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MANAGING RISK PDM Professional Development Meeting [insert date]
2 © APICS Confidential and Proprietary Introductions – Instructor Introduce yourself! Company/Organization Position Name APICS Training APICS Certifications Other Accomplishments Background
MANAGING RISK (RME1)
4 © APICS Confidential and Proprietary Supply Chain Risk Definition What is supply chain risk?
5 © APICS Confidential and Proprietary 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
6 © APICS Confidential and Proprietary Basic Concept of Risk Management Risk stems from uncertainty or lack of full and timely information Risk must be evaluated relative to its potential cost exposure and the likelihood of occurrence Level of risk Risk reward LowHigh Low High Very undesirable: High risk and low reward Very desirable: Low risk and high reward Y X
7 © APICS Confidential and Proprietary What Are the Forms of Supply Chain Risk? Disruptions caused by problems in distribution flows, computer glitches, actions of competitors, security breaches and product failures. Disruptions caused by natural disasters such as hurricanes, floods, wind, drought and earthquakes. 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 currency exchanges, recession, financial failure and stock market crashes. Supply Process Demand Finance Environment
8 © APICS Confidential and Proprietary Supply Chain Risks Survey 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 Partner underperformance Supplier going out of business Other APICS 2011 Supply Chain Risk Challenges and Practices folio 63% 50% 42% 54% 14% 12% 40% 7%
9 © APICS Confidential and Proprietary Why are These Risks Occurring? Risks due to long lead times, exposure to political, security, regulatory and currency. Risks due to limits to supply chain visibility and coordination. 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 objectives and lack of communication. Low cost country sourcing Outsourcing Lean and just-in- time Supply base rationalization “Siloed” business processes
10 © APICS Confidential and Proprietary Financial Impact of Supply Chain Disruptions 107% Drop 114% Drop 93% Drop 6.9% Lower 10.66%13.88% Operating Income Return on Sales Return on Assets Sales Growth Growth in Cost Growth in Inventories Over 10% Reduction Impact on Shareholder Value Source: Hendrick & Singhal, “The Effect of Supply Chain Disruptions on Long-Term Shareholder Value, Profitability, and Share Price Volatility,” Chain Link Research, January 2011
11 © APICS Confidential and Proprietary 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
Creating Resilient Supply Chains MANAGING RISK
13 © APICS Confidential and Proprietary Managing Organizational Resiliency 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 Failure
14 © APICS Confidential and Proprietary Nissan Motor Company – Case Study Disruptive Event: 9.0-magnitude earthquake in Japan Result: 80% of Japanese auto plants suspended production 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. Nissan’s quick recovery strategy:
15 © APICS Confidential and Proprietary 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
16 © APICS Confidential and Proprietary Negative Consequence s Controlling Risk Strategies PreventionRecovery Event Management Disruptive Event Prevent an event from occurring Isolate the affects of an event Minimize the effects of an event Adapted from Nigel Slack and Michael Lewis, Operations Strategy, p. 477.
17 © APICS Confidential and Proprietary Frequency and Impact of Supply Chain Risks Internal External Natural Source of supply chain disruption Low Medium High Magnitude of frequency and impact Impact Frequency Reference: Richard E. Crandall, “Perceptions of Peril,” APICS Magazine Absorb in normal operations or mitigate with preplanned action. Mitigate with preplanned action or with a rapidly devised action based on previous experiences and flexible processes. Mitigate with agile response that may require innovation and originality.
18 © APICS Confidential and Proprietary Basic Risk Responses Avoid existing activities that give rise to risk. Take action to reduce the likelihood or impact related to the risk. Have back-up processes or resources in case of failure. Avoidance Transfer or Share Redundancy Accept the chance of a risk occurring because of its low probability or benefit. Acceptance Take action to reduce the likelihood or impact related to the risk. Mitigate
19 © APICS Confidential and Proprietary Risk Response Plans and Cost Preventive action: Risk response that occurs before a harmful risk event occurs; intent is to reduce probability or severity of the risk. Contingent action: Risk response that occurs during or after a harmful risk event; intent is to minimize monetary, physical or reputation damage. Risk event Best-Cost Outcome vs.Cost of Response Cost of Occurrence × Probability
20 © APICS Confidential and Proprietary Risk Mitigation and Response Attributes 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. Visibility Event detection and alerting Analytics Simulation
21 © APICS Confidential and Proprietary Risk Mitigation and Response Attributes (cont.) Capability to merge teams into the evaluation process to both validate the proposed strategy and to propose key improvements. Capability of the risk team to make a joint decision on which mitigation or resolution alternative best meets organizational goals. Capability to decide which demands to satisfy and then align the supply chain to execute this new prioritization. Capability to use S&OP to integrate all planning layers and functions to review the effect of near- term and long-term risk planning and simulation. Collaboration Scenario comparison Prioritized demand Integrated S&OP
22 © APICS Confidential and Proprietary Steps to Analyzing and Mitigating Risk Explore all avenues of risks (suppliers, logistics, environmental, etc.) affecting the company and assess types and likelihood of risks occurring. Score each risk factor and prioritize each according to low and high likelihood of occurrence and business impact. 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 mitigation strategies need to be reviewed on a regular basis to ensure new factors are included. Visualize and understand risks Measure and prioritize Take action Monitor, review, and maintain
23 © APICS Confidential and Proprietary Risk Response – Methodology Assess Transportation failures Climate, weather Variability/quality problems, incorrect orders Loss of key asset/ supplier/customer Licensing, regulations Theft, vandalism, etc. Generating preventive action plans for each risk to be mitigated Implementing preventive action plans Manage implementation projects… Set goals and expectations Win project approval and funding Exercise project management Measure success Preparing contingency plans Prepare Assign roles Disseminate prioritized plans and practice them Research best practices Develop sourcing alternatives Track shipments with RFID and GPS Coordinating and sharing risks among SC partners Share Work with partners Ensure reliable roles Coordinate response to crisis or problems Transfer risk on basis of who in SC is best able to respond
24 © APICS Confidential and Proprietary Risk Response – Methodology Examples of Supply Chain RiskExamples 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.
25 © APICS Confidential and Proprietary Supply Chain Capabilities to Manage Risk Agile Execution 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.
26 © APICS Confidential and Proprietary Risk Management Maturity Levels Level 0 No recognition Level 1 Initial Level 2 Buffer Planning Level 3 Proactive Level 4 Optimized Level 5 Sustained No risk management strategy in place. Ad hoc processes but not well-defined or documented. Anticipatory risk planning, build capacity and inventory redundancy, and basic risk governance. Proactive risk management, use of quantitative tools, business continuity plans, and use of sensors and predictors. Flexible supply chain, partner risk strategy alignment, quick response and adaptability. Sustained performance of risk management strategy and processes for more than one year.
27 © APICS Confidential and Proprietary Seven Enablers of Supply Chain Risk Maturity Risk governance 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.
28 © APICS Confidential and Proprietary Seven Enablers of Supply Chain Risk Maturity (cont.) 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.
Additional Resources MANAGING RISK
30 © APICS Confidential and Proprietary Resources to Learn More APICS Risk Folios APICS Supply Chain Risk Management Seminar APICS APICS Risk Management Education Certificate
31 © APICS Confidential and Proprietary Congratulations! Download the transcript to track your progress and learn how you can qualify for the remaining hours at Participation in today’s session qualifies for one elective hour (RME1) toward the APICS Risk Education Certificate.
APICS Supply Chain Risk Management Seminar Thank you!
Supply Chain Management Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent.
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