Rainy Lu and David Xia Research Fest Application of Supply Chain Risk Management through Visualization and Value-at-Risk Quantification Rainy Lu and David Xia Research Fest May 22, 2014

Motivation for Research Globalization makes supply chain more vulnerable to disruptions Corporations lack an integrated approach for supply chain risk management (SCRM) Routine risk evaluation improves response and resiliency

Extension of Hi-Viz SC Visualization - Mapping - Advanced diagrams - Dashboards Data-Driven management - SC risk management - Environmental sustainability - Inventory management - Financial performance - Capacity mapping AUTOMATIC DISPLAY

Supply Chain Tree Diagram V18 V13 V7 R2 V6 R1 P3 V1 D1 V14 V11 D2 R3 V19 P1 CM1 W1 V2 R4 V8 P4 D3 V20 R5 V15 V9 V4 D4 R6 P2 CM2 V3 W2 V16 V12 V5 R7 R8 V17 V10 V21 Vendors Contract Manufacturer Plants Warehouses Distributors Retailers Left to right material flow diagram

Supply Chain Mapping Flow diagram now shown on a map. V21 0 – 0.2 $M CM1 V8 V21 P1 V10 V2 CM2 V11 V12 0 – 0.2 $M 0.3 – 0.5 $M 0.6 – 1.0 $M 1.1 – 2.0 $M 2.1 – 3.0 $M OVER 3.1 $M Flow diagram now shown on a map.

Research Framework Adds value-at-risk (VaR) quantification for SCRM Requires the consolidation of supply chain, procurement, and financial data

Value-at-Risk 𝑽𝒂𝑹=𝑹𝒊𝒔𝒌 𝑬𝒙𝒑𝒐𝒔𝒖𝒓𝒆 𝑰𝒏𝒅𝒆𝒙∗𝑷𝒓 𝑫𝒊𝒔𝒓𝒖𝒑𝒕𝒊𝒐𝒏 VaR is used to calculate expected value of loss due to disruptions from natural and man-made catastrophes VaR is defined by a horizon and confidence interval Used frequently in financial services and created a structured and routine method for measuring risk

VaR Visualization

Risk Exposure Index 𝑹𝑬𝑰=𝑫𝒂𝒊𝒍𝒚 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 ∗ 𝑹𝒆𝒄𝒐𝒗𝒆𝒓𝒚 𝑻𝒊𝒎𝒆−𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑫𝒂𝒚𝒔 𝑹𝑬𝑰=𝑫𝒂𝒊𝒍𝒚 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 ∗ 𝑹𝒆𝒄𝒐𝒗𝒆𝒓𝒚 𝑻𝒊𝒎𝒆−𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑫𝒂𝒚𝒔 Daily Revenue Recovery Time Inventory Days How much revenue does a source enable? How long would it take to replace this source? How much inventory is positioned between the source and the customer?

Example of REI Calculation Annual Sales Forecast: $50M Ammonia Supplier Plant Blending Site Distributor 4 Days of semi component Inventory 14 Days of finished goods Inventory 10 Days of Inventory Windings Backup Supplier Backup supplier can be ready in 10 weeks Revenue Enabled: $50M / year Recovery Time: 10 weeks Inventory Available: 28 days (4 weeks) Risk Exposure Index = $50M x (10 wks – 4 wks) = $5.8M (for the Ammonia Supplier) yr 52 wks/yr

Hazard Selection and Risk Heat Maps Public sources e.g. U.S. Geological Society Private sources e.g. Applied Insurance Research Hazards can be turned into risk heat maps and combined with risk exposure

Exceedance Probability Distribution Disruption threshold in dollars are normalized to $1 million of assets Probability of loss Each location will have a different loss distribution. Our research study assumed that a 1% damage threshold would cause a disruption.

Combined Disruption Probability Each location will have a combination of different vulnerabilities. A final combined disruption probability is calculated for each location.

Results - Mapping Upstream Downstream

Results – Risk Exposure Two manufacturing sites have the highest risk exposure Manufacturing is centralized Recovery time is long for internal plants

Results – VaR One supplier (Shenzhen, China) has very high VaR One manufacturing site (Houston) has the highest VaR Risk exposure is high at that node Probability of disruption is medium at that node One supplier (Shenzhen, China) has very high VaR Risk exposure is medium at that node Probability of disruption is exceptionally high at that node

Risk Mitigation Techniques Single Source Vendors Multiple Sourcing: geographically scattered Investment in other vendors’ capability improvement Primary Supplier Balanced supply between primary supplier and back up suppliers Option contract with other vendors to reserve capacity

An Integrated Platform in Future Methodology can be expanded across product lines and even companies Can quickly and routinely calculate risk in an unbiased fashion Can bring several operation strategies into focus Supplier’s factory location Recovery time Capacity Sourcing splits Inventory

Future Real-time Alerts

Questions?