Day 1 Afternoon: Managing Extreme Supply Chain Events Lecture – Market Turbulence and Risk Lecture - Environmental Assessment – estimating likelihood and

• Day 1 Afternoon: Managing Extreme Supply Chain Events

• Lecture – Market Turbulence and Risk

• Lecture - Environmental Assessment – estimating likelihood and impact of high impact, low probability events.

• Break out – Calculating Turbulence and VaR

• Read:

• DRK Environmental Assessment Method (Class Handout)

• Supplier Network Risk Management in Turbulent Environments, Kevin McCormack, DRK Research, [email protected]. Peter Trkman, University of Ljubljana, Faculty of Economics, [email protected] (Class Handout)

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mailto:[email protected]

Market Turbulence and Risk

Dr. Kevin McCormack

Feb 2011

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Environmental Assessment

Dr. Kevin McCormack

Jan. 2010

8SCOR Risk Management Training

Risk Prioritization

|Copyright © Supply Chain Council. 2006. All rights reserved. Copyright © Supply Chain Council. 2006. All rights reserved. Copyright © Supply Chain Council. 2006. All rights reserved. Copyright © Supply Chain Council. 2006. All rights reserved. 9

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Likelihood

Imp

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Assessment (how likely, what is the impact)

• Now that you have a list of potential risks, it is time to assess the magnitude of each• The purpose is to help prioritize mitigation efforts

• Common Measures• Likelihood – that risk event will occur

• Quantitative based on history etc. or Qualitative based on experts• Impact – if the risk event does occur

• Financial or on qualitative scale• Charting ex.


Assessment -> Prioritization

Moderate risk; medium priority for mitigation

Critical risk; high priority for

mitigation

Low risk; low priority for mitigation

Moderate risk; medium priority for mitigation

HighLow

Low

HighRisk Prioritization

PotentialImpact

Likelihood of Occurrence


Likelihood Assessment

• For each potential risk, determine the likelihood that it will actually occur.

• There are several ways to do this• Historical occurrences (hurricanes, distribution disruptions,

unreliable partners)

• Analogy (occurrences in similar locations or processes)

• Simulation models

• Expert opinion

• Express the likelihood for each risk in an annual percent (i.e., percent chance it will occur in a given year)• Note: some risks may increase or decrease by year

• Demand uncertainty may decrease as a product matures

• Events, such as facility relocation, can impact likelihood


Impact Assessment

• For each potential risk, identify the potential impact of the event occurs.• The impact is the direct financial losses (asset destruction,

lost orders, etc.) plus the customer service impact (future lost sales, brand damage, etc.)

• There are several ways to assess impact• Historical occurrences (what was the impact last time this

happened?)

• Analogy (What was the impact in in similar locations or processes?)

• Simulation models

• Expert opinion

• Impact should be expressed in financial terms.• Note: some risks may have varying impacts depending on

seasonality or process changes.


Calculate Magnitude

• For each risk, the magnitude is the likelihood multiplied by the impact.

VAR = L x I


Exercise 2: Risk Assessment

• For each of your risks, assess the likelihood and impact• For today’s purposes, use estimates or educated guesses

where necessary

• Calculate the VAR of each risk

• Rank each risk as High, Medium, Low

• Day One - Afternoon:

• Break out - Environmental Assessment Case:

• Groups will break out and develop environmental risk assessments and present their results:

• Read:

• DRK Environmental Assessment Method Cases (Class Handout)

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Exercises - Report Out and Discuss

• Each team (or maybe 2 teams for time reasons) presents their results. • Results – What is your VAR?

• Issues – What was difficult?

• Comments on tools and techniques

• Q and A

• Outcome: Participants are able to explain how they used SCRM components to complete the exercises.

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Mitigation

(what can be done)


Exercises 3 - Risk Mitigation:

• A short lecture will explain the key concepts of the exercise.

• Mitigation measures (e.g. improved planning methods, alternative suppliers, response plans, redundant infrastructure, etc.) should be evaluated for the serious risks. A risk can be mitigated by deceasing the likelihood that it will occur or by decreasing its impact if it does occur.

• Outcome: Mitigation Plans defined for highest risks.

How can risks be controlled and monitored and likelihood / impact reduced?


Mitigation: What Can Be Done?

To deal with risk you can:

• Mitigate – reduce the magnitude of risk by:

• Reducing likelihood it will occur – How can you avoid that risk event?

• For example – help a risky supplier to improve their operations

• Reducing the impact if it does occur – How can you deal with the event better if it does occur?• For example – have more than one supplier for a certain type of commodity

• Transfer – cause someone else to be responsible for that risk,

• For example – buy insurance or restructure your contracts

• Avoid – Completely eliminate the risk by making it impossible to occur

• For example – stop sourcing from a supplier that is too risky

• Accept – do nothing, may decide the risk is too small or too difficult to mitigate

• For example – don’t do anything about the risk of nuclear war

• Sharing – share the risk with another supply chain member

• For example – create a purchase contract with low initial prices and shared profits for you and them if your end product sells well


Picking Risks to Mitigate

• You cannot mitigate everything• Rank your list of risks from highest to lowest

VAR based on the assessment

• Select the highest risks for potential risk reduction

• Consider the cost of mitigation vs. the reduction in VAR• ROI = Reduction in VAR - Cost to Implement


Source Risk Mitigation Strategies

• For source risks, here are some example strategies• Multiple sources of supply — having multiple sources of

supply for a raw material reduces the impact of one source failing to deliver materials

• Strategic agreements or partnerships with suppliers —strategic agreements with suppliers can lead to continued service in the event of capacity constraints.

• Collaborative Planning Forecasting and Replenishment (CPFR) — by sharing demand and fulfillment data with supply chain partners, there is a reduced risk of unforeseen demand swings or supply shortages.

• Joint product design and delivery — designing products with suppliers reduces the risk of material non-performance or material shortages

• Strategic inventory — keeping extra inventory of high risk critical inventory in case of a disruption


Supply Chain Network Configured to Mitigate Risk

• Design node locations, transportation routes, capacity size and location, number of suppliers, number of production locations, etc. in a fashion that mitigates potential disruptions to the ability to deliver product and service to the end customer.

• Use information collected through risk identification and risk assessment processes to identify nodes that are at a high risk of disruption due to the location of the node.


Crisis Communication

• For all types of risks, good communication helps to reduce the impact of a risk event.

• Some characteristics of good crisis communication are:• Open, i.e. directly able to reach the right person• Fast and reliable with redundant methods available • Periodic reports with supply chain partners to coordinate

efforts

• A crisis communication plan includes:• Crisis definitions• Crisis roles and responsibilities• Pre-defined communication points of contact, methods of

contact, etc.• Media relations procedures• Crisis response operating procedures• Test and exercise requirements for the plan


Monitoring (coordination) (what should be watched)

• Monitor environment• Predict when risk events are about to occur• Detect and react quickly

• Focus on Supply Chain metrics • Statistical analysis (predictors)• Internal monitoring• Visibility into customer and supplier metrics• SCOR model pre-defined metrics are ideal

• “Watch-out” lists – precursors / indicators/ predictors of supply chain risk events


Exercise

• What are your highest risks?

• How could you control them?

• Create a mitigation plan for each one.• What could you do to reduce the risk (likelihood or impact or

both)?

• How much would it cost to implement?

• What supply chain partners do you need to coordinate with to implement this plan?

• Calculate your new VAR

• Calculate you ROI


Exercises - Report Out and Discuss

• Each team (or maybe 2 teams for time reasons) presents their results.

• Q and A

• Outcome: Participants are able to explain how they used SCRM components to complete the exercises.

Documents

Day 1 Afternoon: Managing Extreme Supply Chain Events Lecture – Market Turbulence and Risk Lecture - Environmental Assessment – estimating likelihood and