Supply Chain Vulnerability,

Risk, Robustness &

Resilience
Helen Peck, Cranfield University
In Mangan, Lalwani & Butcher, Global
Logistics and Supply Chain Management
John Wiley & Sons [2008]

Finland 2010

Definitions

Risk:
Decision theory range of possible outcomes & their values, upside gains &
downside losses
Hazard or threat (technological risk; political risk)
Safety & Engineering: Downside consequences of rational decision (worst
case scenario)

Supply Chain Vulnerability:

What
What
What
What
What
What

has disrupted operations in the past?

known weaknesses do we have?
near misses have we experienced?
would be the effect of a key material shortage?
would be the effect of the loss of a distribution site?
would be the effect of the loss of a key supplier or customer?

Robust Strategy:
Firm able to manage regular demand fluctions regardless of disruption

Resilience
Ability of the system to return to its original (or desired) state after
disturbance

Finland 2010

Donald Rumsfeld
What hasnt happened is interesting
There are known knowns
Things we know we know

There are known unknowns

We know that we dont know
Y2K

There are unknown unknowns

We dont know we dont know
9/11
THESE ARE USUALLY THE DIFFICULT
MATTERS
Finland 2010

Creeping Crises
Systematic supply chain disruptions
Post-9/11 security concerns
Hurricane Katrina
Inadequate managerial controls
Enron (WorldCom; Dutch retailer Royal Ahold;
Italian dairy conglomerate Parmalat Finanziara)
Barings Bank

Mitigating legislation
Need Business Continuity Management, due diligence

Sarbanes-Oxley
Basel Accords in International Banking
Finland 2010

Supply Chain wicked

problems
Level 1: Value stream/product/processes
Flow of work, material, information, money

Level 2: Asset & infrastructure dependencies

Fixed & mobile assets

Level 3: Organizations & inter-organizational

network power dependencies
Commercial wellbeing, contractual & stakeholder
relationships

Level 4: Social & natural environment

Society, economy & natural environment

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Level 1: Process Engineering &

Inventory Management
Flows within and between organizations
Underlies lean manufacturing
End-to-end perspective of agile manufacturing

RISK MANAGEMENT
Improved visibility of demand, inventory
Velocity (reduce likelihood of obsolescence)
Tight monitoring and control (TQM, 6 Sigma)

Mastery of process control facilitates

identification, management and elimination
of risk
But need to consider rest of system
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Level 2: Asset & Infrastructure

dependencies
Nodes (facilities) & links (roads, trucks,
etc.)
Asset-based RISK MANAGEMENT
Catastrophes
IT, supply chain system disruption
Loss of key skills

Probability x severity
Impact on operations of loss of links or nodes
through network modeling
Mitigating impacts through business
continuity planning
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Level 3: Organization & InterOrganizational Networks

Financial consequences of events or decisions
Loss of sole supplier or customer

Impact on budget or shareholders

Strategic management
Conflicts of interest

RISK MANAGEMENT

Partnering
Dual sourcing
Outsourcing
Contractual obligations

UPSIDE
Look for competitive advantage in core
competencies
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Level 4: Macro-Environment
Political
Green movement
Wars

Economic
Social
Technological
RISK MANAGEMENT
Risk avoidance
Contingency planning
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Supply Chain Risk

Categories
6 sources

CATEGORY

RISK

NATURE

Extern
al

Natural disaster, plant fire, disease &

epidemics

POLITICAL SYSTEM

War, terrorism, labor disputes,

regulations

COMPETITOR &
MARKET

Price, recession, exchange rate

Demand, customer payment
New technology, obsolescence
substitutes

AVAILABLE
CAPACITY

Intern
al

Capacity cost, supplier bankruptcy

INTERNAL
OPERATION

Forecast inaccuracy, safety

Bullwhip, agility, on-time delivery
Tradeoff: inventory/fill rate
Quality

INFORMATION
SYSTEM

System
breakdown
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Distorted information

Supply Chain risk management

process
P. Chapman, M. Cristopher, U. Juttner, H. Peck, R.
Wilding, Logistics and Transportation Focus 4:4
Risk Identification [2002] 59-64
Uncertainties: demand, supply, cost {quantitative}
Disruption: disasters, economic crises {qualitative}

Risk Assessment

Political
Product availability
Capacity, demand fluctuation
Technology, labor
Financial instability, management turnover

Risk Avoidance
Insurance
Inventory buffers
Supply chain alliances, e-procurement

Risk Mitigation
Product pricing, other demand control
Product variety
VMI, CPFR

Finland 2010

Risk Reduction Strategies

C.S. Tang
Journal of Logistics: Research and Applications 9:1
[2006] 33-45

1. Identify different types of risk

2. Estimate likelihood of each event
3. Assess potential loss from major
disruption
4. Identify strategies to reduce risk
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Robust Strategies

Tang [2006]; Khan & Burnes [2007]; Wagner & Bode [2008]; Manoj &
Mentzer [2008]
Strategy

Examples

Postponement

Standardization, commonality,
modular design delay point of
product differentiation

Nokia,
Xilinx,
Benneton

Strategic stock, buffers

Safety stock for key items

Toyota,
CDC

Flexible supply base

Sole sourcing through multiple

suppliers

HP

Make-and-buy

Outsource

HP; Zara

Economic supply
incentives

Pay premium

Flu vaccine

Flexible transportation

Multi-modal transportation

Dynamic pricing,
promotion

Influence demand through price

Dell

Dynamic assortment
planning

Influence demand by display,

location

Groceries

Silent product rollover

Slowly leak new products

Zara,

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Risk Context
SUPPLY
Political risk (acts of God, acts of man)

DEMAND
Changes in demand from

Loss of reputation for quality

Loss of technological or design competitive edghe
Unpredictable customer preferences
Economic recession

CONTEXTUAL RISKS

Cultural differences
Environmental risk
Regulations risk
Exchange rate risk
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Samsung Electronics ERM

MS Sodhi, S Lee
Journal of the Operational
Research Society 58 [2007]
1430-1439
Finland 2010

Samsung Risk Management

Supply chain risks mitigated by
Keeping inventories low
Keeping capacity flexible
Redundant suppliers for non-core
components
Use of information technology

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Specific Risk-mitigation Steps

Supply related risks
RISK

MITIGATION

Mergers & acquisition threats

Close relations with suppliers (IT

integration)

Acts of God, war, terrorism,

sanctions

Multiple locations for plants &

suppliers

Political risk

Multiple locations for plants &

suppliers

Capacity risk

Flexible capacity multi-platform

lines

Single sourcing

Limit to core-components only (30%)

Intellectual property risk

Internal manufacturing for all core

technologies;
Close relations with suppliers

Supplier delays

Global control center; Integrated

SAP;
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2010
Local
suppliers for non-core

Specific Risk-mitigation Steps

Demand related risks
RISK

MITIGATION

Worldwide recession

Samsung Economic Research Institute

research

Reputation risk

Name recognition; Use reputable auditors

Technology change risk

Heavy R&D investment

Customer preference
change

CRM center

Forecast risk

Monitor retail store inventories with

Rosetta-Net

Receivables risk

Use hard currency in risky countries

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Specific Risk-mitigation Steps

Contextual risks
RISK

MITIGATION

Environmental risk &

compliance

Environment team created 1993;

Proactive anticipation of regulations

Regulation compliance

Use of reputable auditors

Exchange rates

Use of futures
Euros used in Central & Eastern Europe

Financial risk

Strategic restructuring;
Transparent financials

Systems risk

Data center backed up in different

locations

Cultural differences

In-house training

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Rolls Royce Early Supplier

Involvement
G.A. Zsidisin, M.E. Smith, The Journal of Supply
Chain Management [Fall 2005] 44-56

Aerospace Division

Industry driven by cost, reliability

Extensive R&D
Rolls Royce typically 3-4 years for new
product
Industry averaged 10 to 20 years

Supplier-provided components 65-80%

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Rolls Royce ESI process

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Establish customer need

Identify EDI project
Develop component target costs
Prepare ESI project & milestones
Inform business units
Determine commodity breakdown
Develop potential supplier list
Develop business objective
Supplier workshops
Review expectations with suppliers
Conduct ESI workshop
Value engineering, evaluate prices & technical
Evaluate & score suppliers
Make recommendations
Inform suppliers
Develop working agreements & implement
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ESI Benefits

Reduced threat of excessive costs

Reduced legal liabilities
Improved quality
Relaxed supplier capacity constraints
Reduced product development time
Better able to handle product design
changes
Better control over supplier leadership
issues
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Risk of Disintermediation
J.F. Mills & V. Camek, International Journal of Physical
distribution & Logistics Management 34:9 [2004] 714727

Motokov UK Ltd

British importer/distributer in tractors, tires

TRACTORS
Landini Italian agricultural machinery manufacturer
Initially marketed through Edwards Ltd tractor dealership
Replaced with exclusive dealership (Motokov) for 3.5
years
Replaced with newly formed Landini UK distribution

Landini had damage settlement expenses when

terminated with disintermediated firms
Felt they obtained better control, worth expense
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Tires
Motokov dealt with Matador Tyres
Exclusive UK distributors
Tires frangible, low margin

Matador disintermediated Motokov in early 1990s

1994 Motokov rebuilt business around Barum tires
(Czech)
Barum acquired by Continental, who reconfigured their
supply chain
1995 Motokov dropped Barum, returned to Matador
No longer sole importer

2002 Matador acquired large customers wanting

reduced costs
Source producer dealt directly with customers
Motokov too small, disintermediated
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Tractors
Zetor a Czech tractor producer, founded
1946
1960s supplied UK through Motokov
Late 1990s Zetor had financial problems
Full capacity, but no profit
1998 to 2000 halted production

Before 1998 Motokov sold about 600 Zetor

tractors per year
2000 down to 200
Zetor would benefit from buying out Motkov,
reduce costs
Finland 2010