1. LESSON 3 Supply Chain Risk Management and Mitigation
29 August 2014

2. Lesson Objectives
Upon completion of this lesson, you should be able to:
Discuss the importance of conducting risk management activities on a supply chain
Identify the nine types of supply chain risks and their drivers
Determine the types of actions to take for eliminating, reducing or mitigating supply chain risks
Analyze a risk to a project using a decision tree

3. Lesson Topics This lesson will cover the following topics:
Importance of Supply Chain Risk Management
Supply Chain Risks and Drivers
Mitigation Strategies

4. What’s In It For Me?
Your understanding and ability to identify and monitor risks associated with your supply chain will be vital to the successful performance of your job responsibilities

5. Lesson Introduction
How do contractors identify and mitigate risks?

6. Importance of supply chain risk management
Lesson Topics:
Importance of Supply Chain Risk Management
Supply Chain Risk and Drivers
Mitigation Strategies
Decision Trees in the Risk Management Process

7. Importance of Supply Chain Risk Management
Supply chain problems result from:
Natural disasters
Labor disputes
Acts of war
Terrorism
Inaccurate forecasts
Economic downturns
Lack of communication
… and many more
Adopt proactive risk management approaches to reduce impact of these risks

8. Supply Chain Disruption
It’s a delicate balancing act to keep inventory, capacity and other elements at appropriate levels across the supply chain

9. Example: Plant Fire Class Activity
Refer to Module 8, Lesson 3, Scenario 1 CME130_M8_L3_S1_Scenario_FINAL.docx
Read directions on Philips Manufacturing Plant Fire
Complete the activity as a class

10. Scenario Analysis Philips fire in Albuquerque 10-minute fire
Supplied chips to two competitors: Nokia and Ericsson
10-minute fire
Production at plant ceased for weeks
Much longer than Philips originally estimated

11. End Result Strategic advantage for Nokia over Ericsson
Ericsson stock price dropped about 50%
Ericsson eventually merged with Sony (10/2001)
Two different outcomes from one event demonstrates the importance of proactively managing supply chain risk

12. Question and Answer
What was the primary reason why Ericsson wasn’t able to respond to the crisis as quickly as Nokia?
Limited capital investment
Poor supplier relationship management
Nokia interfered with Ericsson’s communication network
The lightening strike wasn’t too severe

13. Question and Answer
The scenario illustrates the vulnerability of supply chains. A preventive measure that organizations can use to reduce their supply chain risk is to:
Be mindful of weather forecasts
Don’t rely on supplier feedback
Partner with numerous suppliers
Adopt proactive approaches to Risk Management

14. supply chain risk AND DRIVERS
Lesson Topics:
Importance of Supply Chain Risk Management
Supply Chain Risk and Drivers
Mitigation Strategies
Decision Trees in the Risk Management Process

15. Supply Chain Risks and Drivers
Understanding the types and interconnectedness of supply chain risks enables you to select risk-reduction strategies

16. Supply Chain Risks and Drivers (cont.)
High capacity utilization
Inflexibility of supply source
Poor quality or yield at supply source
Excessive handling due to change in transportation modes
Disruptions Delays Systems risk Forecast risk Intellectual property risk Procurement risk Receivables risk Inventory risk Capacity risk
Natural disaster
Labor dispute
Supplier bankruptcy
War and terrorism
Dependency upon a single supply source
Exchange rates
Percentage of key components from a single source
Industry wide capacity utilization
Long- vs. short-term contracts
Information infrastructure breakdown
Extensive system networking
E-commerce
Product obsolescence
Holding costs
Demand/supply uncertainty
Organizations must understand risk categories and their risk drivers to effectively manage risk
Vertical integration of supply chain
Global outsourcing and markets
Number of customers
Financial strength of customers
Cost of capacity
Capacity flexibility
Inaccurate forecasts
Bullwhip effect

17. Job Aid: Supply Chain Risks
Refer to Module 8, Lesson 3, Job Aid 1 CME130_M8_L3_JA1_SCR_Categories_FINAL.docx

18. Interconnected Supply Chain Risks3F O R C A S T R O C U E M N T 4R E 5C I V A B L S A P C I Y 6S Y S T E M 7I V N T O R Y

19. Analysis of Supply Chain Risks and Their Drivers
Identifying risks most likely to disrupt a supply chain helps to mitigate such risks

20. Question and Answer
Drivers to “Systems Risk” include extensive system networking, information infrastructure breakdown, and _______________.
Demand and supply uncertainty
E-commerce
Long lead times
Exchange rates

21. Question and Answer
“Disruptions” to a supply chain include supplier bankruptcy, war and terrorism, labor disputes, and _______________.
Demand and supply uncertainty
Inventory holding costs
Long lead times
Natural disasters

22. Question and Answer
What must organizations understand first before they attempt to mitigate a supply chain risk?
Bullwhip effect
Drivers of the risk
Inventory management
Supply and demand

23. MITIGATION STRATEGIES
Lesson Topics:
Importance of Supply Chain Risk Management
Supply Chain Risk and Drivers
Mitigation Strategies
Decision Trees in the Risk Management Process

24. Mitigation Strategies
There is not a “one-size- fits-all” strategy for protecting supply chains
Managers need to know which mitigating strategy works best for each specific risk

25. Job Aid: Supply Chain Mitigation Strategies
Refer to Module 8, Lesson 3, Job Aid 2 CME130_M8_L3_JA2_MitigationStrategies_FINAL.docx

26. Mitigation Strategies for Delays
Combine inventory with different transport modes
Example: Dell
Maintain flexible capacity in plants
Example: Toyota
Balance capacity and inventory
Example: Cisco

27. Mitigation Strategies for Disruptions
Stockpile inventory
For products with low holding cost and no obsolescence
Redundant suppliers
Not every supplier will be disrupted at the same time
Use for products with high holding costs and high obsolescence

28. Mitigation Strategies for Systems Risk
Robust back-up systems
Well-designed recovery systems
Cyber warfare is no longer a threat for businesses… it’s a reality

29. Mitigation Strategies for Forecast Risk
Use the bullwhip effect mitigation strategies
Selectively hold inventory
Example: Commodities
Build responsive production and delivery capacity
CPFR
VMI
EDI
Milk Runs
Vendor Managed Inventory
Electronic Data Interchange
Collaborative Planning Forecasting and Replenishment

30. Mitigation Strategies for Intellectual Property Risk
Bring (or keep) some production in house
If not, keep it under direct control
Examples: Cisco, Sharp
Limit the flow of intellectual property into countries with weak legal protections

31. Mitigation Strategies for Procurement Risk
For exchange rate risks:
Balance cost with revenue
For mitigating price increases by suppliers:
Sign long-term contracts
Redundant suppliers

32. Mitigation Strategies for Receivables Risk
Filter customers and suppliers for credit worthiness
Spread the risk across more customers
Example: McMaster-Carr

33. Mitigation Strategies for Inventory Risk
Pool inventory
Example: Nordstrom
Component commonality
Example: Paint industry
Postpone or delay
Example: Benetton

34. Mitigation Strategies for Capacity Risk
Make existing capacity more “flexible”
Use same capacity for a variety of products
Example
Toyota

35. Mitigation Strategy Benefits
Mitigating supply chain risk:
Improves traceability and visibility
Lowers costs
Increases operational efficiency
Improves customer satisfaction
Closer compliance to regulations
Creates a climate of continuous improvement

36. What strategy can an organization use to mitigate forecast risk?
Question and Answer
What strategy can an organization use to mitigate forecast risk?
Use redundant suppliers
Bullwhip effect strategies
Sign long-term contracts
Spread the risk across more customers

37. Question and Answer
What strategy can an organization use to mitigate intellectual property risk?
Keep some production in-house
Sign long-term contracts
Stockpile inventories
Use redundant suppliers

38. Question and Answer
Mary received bad news from a supplier. The firm cannot meet its next three shipments because the firm’s main vendor is insolvent. What mitigating strategy should the firm have used first before contracting with the vendor?
Credit worthiness
Redundant suppliers
Stockpile inventory

39. Exercise: Mitigating a Supply Chain Risk
Small Group Exercise
Find a partner or work in a trio
Refer to Module 8, Lesson 3, Exercise 1 CME130_M8_L3_E1_Exercise_FINAL.docx
Read directions on: Mitigating a Supply Chain Risk
Complete the activity; be prepared to share your responses
Time allowed: 20 minutes

40. DECISION TREES IN THE RISK management PROCESS
Lesson Topics:
Importance of Supply Chain Risk Management
Supply Chain Risk and Drivers
Mitigation Strategies
Decision Trees in the Risk Management Process

41. Decision Trees in the Risk Management Process
Tool for course of action decision-making
Helps for choosing options involving high costs and risks
Provides structure for alternatives and outcomes
Finds numerical values for alternatives
Provides picture of risks and rewards
for each course of action
Outcome 1.1
25% likely
Outcome 1.2
70% likely
Outcome 1
20% likely
Risk B
$30,000 implication
Outcome 1.3
5% likely
Outcome 2
80% likely
Risk A
$10,000 implication

42. The 3-Step Process for Decision Tree Analysis
Identify the problem
Assess the likelihood and magnitude of impact
Use a decision criterion to model the process of choice

43. Identify the Problem: The Objectives Requirement
Overall Goals
Tradeoffs
Metrics
Evaluate Progress

44. Nodes and Branches A diagram of nodes and connecting branches:
Decision nodes: these are strategies =
Chance events: chance or uncertainty determines outcomes =

45. Example: Two Vendor Decision
Class Activity
Refer to Module 8, Lesson 3, Scenario 2 CME130_M8_L3_S2_Scenario_FINAL.docx
Read directions on: Which Vendor to Choose
Complete the activity as a class

46. Scenario Analysis: Draw the Decision Tree
Vendor B
Vendor A
Decision trees need room to grow!
Start all the way on the left side of the paper
Root node

47. Chance Outcomes and Endpoints
Early
On Time
Late
Delivery
Chance node
Vendor B
Vendor A
Endpoint

48. Analyze the Risk
$75,000
$50,000
$25,000
$90,000
$30,000
Proposed Price
$45,000
Expected Price
$56,000 .1 .6 .3 .4
Probability
Delivery
Vendor B
Vendor A
Early
On Time
Late
.1 x $75,000 = $7,500
.3 x $90,000 = $27,000
.3 x $25,000 = $7,500
.6 x $50,000 = $30,000
.3 x $30,000 = $9,000
.4 x $50,000 = $20,000

49. Why use a decision tree to analyze a problem?
Question and Answer
Why use a decision tree to analyze a problem?
Helps in making good choices for decisions involving high costs and risks
Complements gut instinct for spur- of-the-moment decision-making
Helps in analyzing probabilities for just the minor problems
Since consequences are not known, decision trees really don’t help

50. Question and Answer
Which step in decision tree process looks at the problem in relation to the organization’s overall goals?
Identify the problem
Assess the likelihood and magnitude of Impact
Use a decision criterion to model the process of choice

51. Summary Having completed this lesson, you should now be able to:
Discuss the importance of conducting risk management activities on a supply chain
Identify the nine types of supply chain risks and their drivers
Determine the types of actions to take for eliminating, reducing or mitigating supply chain risks
Analyze a risk to a project using a decision tree

52. Summary (cont.)
Your ability to apply the principles of risk management and collaborative engagement is vital to effectively executing your job responsibilities and to protecting our national supply chain.

53. Module 8 Wrap Up Activity
Refer to the Module 8 Wrap up Activity
As a team, answer the questions in the Module 8 Wrap Up Activity File
Each team must answer all the questions.
Each Team must be prepared to present their answers.
You have the remaining time as directed by the instructor to complete this activity.