities for the near, medium and long term. STRESS TESTING
STRESS TESTING
Tailoring Risk Management Approaches
Managers must keep a vigilant eye on the trade-off between the risk and the cost of building a reserve to mitigate it.
Three key relationships influence this optimal balance.
Balancing Supply-Chain Risk/Reward Relationships
Balancing Supply-Chain Risk/Reward Relationships The first relationship is the increasing cost of risk reduction. This simply means that using inventory to cover a high level of demand risk costs much more than covering a low level of risk.
The second relationship shows that pooling forecast risk, receivables risk or some other risk reduces the amount of reserve required for a given level of risk coverage.
The third relationship shows how the benefit of pooling grows with the level of risk covered: The benefit of pooling inventory is great only if the product has high forecast or inventory risk.
Rules Of Thumb For Tailored Risk Management
Rules Of Thumb For Tailored Risk Management
When the cost of building a reserve is low, reserves should be decentralized When the cost is high, reserves should be pooled. If the level of risk is low, focus on reducing costs. If the risk is high, focus on risk mitigation. By tailoring reserves for all risk-mitigation strategies, companies can maximize rewards for the same level of risk, or lower risks for the same reward.