Winter Project Dec 2012

A Literature review on Risk in Supply Chain

Under the Guidance of: by: Prof. P.K. Jha Singh Dept. of Industrial Engineering & Management M.Tech 1st year IIT Kharagpur 12IM60R03

Submitted Sandeep

Risk in supply chain

1. What is Risk? Risk can be broadly defined as a chance of danger, damage, loss, injury or any other undesired consequences. A more scientific definition of risk was provided by the Royal Society (1992):the probability that a particular adverse event occurs during a stated period of time, or results from a particular challenge. As a probability in the sense of statistical theory, risk obeys all the formal laws of combining probabilities. Others have developed this scientific perspective of risk, such as Mitchell (1995) and Gillet (1996). Mitchell (1995) defined risk as the probability of loss and the signicance of that loss to the organization or individual. Mitchell expressed this as a formula Risk = P (loss) X I (loss) 2. Why are supply chains prone to risk? Global supply chains are formed by a multitude of companies acting as part of a long and complex logistics system. The continuing disintegration and the specialization of operations have made the chains vulnerable to disturbances coming from both inside and outside the system. The visibility of operations outside the companies own functions has decreased, and with it the ability to identify risks threatening them and the whole supply chain. Harland et al. (2003) found that less than 50% of the risks were visible to the focal company in the supply chains they examined. The risks that are identied are typically related to the companies own functions. In most cases, in terms of business impact, risks of disruption are much greater than the operational risks (Tang, 2006). There is therefore a need for a broader view of the supply chain that would facilitate proper risks identication. The possible reasons for this are: Product/Service complexity Outsourcing Globalization

e-business

Product/Service complexity: Increasing demand for product/service performance and variety, combined with more complex product/service and process technologies, has led to increasingly complex products and services. Various dimensions of complexity impacting on supply networks have been identified, including: scale, technological novelty, quantity of subsystems components, degree of customization transformation process, regulatory involvement, number of actors in the network, web of nancial arrangements supporting the product/service, and extent of political and stake holder intervention (derived from Rush,2001; Harlandetal.,2000; Harland,1998). One of the effects of increasing product/service complexity is the recognition that single rms cannot be excellent at everything; this gives rise to outsourcing. Outsourcing: Outsourcing involves the use of specialists to provide competence, technologies and resources to provide parts of the whole (Ford et al., 1998; Gomes-Casseres, 1994; Knight and Harland, 2000; Lonsdale, 1999). Outsourcing not only impacts on the organization and its immediate relationships, but also changes supply network structure and processes. Aggregating these changes; outsourcing changes industry structures (Knight and Harland, 2000), shifting the balance of supply markets (Walker et al, 2001). Increased outsourcing allows access to global markets, and may cause organizations to seek international sources for perceived best in class performance. This has contributed to supply networks becoming globalised. Globalization: Outsourcing is only one driver of globalization. The transnational mobility of capital, information, people, products and services is increasing, leading to global entanglements (Fombrun and Wally, 1992). Strategic intent, global brands, economies of scale and scope, management of the value chain, comparative advantage, market access, the growth of free trade and facilitating information technologies, most recently e-business, have all been cited by various authors as contributory reasons for globalization (Harland,1995). e-business: e-business, or doing business electronically (Timmers, 2000), has increased opportunities to reach new customers and suppliers (Erridge et al., 1998) and respond to rapidly changing markets (van Hoek et al. 1999). The new market and commercial opportunities afforded by the

Internet increase the speed of change and complexity in supply networks, and consequently increase risk. Losses that occur due to supply chain risks: Performance loss Physical loss Psychological loss Social loss Time loss Financial loss Losses can be quantied and related to damages or sentences in criminal prosecution. Situations can give rise to different types of loss. For example, the worlds worst industrial accident at Bhopal in India caused the physical loss of 3800 lives with the associated psychological, social, nancial, performance and time losses (Schwartz and Gibb, 1999). Some losses are relatively minor and have been termed operational losses (Eppen, 2000). Others can be catastrophic in their level (Schwartz and Gibb, 1999 Smallman, 1996). Managers tend to focus more on the magnitude of the loss than on the probability it will be realized (Miller and Leiblein, 1996; Shapira, 1995).

3.Classifying risks:
Type of risk
Strategic risk

Author
Simons (1999)

Description
Affects business strategy implementation

Operations risk

Fitzgerald (2005) Meulbrook (2000) Simons (1999)

Supplier selection, outsourcing Affects a rms internal ability to produce and supply goods/services results from the consequences of a breakdown in a core operating, manufacturing or Processing capability

Vilko, (2011)

Hallikas

Supply risk

Meulbrook (2000)

Vilko, (2011)

Hallikas

Bogataj (2007)

Ship collision or sinking in the approach lane. Lack of skilled workers. The condition of cargohandling equipment. Carelessness and a lack of motivation among the work force. Interpretation problems with documents, contracts and permits. Adversely affects inward ow of any type of resource to enable operations to take place; also Termed input risk Hazardous materials. Stoppage with cargo onboard. Lack of inter modal/multimodal equipment. Bottle necks in the transportation routes. Capacity problems in rail road traffic. Problems with customs clearance. Employee strikes in ports. The permits of the transportation company. Oil spills. Bottle necks in the RoRo/Ropaxs-capacity. The ow of goods in a certain activity cell is not on time, of the required quality and quantity. Supplier selection and outsourcing Supplier Opportunism Inbound product quality Transit time variability Risks affecting suppliers

Tang, Musa (2010)

Manuj, (2008)

Mentzer

Smallman (1996)

Customer risk

Meulbrook (2000)

Asset impairment risk

Simons (1999)

Competitive risk

Simons (1999)

Financial risk

Meulbrook (2000)

Reputational risk

Schwartz and Gibb (1999) Meulbrook (2000) Meulbrook (2000)

Fiscal risk Legal risk

Regulatory risk

Meulbrook (2000)

Process risk

Smallman Bogataj (2007)

Categorized with human technological and organizational risks as direct risks Affects likelihood of customers placing orders; grouped with factors such as product obsolescence In product/market risk Reduces utilization of an asset and can arise when the ability of the asset to generate income is reduced Affects a rms ability to differentiate its products/services from its competitors Exposes a rm to potential loss through changes in nancial markets; can also occur when specic debtors default Erodes value of whole business due to loss of condence. Arises through changes in taxation Exposes the rm to litigation with action arising from customers, suppliers, shareholders or employees Exposes the rm with changes in regulations affecting the rms business, such as environmental regulation. Indirect risk The risk, that the product in a certain activity will not be Produced on time in desired quality and quantity The risk that the product

Demand risk

Bogataj (2007)

Control risk Environmental risk

Bogataj (2007) Vilko, (2011) Hallikas

Bogataj (2007)

Internal risk

Thung and hoeing (2009)

will not be in demand or the risk that planned and realized delivery will be lower than the demand The risk of insufficient quality control Nuclear disaster in nearby plants Oil catastrophe in the GoF/shipping lane/port Ice conditions in winter Fire Regional infectious diseases Climate change Natural forces (weather changes, storms, oods, etc.) Finlands geographical position and dependence on sea traffic Long distances Toxic waste in the bottom of the lane (dredging) Fog in the shipping lane Slipperiness in winter time Risk of environmental inuences (it can be physical environment, social environment, Political environment, legal environment, operational environment, economic environment, cognitive environment) Supplier failure Malfunction of IT Supplier quality problem Change in customer demand Increasing raw material prices Delivery chain disruption Transportation failure Machine breakdowns Technological change

External risk

Thung and hoeing (2009)

Policy risk

Vilko, (2011)

Hallikas

Macro risk

Vilko, (2011)

Hallikas

Security risk

Vilko, (2011)

Hallikas

Accident Strike War Natural disaster Terrorist attack Increasing custom duty Import restriction Oil crisis Russian customs Railway operators attitude towards free markets Financial Crisis Finlands small and unattractive markets Fierce competition in the transportation sector Inltrating into the SC People-smuggling Information systems Drunken drivers Infringement of traffic regulations Outside interference in the SC Spying and espionage The ownership of the Finnish merchant eet (supply security) The applications of the transported good Invoice inspection in transit traffic Energy supply Demonstrations (Ecoterrorism) Water supply Problems in telephone connections Breakdown at a critical railway crossing or yard Commercial and administrative linkage( foreign ownership) The order organizations nancial problems Terrorism

Customs clearance

Risk identification by Tang and Musa (2010)

4. How to manage risk? A typical process of risk management contains four basic steps. This procedure seems to receive consensus in the literature and are applicable to risk management in supply chain processes as well. Hence, we will apply it as is in this article:

(1) The rst step is the risk identication which helps to develop a common understanding of the future uncertainties surrounding the supply chain, thus recognizing the potential risks in order to manage these scenarios effectively. (2) The second step is the risk assessment, which refers to the assignment of probabilities to risk bearing events in the system and identifying the consequences of these risk events dened in the rst step. Associating probabilities to risks is not an easy task and require stedious work. Companys own experiences, other companies performance results or forecasting analysis can be utilized to this end. (3) As a third step, risk management actions are to be implemented. These actions could be for instance the backup scenarios should a pre-identied risk actually takes place (i.e. reactive actions) or the risk mitigation actions to act directly on the pre-identied risks in order to reduce either the occurrence probability or the degree of severity of its consequences (i.e. proactive actions). (4) And nally the fourth step is the risk monitoring where the system is supervised to detect the risks when they occur.

5. Techniques for risk identification, assessment and analysis: 5.1 Risk identification

Apart from case studies and empirical research there are certain models which are used for risk identification. Example: VFPE-based methodology for supply chain risk identification. VFPE is a methodology that combines process-based and objectives-based business modeling approaches into a model that enables holistic representation of the business. Suggested reading: Supply chain risk identication with value-focused process engineering (Dina Neiger, Kristian Rotaru & Leonid Churilov, 2007)

5.2 Risk analysis A widely used method for risk analysis is the failure mode, effects and criticality analysis (FMECA). FMECA is a well-documented method used to

quantify and analyze safety concerns for a product or a process. As an input, it takes plans and diagrams, probabilities and frequencies based on historical knowledge. As an output, FMECA provides a list of most critical risks as well as some target mitigation actions. Suggested reading: Risk assessment and management for supply chain networks: A case study Gonca Tuncel & Gulgun Alpan, 2009)

An empirical analysis of supply chain risk management in the German automotive industry Jorn-Henrik & Daniel Hoeing October 2009
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The analysis is based on a survey with 67 manufacturing plants conducted in German automotive industry. The authors have tried to identify the risk, probability of occurrence of risk and the impact of that risk on supply chain. The supply chain managers were asked to answer the questions regarding their supply chain vulnerability, risks etc on a scale of 5. Risks were classified as internal and external and a probability-impact matrix was designed.

Authors gave certain hypothesis which was then validated performing T test, ANNOVA, Factor analysis and Cluster analysis on the statistical data collected. Furthermore the authors analyzed the SCRM instruments used by managers in their companies. The companies were categorized in three groups viz. companies using Reactive SCRM, companies using Preventive SCRM and companies using NO SCRM.

Certain performance measures were used to compare between the three groups. Using factor analysis the results were obtained which exhibited that the group pursuing the instruments for preventive SCRM has higher values in terms of an increased flexibility and decreased stocks. On the contrary companies with reactive SCRM instruments have higher average value s in terms of reduction of bullwhip effect. Which shows there exists a difference between companies using preventive and reactive SCRM.

Risk Assessment in multimodal Supply Chain Jyri P. P. Vilko, Jukka M. Hallikas September 2011
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The Authors have tried to analyze multimodal maritime supply chain and tried to present a framework for categorizing the risks in terms of their driver factors to assess the overall impact on the performance of the supply chain. Also risk impacts (in terms of delay) are analyzed using Monte-Carlo based simulation. In other words, the main objective was twofold: first, to identify and assess the risk affecting the cargo flows, and secondly to analyze the impact of risk in terms of delay. The maritime supply chain runs between southern Finland the Gulf of Finland (approx. length 200 Km), including both maritime and land transport.

Empirical study and Method: The study is based on the literature focusing on risk and supply chain risk management and on the findings from the interviews with the supply chain experts of the companies.

In first phase the interviews were conducted In second phase risk analysis was done with the help of expert group of researchers and practitioners in the field. In third and final phase risk impact of time delay was evaluated by means of simulation.

From previous literature a standard formula for quantitative definition of supply chain risk is used i.e. Risk = P (loss) X I (loss) Risk identification, Classification & Risk Analysis (Framework): From the study conducted the potential risks were identified and classified. The likelihood of the occurrence and their impact was also identified on a scale of 0,1,3,9. (The scale is adopted from Quality Function Deployment Design Method). The results are shown below in a tabular form:

Simulation: The qualitative assessment provides a general framework to identify most serious risks. As a further step, time delay was used as a

quantification measure. The simulation result is based on the delay impact of the identified risks; the aim is to investigate variation in distribution of possible supply chain outcomes, their likelihood, and their subjective values. The advantage of simulation approach is that one measure (time) can be used for modeling risk impact and probability, unlike expert assessment.

It appears from the detailed simulation report that the delay impact could vary between 0.08 to 0.27 days.

Essential Risk Drivers: According to simulation analysis, ice conditions (38.4%), financial problems (37.5%), fire (9.0%), terrorism (6.5%) and strikes

(3.4%) constitutes the major risk drivers. The same is depicted in the chart below:

The study broadens the perspective of risk management in multimodal maritime supply chain. Risk drivers and uncertainty in supply chain are often analyzed separately, but the study presents an integrated framework. The delay impact is used to model risk exposure to the supply chain.

Risk in supply networks

Christine Harland, Richard Brenchley, Helen Walker December 2002 _____________________________________________________________________________ _ The Authors have studied certain supply networks and tried to identify the risks classified risks under different categories. The Authors took into account a holistic view of risk assessment and risk management. Sources of complexity in networks: Product/Service complexity Outsourcing Globalization e-business

Risk: the probability that a particular adverse event occurs during a stated period of time, or results from a particular challenge. As a probability in the sense of statistical theory, risk obeys all the formal laws of combining probabilities. RISK = P (loss) X I (loss) Type of Risk:

Type of Loss: Performance loss Physical loss Psychological loss Social loss Time loss Financial loss

Risk Assessment: There are two main questions to be answered: 1. How likely is that the event will occur? 2. What is the significance of consequences and losses?

Risk Management: a tool to identify, assess and manage risk is provided. The individual firms can use this tool independently. The risk tool has been developed iteratively; the one provided here is a version derived from previous versions that have been tested in a pilot and four case-studies conducted in a focal rm in the electronics sector, each testing giving rise to redevelopment of the tool.

Supply network risk tool

Conclusion: the study provides reference to supply chain managers to identify, assess and manage risk/loss in their network. It also provides a supply network risk tool which can be effectively used over a supply network.

COMPARISON CHART

Title

Authors/Ye ar of Publication Jorn-Henrik Thun, Daniel Hoeing October 2009

Methodology/Find ings Identify Risk Probability of occurrence Impact of risk Design probability-impact matrix Instruments for SCRM Reactive & Preventive SCRM Identify risk, classify, identify risk impact, and develop a framework. Carry out simulation to study time delay impact. Identify risk, classify, identify risk impact, and develop a supply network risk tool.

Techniques/To ols used Empirical Study Hypothesis T tests ANNOVA Factor Analysis Cluster Analysis

Background/Refere nces Atkinson W. 2006 Z. Sisidin et al. 2005

An empirical analysis of supply chain risk managem ent in the German automoti ve industry. Risk Assessme nt in multimod al Supply Chain

Jyri P. P. Vilko, Jukka M. Hallikas September 2011

Empirical study Interviews, experts. Monte-Carlo Simulation

Harland et al. 2003 Juttner et al. 2003

Risk in supply networks

Christine Harland, Richard Brenchley, Helen Walker December 2002 David Bogataj Marija Bogataj January 2007

Empirical study/Casestudies

Adams, J. 1995 Harland et al. 1999

Measurin g the supply chain risk and vulnerabil ity in frequency space

Use of frequency space to measure and control risk in supply chain. Measuring cost of risk in a supply chain exposed to internal and external risk using NPV of activities approach. NPV optimization using linear programming.

Parametric Linear Programming. Input-Output analysis and Laplace transform.

Input-Output analysis and Laplace transform of supply chain model. MRP-DRP Stochastic modeling. Grubbstrom, R.W 1967 Grubbstrom, R.W 1998 Grubbstrom, R.W 1999 Grubbstrom, R.W,

Bogtaj, L. (Eds.) 1997

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