1. 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

2. 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

3. 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

4. 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

5. 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.

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

7. 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

8. VaR Visualization

9. 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?

10. 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 wks/yr

11. 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

12. 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.

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

14. Results - Mapping
Upstream
Downstream

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

16. 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

17. 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

18. 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

19. Future Real-time Alerts

20. Questions?