evolutionary supply chain risk...

Evolutionary Supply Chain Risk Management:

Transforming Culture for Sustainable Competitive Advantage

Romain LévyMay 21st, 2008

Thesis supervisor: Dr. Mahender Singh


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Agenda• Motivation

• Research Questions

• Methodology

• Our Framework

• Insights

• Next Steps


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Complexity of supply networks is increasing

• Vertical disintegration and globalization• Outsourcing• Lean operations• Shorter product lifecycles and

compressed time-to-market

More vulnerabilities and less control accross the supply network


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Issues with Risk Management

•Perceived as incompatible with short term market pressure• Costs are immediate,

Benefits are remote, uncertain and intangible

• Over-discounting of the future• Lack of incentives in the organization

Informal approach to risk management


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Research Questions•What steps are needed to formally and holistically address the challenge of risk in the global supply chain context?

• How can supply network risk become transparent for all stakeholders in the organization?

• How can we hold people and organizations accountable for the supply network risks they are bearing?

• How can supply network risk be quantified?


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Methodology

• Review of the state-of-the-art• Case study•Semi-structured interviews• Leveraging ideas outside the

realm of supply chain risk management•Policy approach•Market approach

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ratio

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Our Framework

• Review of the state-of-the-art and industry research (Qualitative and quantitative)

• Evaluate the risk management practices in place• Qualitative Analysis and Recommendations• Quantitative Analysis and Recommendations


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Risk Mapping

Heat Matrix (KPMG, 2002)


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Risk Mapping (cont.)

Concentric Vulnerability Map(adapted from General Motors and Sheffi, 2004)


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Key Insights

• Unclear risk and protection assessment

• Cost cutting vs. Supplying the market

• Business Continuity Planning vs. Risk Management Crisis Management vs. Risk Management

• Risk as exogenous factor

• Absence of feedback loop


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Feedback loop is key

Evolutionary Risk Management process


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Cultural shift

Ten Key Elements forRisk ManagementEvolution


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Next Steps• Initial piece of a multi-year effort

Problem definition Risk quantificationAccountability within

the organization

Global transparencyQualitative risk management

Information Symmetry


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Thank you!

Questions?

[email protected]

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Back-up slides


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Causal Loop Diagram


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Credit Default Swap


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Company Stakeholders: Risk Perspective

Those who own the ultimate responsibility for the company's actions are unaware of the risks that it bears

Customers

Managers

Employees

Investors

SuppliersGovernment


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Risk and engineers

• Risk Management:• An everyday concern for engineers• Too often an afterthought in business

or government illustrations.fr


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Supply Chains are more at Risk•Risk•=•Probability•x•Business Impact• Both are increasing...


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Initial results• Common mistakes

• Risk Elimination ≠ Risk Management• Unavailing and costly effort• Risk comes (often) with an opportunity• Risk is the essence of business• Source of competitive advantage• Company risk appetite• Risk portfolio optimization


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Higher Probabilities: an Uncertain World

TerrorismTerrorism Natural disasters Natural

disastersSocial outrest Social outrest

Armed conflicts Armed

conflicts EpidemicsEpidemicsNext:

Bird flu? Next:

Bird flu?

Source: G

M E

nterprise Risk M

odeling, 2006


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Higher Impacts: a Global, Lean Supply Chain

• Increased use of outsourcing• Globalization of supply chain• Reduction of supplier base• Integrated processed between supply

chain partners• Lower inventory• Shorter lifecycles and compressed time-

to-market

Source: N

orman, A

& Jansson, U

, “Ericsson’s proactive supply chain risk m

anagement approach...”


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Supply Chains are more at Risk•Coping with risk is the normal

operating state

Source: G

M E

nterprise Risk M

odeling, 2006


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Common Errors• Insurance is not the answer

• Money will ultimately not save your company if products cannot be delivered

• Underestimated ripple effects• Long-term effects• Post-9/11 and -Katrina capacity of

insurance market is limited and expensive


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Increasing Awareness at High Level Source: Ernst&

Young, A

xa Corporate S

olutions, “Risk M

anagement P

ractices in 2006”

• Among members of European risk management associations:


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Risk Management is evolving

Source: K

PM

G, “E

nterprise Risk M

anagement”, 2001

Traditional Risk ManagementTraditional Risk Management EnterpriseEnterprise Risk ManagementRisk Management

Risk as individual hazards Risk in the context of business strategy

Risk identification and assessment Risk “portfolio” development

Focus on all risks Focus on critical risks

Risk mitigation Risk optimization

Risk limits Risk strategy

Risks with no owners Defined risk responsibilities

Haphazard risk quantification Monitoring and measurement

Risk is not my responsibility Risk is everyone’s responsibility


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Issues with Risk Management• Deficit of methods to tackle uncertainty

• Mainly qualitative frameworks• Decision-makers need a Cost-Benefit

Analysis to justify investments: What is the fair price to pay to mitigate this risk?

• Our challenge is to develop those tools...


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Supply Risk Assessment• Identification

• Valuation• Scope• Location

• Drivers• Mapping and Categorization


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Supply Network Design• Scenario building• Formalize business objectives, e.g.:

• Desired Customer Service Level,• Limited financial impact...

• Model development*• Identification and testing of possible

strategies, e.g.:• SKU rationalization,• Region / Distributor selection...

• Sensitivity analysis and design selection


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The Real Options Framework• The Real Options framework is a

financial tool adapted to the needs of the industry.

• Finance uses risk management, risk optimization and risk portfolios every day...

• Using a tool derived from finance to improve the industry’s handling of risk therefore makes sense.


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The Real Options Framework•A Real Option is...

• a right, but not the obligation•(“exercise” only if advantageous, or “in-the-money”)• to buy or sell an underlying asset•(or grow/change a system, etc.)• in a determined future timeframe• at a pre-determined price (“strike” price).

•The price to pay upfront for having that option is called the “premium”


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The Real Options Framework•Two basic types of options, like in financial

options• Call option: right to take advantage of an

opportunity• Put option: right to limit losses of a bad

situation (like insurance policy)•Also possible to build complex options strategy

• Like nested options (ex. research then development) or simultanaous options (call +

t)


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Parking Garage example• Project: Building a parking garage in an

area where business expands• But actual demand is necessarily

uncertain, over 5 to 10 years.


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Parking Garage example• Construction options:

• Small garage (4 floors):• Inexpensive – relatively low risk, but...• wasted opportunity if demand ends up high

• Large garage (8 floors):• Expensive, and...• high risk of losses if demand ends up low

• Flexible garage: small garage first, but with strong fondations, i.e. a real option to add more floors if demand is high! • Slightly more expensive that small garage case (option

premium)• But keeps risk low while capturing the upside if demand is

high


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Back to our challenge...

•How could we value Supply Network Risk Management initiatives using the Real Options framework?

Slide Number 1AgendaComplexity of supply networks is increasingIssues with Risk ManagementResearch QuestionsMethodologyOur FrameworkRisk MappingRisk Mapping (cont.)Key InsightsFeedback loop is keyCultural shiftNext StepsSlide Number 14Slide Number 15Causal Loop DiagramCredit Default SwapCompany Stakeholders: Risk PerspectiveRisk and engineersSupply Chains are more at RiskInitial resultsHigher Probabilities: an Uncertain WorldHigher Impacts: a Global, Lean Supply ChainSupply Chains are more at RiskCommon ErrorsIncreasing Awareness at High LevelRisk Management is evolvingIssues with Risk ManagementSupply Risk AssessmentSupply Network DesignThe Real Options FrameworkThe Real Options FrameworkThe Real Options FrameworkParking Garage exampleParking Garage exampleBack to our challenge...

evolutionary supply chain risk...

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