Presented by:Hafiz Sabir AliGlobal Manufacturing 12

Supply chain Risk Management

“Perspectives in Supply Chain Management “By Christopher S. Tang, Published on March 2, 2006

Main Topic

‘‘the management of material, information and financial flows through a network of organizations that aims to produce and deliver products or services for the consumers. It includes the coordination and collaboration of processes and activities across different functions such as marketing, sales, production, product design, procurement, logistics, finance, and information technology within the network of organizations.’’

Supply Chain Management

“the management of supply chain risks through coordination or collaboration among the supply chain partners so as to ensure profitability and continuity”.

Supply Chain Risk Management

Two dimensions

Supply chain Risk • Operational Risk • Disruption Risk

Mitigation Approach • Supply Management • Demand Management • Product Management • Information

Management

• Natural & Man Made

• Earthquake• Floods• Hurricanes• Terrorist• Economic crises

Disruption

refers to

• Inherent Uncertainties

• uncertain customer demand

• Uncertain Supply

• Uncertain cost

Operational refers to

Operational Vs. Disruption Risk

a firm can coordinate or collaborate with upstream partners to ensure efficient supply of materials along the supply chain.

a firm can coordinate or collaborate with downstream partners to influence demand in a beneficial manner.

A firm can modify the product or process design that will make it is easier to make supply meet demand.

The supply chain partners can improve their coordinated or collaborative effort if they can access various types of private information that is available to individual supply chain partners.

Basic frame work

Mitigation Approach

Supply Chain Risk

Management

Product management

Demand management

Supply Management

Information Management

Supply Management

Five inter related issues• Supply network design • Supplier relationship• Supplier selection process• Supplier order allocation process• Supply contract

1. Network configuration2. Product assignment3. Customer assignment4. Product Planning5. Transportation Planning

Network design

Recent changes in suppler relationship from adversarial to co operative level.

Different types of relationship , ranging from one time purchase to virtual integration

Tang(1999) four types of relationship , vendor , Preferred supplier, exclusive supplier and partner

Short term contract & Long term contract

Supplier relationship

Selection Criteria dependent or independent• Cost reduction , capability, quality, production volumes

Using Multivariate statistical techniques • (factor analyses, cluster analyses)

Supplier selection process

All level , commitment to establish long term relationship is important

Price is least criteria , where as quality and delivery are more important

Supplier capability and financial stability

Survey conclusions

Linear weighting model ( assign weights)

Total cost of ownership (cost incurred throughout life)

Mathematical programming model (minimum cost)

Stimulation models (yield loss, stochastic lead times)

Some other methods as well suggested by researchers

Selection Approval

Uncertain demands • Single supplier allocation• Multiple supplier• Mostly restricted to 2 suppliers due to complexity• Two modes regular & emergency

Uncertain supply yields• Buyer receive random fraction of order from supplier• Multistage multiple periods

Uncertain supply lead times• When replenish lead times are stochastic, deterministic demand• (s , Q ) ordering policy

Uncertain costs• Currency rates in global supply chain • Uncertain supply cost imposed by upstream supply partners• Flexibility to shift production between two plants located in two different countires

Supplier order allocations

Supply partners in different firm make independent decisions Locally operational inefficiency & global suboptimal decisions Disintegrated supply chain is due to

Customer demand follows an AR, which will create “bullwhip” effect

Maximizing their own profit Locally optimal decisions would result in total loss of supply

chain

Supply contracts

Uncertain demand• Whole sale price contracts

• What should the whole sale price• Retailer order quantity• Retail order according to newsboy model

• Buy pack contracts• Offer return policy • Buy pack up to R% up to retailer’s excess inventory [Q-D]+, where

R<=100% and b<=w• Revenue sharing contracts

• In stocking out at retailers , manufacturer has more loss , customer would buy similar products

• Block buster shares probably between 30% to 45 % of their rental in exchange of reduced whole sale price

• Quantity-based contracts-quality flexibility and optimal order

Supply contracts( Cont’)

Demand Management

Demand management during fixed supply like in service and fashion Industry

Firm uses different managements to increase profit Modified demand should better match the fixed supply Carr and Love joy are the first to develop single period

model to handle multiple customers with random demand distributions

Demand Management

Shifting demand across time Shifting demand across markets Shifting demand across Products

Demand Management

In service Industry Higher price during peak seasons Price discounts Advance purchase through card money , online payments

(Win-Win Strategy ) Demand postponement strategy

Price discount to customer who accept late shipment

Shifting demand across time ???

When selling products with short life cycles in different markets, firms need to manage product rollovers.

Roll over in uncertain demand is great challenge Solo-roll overs ( selling new products in different markets) Shifting demand from primary market to secondary market.

Selling price & Stocking level ? Forecast of demand in secondary markets Transshipment quantity to be shipped

Shifting demand across markets

When selling multiple products in a single market, various pricing and promotion strategies to entice customers to switch brands or products. The ultimate

goal of various marketing strategies is to help a firm increase market share, sales, or revenue.

Product substitution by selling products with similar features, a firm can increase the product substitutability. product substitution can occur when one product dominates another product in terms of

quality or performance. Product bundling

a firm can change the demand of the products by developing bundles. Examples can be found across a range of products including food (cans of chicken

broth), apparel (under garments), cosmetics (shampoo and conditioner), and electronics (computers and printers).

When products are sold in bundles, they force the customers to buy all products as a bundle, which will affect the effective demand of the products.

Shifting demand across products

Product Management

Product variety is an effective strategy to increase increasing market share because it enables a firm to serve heterogeneous market segments and to satisfy consumer’s variety seeking behavior.

It may help a firm to increase market share and revenue.

A firm can produce Product platforms as Computer manufacturing to reduce cost for variety

Product management

Two major issues

• Postponement• Process sequencing

Product Management

A manufacturer produces a generic product, which can be modified at the later stages before the final transport to the customer. 

Postponement

Some researcher believe that , variation can be reduced by reversing the original process sequence.

Example : woolen Industry Knitting – dying Knit first , dye later

Process Sequencing

Information Management

Fashion products• Short life cycle • Higher level of demand uncertainties

Functional Products

Information Management Strategies

Reduction in standard deviation of the demand over the replenish lead time would result in inventory reduction for entire supply chain

Managing short life cycle , short replenish time could enable retailers to order twice in selling season.

Quick response

Fashion products

Product with longer life cycle Market information is critical in generating accurate

demand forecast. Bull whip effect , although demand was stable Increase in variability could cause problems like , high

Inventory , low customer service, insufficient use of productions , transportation capacities

Root causes need to be identified.

Functional Products

Four root causes for Bullwhip effect

• Demand forecasting

• Batch ordering• Supply shortage• Price variation

Mitigating strategy

• Information Sharing

• Vendor Management

• Collaborating forecasting

Manufacturer has the information of demand distribution Retailer order according to order up-to policy in each

period Information sharing has the advantage to manufacturer

to know the actual demand in certain period. Manufacturer can reduce inventory level as well as total

expected cost Manufacturer can benefit retailer with price discount replenish

lead time reduction.

Information sharing

As information sharing is beneficial to manufacturer , they build VMI to benefit retailer

Retailer delegate the ordering and replenish planning to manufacturer

In return manufacturer get direct information about customer demand as well retailers inventory

Vendor Managed Inventory

Under VMI

• Retailers can reduce the• overhead• operating cost• Replenish planning • Guarantied service level

• Manufacturer benefits• Reduce bullwhip effect • Reduce production/transportation cost

voluntary Industry Commerce standard(VICE) developed initiative called Collaborative planning and forecasting replenishment (CPFR)

Mutual agreeable demand forecasts jointly Both parties agree on common forecasts, retailer develop

replenishment plan , while manufacture development plan independently

Collaborative forecasting

Robust strategies for disruption Risks

Most companies recognize the importance of risk assessment programs and use different methods, ranging from formal quantitative models to informal qualitative plans, to assess supply chain risks. But most companies invested little time or resources for mitigating supply chain risks.

Due to few data points, good estimates of the probability of the occurrence of any particular disruption and accurate measure of potential impact of each disaster are difficult to obtain.

Therefore Firms tend to underestimate disruption risk in the absence of accurate supply chain risk assessment but they rarely invest in improvement programs in a proactive manner because ‘‘nobody gets credit for fixing problems that never happened.’’

Manager towards disruption Risks

As it id difficult to find the probabilities of occurrence major disruption and its impact,,,

Efficiency—the strategy would enable a firm to manage operational risks efficiently regardless of the occurrence of major disruptions.

Resiliency—the strategy would enable a firm to sustain its operation during a major disruption and recover quickly after a major disruption

Properties of robust strategies

Robust supply Management strategies Multi-suppliers in many countries

Robust demand strategies Capability to shift demand across product can make supply chain

more efficient. Responsive pricing strategy enable firm to increase profit by shifting

demand across products Robust product management strategy

Postponement strategy is robust Robust information Management strategy

Collaborative forecasting and replenishment is robust as it increase the supply chain visibility as upstream partners have access to demand and inventory position to downstream stages

Demand and supply process• Consider the non stationary demand or supply

Objective function• Change the objective function as cost/profit or some other performance targets, such

recovery time after disruption.Supply Management strategies

• Introduce idea for back up suppliers

Demand Management strategies• it appears that dynamic pricing appear to be influential in managing disruption risk ,

as firm can deploy this strategy easily after disruption • Also the revenue management

Product management strategies • Reconfiguring the items on display in the store or in online selling e-tailors can

change their products dynamically according to supply and demand.

Conclusions

Product management strategies Reconfiguring the items on display in the store or in online

selling e-tailors can change their products dynamically according to supply and demand.

Conclusions( Cont.’)