Supply Chain Risk Management

Supply Chain Risk Management A global supply chain is subject to various types of supply and demand uncertainties existing at different nodes of the supply chain giving rise to a variety of risks that can lead to disruption. Companies that stay on top of supply chain risk make their businesses more resilient. They can enhance the companys competitive position, support growth and produce measurable returns. Many companies have recognized this and are now undertaking supply chain risk management programs This research paper reviews published approaches to supply chain risk management and tries to understand how the risks differ in two major industries-electronics and pharmaceuticals. For managers, it provides knowledge of the types of risks that may be present in their supply chain and presents a variety of strategies for identifying and managing the same. Introduction Globalisation, multiple channels to market, the pressure to run lean supply chains extending beyond traditional organisational boundaries, and the need to embrace external parties such as contract manufacturers and logistics service providers, have left the modern supply chain increasingly vulnerable to risk and to possible disruption. Economic disruptions including currency fluctuations, commodity price volatility, and sudden downturns in demand and ownership or investment restrictions imposed by governments have become more frequent and more visible since the financial crisis of 2008. Despite significant growth in international trade, cross-border movements are vulnerable to customs regimes, tariff and non-tariff barriers, quota systems, security concerns and infrastructure bottlenecks. All these risks can be clubbed into- macroeconomic, extended value chain, operational and functional risks. Almost two-thirds of the respondents to a global survey conducted by Mckinsey consisting of executives, say that the risks to their supply chain have increased over the past years. A significant of them also agreed to the fact their companies dont take any steps to mitigate these risks. (Source: September 2006 Mckinsey Quarterly global survey of business executives) Thus there is a clear need to review risk management practices as they pertain to both long-term strategic and short-term tactical decision-making. Organizations should review their risk exposure against objective, transparent criteria, with costs balanced against the benefits of potential methods for mitigating risk. . There are two sides to supply chain risk management: Risk assessment and mitigation Response to supply chain disruption Both are necessary components to an effective supply chain risk management strategy. With strong risk mitigation strategies in place a company is ready to face a given supply chain event. However, not all events may be anticipated. When these events occur, accompany must be prepared to respond quickly and effectively or risk suffering financial and customer service losses. Both the quantitative and qualitative risks will be covered through this paper. A step by step approach to tackle SCRM is proposed:- Assessing risk To assess risk, an inventory of key risks is build, along with the effects and probabilistic likelihood of each risk. A supply chain probability and impact matrix needs to be built. Designing a framework to manage the supply chain Once assessed, supply chain risks need to be managed via a framework that integrates all the key risk capabilities required. Implementing supply chain risk mitigation Companies need a robust action plan funded with the appropriate resources to address the core of the risk issues and implement treatment. The objective of this paper is to propose a comprehensive risk management and mitigation model for global supply chains. The model is intended to equip managers with a step-by-step procedure to identify, assess, and manage risks in their global supply chains, and guide future research. The paper reviews various risk mitigation techniques proposed in different papers in this subject and tries to understand its significance in the electronics and pharmaceutical industry. Literature Review Manuj and Mentzer (2008) say that due to demanding customers and competitive pressures, businesses today are restructuring themselves to operate on a global basis to take advantage of the international product, factor, and capital markets. There are several concerns in operating globally, including economic, political, logistical, competitive, cultural, and infrastructure. Typically, a firm operating internationally is part of a complex supply chain. Global supply chains require highly coordinated flows of goods, services, information, and cash within and across national boundaries. Maximizing profits in a multi-national environment include sourcing from locations that offer the lowest total procurement cost, manufacturing and assembling products in least cost countries, and marketing in high potential demand centres. But Wright and Datskovska (2012) are of the opinion that through lean processes and the geographical concentration of production, most executives would probably say tha t their supply chains and transport networks have become more efficient. These advances in efficiency, however, have also changed the risk profile for their supply chains. Janat Shah (2009) proclaims that lean techniques have created chains with longer paths and shorter clock speeds resulting in more opportunities for disruption and a smaller margin for error for a disruption to take place. Lengthy supply chains are increasingly proving to be a source of concern in the face of disruptions in sourcing, production and distribution of goods and services. As a result, many organizations need to take a hard look at supply chain risk and to review their plans and procedures for dealing with a broad range of new contingencies. Supply chain risk classification Wagner and Bode (2008) describes a supply chain risk as the combination of (1) an unintended, anomalous triggering event that materializes somewhere in the supply chain or its environment, and (2) a consequential situation which significantly threatens normal business operations of the firms in the supply chain. We can describe a five step approach to supply chain risk management- Risk Identification, Risk Assessment and Evaluation, Selection of Appropriate Risk Management, Implementation of Supply Chain Risk Management Strategy and Mitigation of Supply Chain Risk. Different authors have described various classifications of risk sources. Various supply chain risks can be divided as Supply, Operational, Demand, Security, Macro, Policy, Competitive and Resource risks. Chopra and Sodhi (2004) classify them as Disruption, Delay, Forecast, Systems, IP, Procurement, Receivables, Inventory and Capacity risks. Juttner, Peck and Christopher (2004) simplifies the classification to environmenta l risk sources, network-related risk sources and organisational risk sources. Risk assessment Pramod Kumar Mishra (2011) says that decisions on supply risks can be taken only when the impact of risks on the companys business can be evaluated. This can be quantitative or qualitative depending on the resources available. Risk assessment involves exploring what if scenarios like those below can help groups identify, understand and prioritize risks, a key prerequisite to tailoring effective risk-mitigation strategies. Manuj talks of two methods-probabilistic choice and risk analysis methods depending on the repeatability of events. Janat Shah has described constructing a probability and impact matrix to assess risk. Historical data may be used to understand the behaviour of risk probability distributions. However, there are many instances when there is none, inadequate, or unreliable historical data. In such cases, techniques such as the Delphi method may be used to assign probabilities. But Iyer(2008) says that this exercise is challenging because the relationships between risk factors are not static. One decision or risk factor may impact other risk factors. Risk mitigation Risk management is focused on identifying and assessing the probabilities and consequences of risks, and selecting appropriate risk strategies to reduce the probability of, or losses associated with, adverse events. Basically risk mitigation strategies can be classified primarily into seven categories: avoidance, postponement, speculation, hedging, control, sharing/transferring, and security. Hult, Craighead and Ketchen (2010) have suggested real options based method. Janat Shah has created a matrix with investment required for mitigation and risk score as the axis to decide the mitigation plan. Juttner, Peck and Christopher (2004) in there paper have defined an approach based on avoidance, control, cooperation and flexibility. Avoidance is through dropping product lines, markets, supplier or partners. They define a control approach through increasing stockpiling and buffer inventory, maintaining excess capacity and imposing contractual obligations. Cooperation is mentioned to be thr ough joint efforts in information sharing and preparing continuity plans. Flexibility can be through multiple sourcing and localised sourcing. Blos, Wee and Yang (2009) have devised a framework based on business continuity planning. Depending on the demand and supply uncertainty, the authors have also defined a matrix aligning the strategic objectives of the firm with the supply chain objective and the mitigation plan to be followed. An efficient, responsive, risk hedging and agile supply chain each have different plans. There are also devised methods for continous risk monitoring-stress testing and Tailoring Risk Management approaches. Trade-off The biggest challenge companies face is mitigating supply-chain risks without eroding profits. Juttner, Peck and Christopher (2004) summarised the trade-off decision as (1) Repeatability versus unpredictability, ie trading the benefits of repeatable processes against the cost of a lack of flexibility; (2) the lowest bidder versus the known supplier; (3) centralisation versus dispersion decisions in production and distribution; (4) collaboration versus secrecy, ie while sharing more information on e.g. the results of risk audits would better place organisations to manage supply chain risks, it could also deter potential customers or weaken the bargaining position; (5) redundancy versus efficiency, ie managing the conflict between excess capacity in a supply chain and the efficiency-focused lean paradigm aiming at the elimination or reduction of waste. A final, maybe paramount supply chain trade-off decision is between managing risk and delivering value. This is the trade-off between t he extra costs related to most of the mitigating strategies and the total costs of supply as a main principle of contemporary supply chain management. Risks in Pharmaceutical industry Enyinda, Mbah, Ogbuehi (2010) reports on the empirical findings of the quantification of risks that decision makers consider most important when deciding on a risk portfolio to mitigate and the manner in which risks are prioritized according to their importance in the pharmaceutical sector. The empirical findings suggest that decision makers attached great importance to counterfeit, Food and Drugs Board, and exchange-rate fluctuations. With respect to risk-mitigation strategies, risk reduction is considered most important, followed by risk avoidance. Dynamic sensitivity analysis with respect to a change (increase) in the Food and Drugs Board did not result in any change in the ranking of risk policy options, while a change (increase) in counterfeit resulted in a change in the ranking between risk reduction and risk avoidance. Risk avoidance ranked number one, followed by risk reduction. The paper leverages the analytic hierarchy process (AHP) to quantify risk mitigation. Greg Brandyberry (2010) reports five important trends in risk management practices in the pharmaceutical industry. Sensible cash-flow management: With the changing environment of increased regulation, price controls, generic-drug competition, and longer and more expensive research and development cycles, pharmaceutical and biotechnology companies have become much more focused on supply-chain cash-flow management strategies (following the lead of other industries that began implementing these strategies as many as 25 years ago). These strategies consist of a combination of programs that strive to better balance cash inflows versus cash outflows. Better balance of low cost versus low risk. Global supply chains have been under development across pharmaceutical industry since decades. Outsourcing, combined with low-cost country sourcing, is even riskier. The US Food and Drug Administrations recall of heparin in 2008 due to contamination of lots produced in China is another example. In this heparin recall, the drug was oversulfated as Chinese heparin manufacturers were unethically cutting the medication with chondroitin sulfate to cut down on manufacturing costs. This incident had devastating impacts on those who had chosen to use this Chinese supplier. FDA reported that there were hundreds of serious adverse reactions and scores of deaths among patients that had taken the heparin (2). The hard lessons learned from this incident have made it important for companies to revaluate their low-cost country sourcing strategies. They are evaluating risk versus cost and rebalancing their supply strategies to less riskier profiles. Comprehensive strategic-procurement initiatives Strategic sourcing is a pragmatic and structured procurement process. This process is conducted over several steps and includes: rigorous internal and external analysis; development of multiple strategic options weighted for risk and cost; strategy selection made collaboratively with business stakeholders; well-orchestrated negotiation; and detailed implementation planning, supplier selection, and ongoing supplier management, including continuous-improvement activities. Sustainability When it comes to embracing sustainability and green behaviour in manufacturing and product specifications, several large corporations such as GlaxoSmithKline (London), Proctor Gamble (Cincinnati), Diageo (London), and Unilever (London) achieved material cost savings, enhanced brand image, and generated increased demand for their products through innovative changes in primary and secondary packaging components. Risk in electronics industry Frank Zwibler and Marco Hermann (2012) have suggested that most supply chains in the electronics industry are global networks consisting of a single OEM, an A-supplier, and several small and medium supply companies (SME). These networks are characterized, firstly, by the dominance of the OEM or the A-supplier and, secondly, by the volatile electronics market and its strong fluctuations in demand, short product life cycles, and tremendous potential for technical innovation. Supply chain mapping, brain-writing method and stress, resilience and expense portfolio have been described as successive steps of risk identification. The Failure Mode and Effects Analysis (FMEA) technique has been used for risk assessment. After assessing the different parameters, the so-called risk priority number (RPN) can be determined. Risk measures to control are similar to earlier described mitigation plans. Sodhi(2005) has outlined a process to manage this risk by suggesting two risk measures for demand- a nd inventory-related risk respectively and two linear-programming (LP) models: one for allocating the plants replenishment schedule among the customers and the other to guide the request to plants for replenishment over the horizon. Research lacunae There is an immense need for action in industry to implement supply chain risk management systems. Each industry differs in their management of supply chain risks. Not only that supply chain risk management is not evenly applied throughout the different sectors, there are also great differences in the use and the implementation of supply chain risk management. A study comparing sector wise supply chain risk management is of immense scope. Research Methodology Mainly secondary research from peer reviewed journals, articles, websites and proceeds. Analysis The supply chain risk management process can be summarised as Figure : Supply Chain Risk Management Framework Electronics Industry More than ever before, electronics manufacturers are facing harsh realities. With further dismantling of trade barriers, globalization is now enabling companies to enter new markets each with its own standards and regulations creating fragmented product lines and distributed networks of suppliers and vendors. Product innovation is receiving greater emphasis as global competitors turn up the heat and product lifecycles continue to shrink. The entire nature of demand has changed, placing traditional forecasting weak. The fact is, long-range planning and demand forecasting are increasingly and inherently losing their ability to guide manufacturers as the recent inventory crisis in electronics showed all too clearly. With the introduction of partners such as electronics manufacturing services (EMS) providers, component suppliers and distributors, original design manufacturers (ODMs), contract design manufacturers (CDMs), and other participants, it becomes more challenging to control that network of suppliers. Although original equipment manufacturers (OEMs) still have direct design relationships with the semiconductor. Suppliers, the purchasing relationship comes about through the OEMs partners, making inventory ownership ambiguous, blurring inventory visibility across the supply chain, and creating unstructured processes among partners for managing supply chain execution. Figure Electronics Supply Chain (Source: QAD White Paper: Successful Risk Management in the Electronics Supply Chain) Critical risks Inventory Risk This is the greatest risk for supply chains getting caught holding inventory when a product becomes obsolete or demand shifts unexpectedly. With the highly volatile demand of electronics manufacturing, companies that rely heavily on demand-forecast accuracy face unnecessary inventory risks. Supply-Interruption Risk Conversely, no company wants to experience materials shortages that impact their ability to supply finished product to their customers. Supply interruptions are the ultimate opportunity cost for manufacturers. Capacity Risk In the cyclical electronics industry, most profits arise from new orders during a peak cycle coinciding with price premiums. Too little capacity presents significant opportunity costs. Conversely, excess capacity can negate the profits gained in the peak period. (Frank Zwibler and Marco Hermann (2010)) Risk Mitigation Inventory Visibility Faster Information Lead Times Sales and Operations Planning Managing Key Performance Indicators Managing Inter-Enterprise Business Processes Lean Manufacturing Service and Support Management An IT backbone enabling Supporting a pull-based manufacturing and replenishment environment Achieving inventory visibility across fragmented supply chains including multiple tiers and component suppliers and contract manufacturers Minimizing supply interruptions by reducing information lead time Comprehensive sales and operations planning (SOP) to optimize inventory at various points in the supply chain Monitoring supply chain KPIs including supplier and contract performance Managing outsourcing operations Supporting lean manufacturing and lean supply chain strategies Creating aggregated supply plans to drive strategic sourcing This ability to assess the impact and exposure from sources of risk made a big difference to the fortunes of Nokia and Ericsson, which were leading cell phone vendors in 2000. In March 2000, a fire broke out at their common supplier Phillips NVs semiconductor plant in New Mexico, forcing the plant to remain shut down for several months. The difference in outcomes between the two companies was dramatic-Nokia came out of the disruption stronger and gained market share, while a substantially weakened Ericsson lost more than à ¢Ã¢â‚¬Å¡Ã‚ ¬400 million that year and ultimately exited the cell phone market in 2001. This difference was primarily due to Nokias comprehensive supply chain risk management program, which helped the company immediately-and accurately-estimate the impact of the shutdown on its business, and then react accordingly. Nokia switched orders to other Phillips plants and to Japanese and American suppliers, and redesigned chips to reduce its reliance on Phillips products. By comparison, Ericsson was unable to assess the potential impact of the fire on its business and could not respond quickly to the incident. Pharmaceutical Industry Figure : Pharmaceuticals Supply Chain (Source: Chartered Quality Institute Guide) Critical Risks Counterfeit Drugs As pharmaceutical supply chains worldwide continue to experience increased risk levels, led by counterfeit risk, the WHO reports (1998) that 10% of all drugs distributed worldwide are counterfeits, with a disproportionate 60% rate in the developing countries. Pharmaceutical counterfeits can impose tremendous costs on both the pharmaceutical industry and patient safety. The costs through the actions of counterfeiters and diverters include more sick patients, loss of life, erosion of public health confidence, loss of brand image, reduced profit and reduced shareholder value. These costs are compounded by the costs of product recalls and the growing threat of counterfeiting and diversion. Compromised or untrustworthy drug value chains can create uncertainty , decrease investment, and decrease in research and development. Food and Drugs Board Compliance norms for pharmaceuticals can make or break a drug. Regulators are becoming much stricter about quality issues, increasing the size and frequency of mandatory product recalls. The number of drug recalls by the FDA increased by more than 28 percent in 2009 to 2010, for example Exchange-rate fluctuations Foreign exchange rates can fluctuate dramatically over the course of a supply agreement and it is important to consider their impact upfront. Clinical trial risk This is a risk specific to the pharma supply chain arising as a result of the drug development process. The empirical findings from Enyindas research using Saatis AHP indicate that counterfeit risk (0.453) is considered more important, followed by FDB (0.264), exchange rate (0.112) and other risks. This helps in inferring the ranking of the risks in the sequence presented above. Risk mitigation for Counterfeits Usage of technology is the only means to curb the menace of counterfeit drugs. Sophisticated pack design and labelling using special inks Holograms Tags and tamper-evident seals Field agents actively investigating instances of counterfeit product Consumer Awareness Programs Enyinda Szmerekovsky(2010) have proposed that U.S. pharmaceutical firms must turn to SR supply chain to better track and trace prescription drugs. And the key enabler to SR supply chain is RFID technology that has been touted as the holy grail. Because of the significant promise that RFID has, FDA recommended its adoption by the pharmaceutical industry in order to achieve and meet the electronic pedigree requirement and compliance. Effective risk management requires the ability of the decision maker to rank and prioritize a portfolio of risk factors involved in the supply chain. Managing the risk throughout the supply chain now means taking a systemic view. The goal is to build a system that can detect and work around any major supply-chain weaknesses. Discussion Hypothesis H0: All industries face similar supply chin risks. H1 :All findustries do not face same supply chain risks. Analysis of the risks shows that each of the industrys pharmaceuticals and electronics has critical risks which are quite unique to it in the case of the former. Firstly, Counterfeit risks are an inherent risk in the pharmaceutical sector with irreparable damage and life threatening implication as a result. This can tarnish the company with a huge blow to its brand and spoil its top line in the short term. They have a higher potential of damage to the company in terms of plausible revenue losses because of the inseparability in their appearance as compared to the original. This is not the same case with electronics where, there are ample amount of duplicates in the market but their appearance and performance can be easily scrutinized to arrive at a decision to buy. And they rarely have life threatening consequences. Secondly, pharmaceutical industry is controlled by the FDA who is a strict watchdog of the practices in the industry. New drugs receive extensive scrutiny before FDA approval in a process called a New Drug Application or NDA. The FDA reviews and regulates prescription drug advertising and promotion. After approval of an NDA, the sponsor must review and report to the FDA every patient adverse drug experience of which it learns. In electronics there is CEA, but they are not that a controllable authority as that FDA puts on pharmaceuticals. Thirdly, clinical trials done during drug development are very unique to the pharmaceutical research developing new drugs. Thus these particular risks are not a part of electronics industry and the generalised risk framework wont do for the same.They require specialised risk mitigation plans as discussed. Conclusion and Managerial Implications Supply Chain risk management will be a key success factor for companies in a globalized world if they have implemented a risk management process in their organizational structure. We have briefly reviewed several published literatures on supply chain risks. An effort has been made to define critical risks followed by its classification for electronics and the pharmaceutical industry. Several models of risk assessment from published sources have been reviewed .After this, several strategies of risk management is being presented. Supply chain risk management is thus a growing and challenging area with lot of research potential to be explored further. A future research scope would be to quantify the impact of various risks on each industry through primary research. Both pharmaceutical and electronic supply-chain risks are often related to a lack of information visibility or deviations in the information and physical flows from upstream to downstream, increased knowledge of essential risk management procedures and structures can significantly improve the ability of decision makers in implementing appropriate mitigation treatments for identifiable risk portfolios.