Evolve Your Sourcing Paradigm: Onboard rapidly, yet consider risk

Speaker:Prof. Dr. Erik Hofman Director at Institute of SC Management, University of St. Gallen

Heiko Schwarz CRO & Founder, riskmethods

Moderator:Erin Denlea Director of Marketing, Americas, riskmethods

WELCOME!riskmethods Academy Webinar Series

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Prof. Dr. Erik Hofman

Director at Institute of Supply Chain Management,

University of St. Gallen

Heiko Schwarz

CRO & Founder, riskmethods GmbH

Supply Chain Continuity Academy: Webinar Series & Expert Discussion

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For this four-part webinar series we invited experts who will provide you with concepts, learnings and actionable insights to be better prepared:

Part 1: Secure Supply: Don’t just react to risk – anticipate itAugust 5, 10am EST | 4pm CET

Part 2: Evolve Your Sourcing Paradigm: Onboard rapidly, yet consider riskAugust 12, 10am EST | 4pm CET

Part 3: Enhance Supply Network Management: Really understand your suppliersAugust 19, 10am EST | 4pm CET

Part 4: Become a Risk-Aware Enterprise: Optimize and transformAugust 26, 10am EST | 4pm CET

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Focus areas for recovery and greater risk awareness

Secure SupplyEnsure that your existing supply chain is not impacting your ability to meet customer commitments.

Evolve Your Sourcing ParadigmEnhance your sourcing program to be better equipped to expand and manage supplier relationships.

Enhance Supply Network ManagementExtend your ability to understand dependence and collaborate with your supply network.

Become a Risk-Aware EnterpriseTransform your supply chain risk management processes to survive and thrive.

riskmethods Webinar

Total Cost of Resilience

A new paradigm of procurement in the age of COVID-19

Prof. Dr. Erik Hofmann August 12, 2020

St. Gallen, SwitzerlandDirector ISCM-HSG

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 6

1. The initial situation: The aftermath of COVID-19 on global supply chains

2. The big issue: The sources of risk for global supply chains

3. The vision: Towards the concept of Total Cost of Resilience (TCR)

Agenda

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 7

The initial situation: The aftermath of COVID-19 on global supply chains

Dramatic headlines have coined the discussion around the consequences of

COVID-19 on global supply chains in recent months

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 8

The initial situation: The aftermath of COVID-19 on global supply chains

In fact, the short- and long-term effects of COVID-19

on supply chains are dramatic

Supply shock Demand shock

Disrupted

supply chains:

The new normal?Rapid spread of COVID-19

and massive interventions by

countries (especially border closures

and lockdowns)

In the interest of the budget,

savings were made at the

expense of agility.

The supply chains became too lean.

As a result, supply chain

vulnerability has massively

increased.

Hoarding: stockpiling of basic

consumer goods to comply with

transport restrictions

Abrupt slump in global demand

(with a few exceptions like food,

pharmaceuticals, personal

protection equipment, PC/ICT)

Supply chain planning

processes designed for continuous

and smooth demand curves cannot

keep up

Liquidity shortages

&

(upcoming) insolvencies

Insecure

supply

situation

Broad

bullwhip

effect

Aftermath

for supply chains

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 9

1. The initial situation: The aftermath of COVID-19 on global supply chains

2. The big issue: The sources of risk for global supply chains

3. The vision: Towards the concept of Total Cost of Resilience (TCR)

Agenda

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 10

The big issue: The sources of risk for global supply chains

The COVID-19 pandemic exemplifies the large variety of risks that global supply

chains face

Natural disasters▪ Earthquakes

▪ Ash clouds

▪ Flooding

State interventions▪ Trade policy

▪ Regulation

▪ Fiscal policy

▪ Financial policy

Man-made disruptions▪ Armed conflict

▪ Labor unrest

▪ Terrorism

Disruptive innovations▪ Technology

▪ Organization

▪ Business model

Macroeconomical effects▪ Business and financial cycles

▪ Demographic shifts

▪ Limits to growth

▪ Commodities and environment

Customer dynamics▪ Local tastes

▪ Disposable income levels

▪ Attitudes toward social / environmental

impact

Endogenous

dynamics▪ Commoditization

▪ Compliance

▪ Reputation

▪ Inventory

▪ Financial

COVID-19

impact

(caused by

worldwide

lockdowns)

Source: World Trade Organization – Global value chains in a changing world (2013)

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 11

National

dynamics▪ Regulation

▪ Taxes

▪ Prices

▪ Provision of education,

healthcare and

infrastructure

Macroeconomic and

global market

dynamics▪ Disposable income

▪ Commodity prices

▪ Exchange rates

▪ Financial stress

Geopolitical

dynamics▪ Perceived imbalances

▪ Trade regime

▪ Security tensions

▪ Environmental

regulation, e.g. ESG

Reduced risk controllability

through management interventions

Customer

dynamics▪ Consumer tastes

▪ Fads

▪ Consumer

confidence

The big issue: The sources of risk for global supply chains

Sources of risk from inside the ecosystem are easier to control and mitigate for a

single firm than sources of risk from outside

Competition

dynamics▪ Innovation

▪ Product

▪ Price

▪ Consolidation

Firm-level

dynamics▪ Capacity

▪ Quality

▪ Flexibility

▪ Resilience

Supply chain

dynamics▪ Delays

▪ Disruptions

▪ Bullwhip effect

▪ Redundancy

Source: World Trade Organization – Global value chains in a changing world (2013)

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 12

2. The big issue: The sources of risk for global supply chains

3. The vision: Towards the concept of Total Cost of Resilience (TCR)

1. The initial situation: The aftermath of COVID-19 on global supply chains

Agenda

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 13

The vision: Towards the concept of Total Cost of Resilience (TCR)

A general definition of supply chain resilience involves enablers and inhibitors

Restart

Recovery

Resilience

Supply Chain

Performance

t

Supply chain resilience can be defined as…

… the capability of supply chains to respond quickly to unexpected

events to restore operations to the previous performance level or

even to a new and better one.

en

ab

lers

Flexibility (Christopher 2000)

Redundancy (Rice and Caniato 2003)

Visibility (Sheffi 2001)

Agility (Blackhurst et al. 2005)

Collaboration (Lee et al. 2009)

Integration (Tachizawa and Gimenez 2010)

Information sharing (Zeng 2000)

Financial strength (Pettit et al. 2010)

Coordination/control (Tang 2006a)

Trust (Christopher 2000)

Supply chain design(Spiegler et al. 2012)

Risk management(Sheffi and Rice 2005)

Company’s knowledge(Jüttner and Maklan (2011)

Alignment(Simangunsong et al. 2012)

Velocity and acceleration (Christopher and Peck 2004)

inh

ibit

ors

Complexity(Christopher 2000)

Financial weakness(Christopher and Jüttner 2000)

Lack of capacity(Sheffi 2001)

Lack of collaboration(Ponomarov and Holcomb 2009)

Lack of coordination(Blackhurst et al. 2005)

Lack of information(Tang 2006b)

Lack of integration(Pettit et al. 2010)

Lack of flexibility(Zsidin and Wagner 2010)

Lack of knowledge(Christopher and Holweg 2011)

Lack of visibility(Christopher et al. 2011)

Lack of trust(Jüttner and Maklan 2011)

Long lead times(Carvalho et al. 2012)

Long distances(Carvalho et al. 2012)

...but companies shouldn't exaggerate.

Due to COVID-19 situation, cost is king again!

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 14

The vision: Towards the concept of Total Cost of Resilience (TCR)

Today's TCO models pose great challenges for users in procurement

Lack of availability of data and resources

Hardly any use of forecasting models

Increasing share of digital hybrid products

No holistic view of costs and risks

▪ Lack of data sources prevents an

automated data collection system

▪ The development, implementation and

manual maintenance of TCO models is

very complex

▪ TCO models are static and hardly take

future developments and risks (prices,

markets, networks, etc.) into account

▪ Target cost management is not applied to

TCO, only the material price is included

▪ The increasing share of new types of

product-service-bundling (hybrid

products) requires new cost models

▪ The classification in the material

group hierarchy is often unclear

▪ TCO models focus on the cost price and

take too little account of supply chain

costs and risks

▪ TCO methods are not adapted to the

current (system) landscape

Need for a “smart” concept that considers

both costs and resilience factors!

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 15

The vision: Towards the concept of Total Cost of Resilience (TCR)

Data-based procurement decisions enable companies to navigate the tension field

between resilience enhancement and cost reduction

Resilience

Cost reduction

Are

a o

f ten

sio

n

Internal data

Inventory data

Supplier data (e.g. risk values)

Demand

etc.

External data

Commodity prices

Exchange rates

Transport cost

etc.

Securing the

viability of

companies with

global supply chains

Procurement strategy:

exemplary scenario

Global Local

Single Dual

Make Buy

Existing

suppliers

New

suppliers

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 16

TCR could help to support procurement decisions regarding the

selection/negotiation of suppliers, the identification of cost reduction potentials and the

quantifiable measurement of risks, e.g. unexpected supply chain disruptions.

The vision: Towards the concept of Total Cost of Resilience (TCR)

The concept of Total Cost of Resilience create transparency in the supply chains

and can therefore address a broad range of key issues

Supplier selection

and change

Identification of

relevant cost drivers

Performance measurement

in purchasing

Risk management

(supply chain resilience)

Make-or-buy

decisions

Total Cost of

Resilience

(TCR)

Sustainability

management

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 17

The vision: Towards the concept of Total Cost of Resilience (TCR)

An automated Total Cost of Resilience system supports proactively procurement

decisions and increases the viability of supply chains

Procurement

decisions

&

supply chain

viability

Diversifying procurement portfolioPursuit of dual or multiple sourcing strategies

Accelerating supply chainsReduction of organisational complexity through vertical integration

Re-designing supply chainsShift of the value added closer to the end consumer

Detecting weaknesses in the supply chainIdentification of the highest risks of disruption

TCR engine

Holistic cost and

resilience

overview for

decision support in

procurement

Selected implications

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 18

The vision: Towards the concept of Total Cost of Resilience (TCR)

… and we would like to accompany you into this future!

Provides insights into the industry

Offers technical expertise

Potential pilot cooperationImplementation

partner

Industry

partner

ISCM-HSG

Innosuisse

University of St.Gallen | Institute of Supply Chain Management | © ISCM-HSG 2020 | August 12, 2020 | Total Cost of Resilience| Prof. Dr. Erik Hofmann Page 19AKKREDITIERUNGEN

Thank you for your attention.

Prof. Dr. Erik Hofmann

Director

Institute of Supply Chain Management (ISCM-HSG)

Phone: +41 71 224 72 95

Mail: erik.hofmann@unisg.ch

University of St.Gallen (HSG)

Institute of Supply Chain Management (ISCM-HSG)

Dufourstrasse 40a

9000 St. Gallen

Switzerland

+41 71 224 72 80

iscm@unisg.ch

iscm.unisg.ch

ISCM.HSG

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Framework for Supply Chain Continuity

Evolve your sourcing paradigmri

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Categorystrategyupdate

Supply base growsor composition

changes Dual & multiple sourcing

Re-shoring / regional buying

Consider riskpreparednessof suppliers

Implement fast awarding decisions

considering risk

Rethink Supplier Relationship

Management

Customer & shareholder pressureto be more resilient

Pressure points

Enhance traditional supplier onboarding

processes

Risk balancedsupplier

segmentation

Supplier developmentbeeing influenced by

preventive risk actions

Cyber risk and CSR „returns back“

Lower cost of risk

Remain provider / supplier of choice

Q&Ariskmethods Academy Webinar Series

For more information about SCRMri

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Don’t miss our next Academy sessions:

Part 3: Enhance Supply Network Management: Really understand your suppliersAugust 19, 10am EST | 4pm CET

Part 4: Become a Risk-Aware Enterprise: Optimize and transformAugust 26, 10am EST | 4pm CET

NEW! How We Secure Our Supply Chain: Managing Risk is Mission CriticalBEST PRACTICE ADVICE FROM GENERAL DYNAMICSSeptember 2, 10am EST | 4pm CET | REGISTER NOW! https://www.riskmethods.net/webinars/secure-supply-chain/

Check out our whitepaper:

Achieving Supply Chain Continuity: Framework for Coronavirus crisis recovery and greater risk awareness

https://www.riskmethods.net/resources/achieving-supply-chain-continuity/

Thank you!

Prof. Dr. Erik HofmanDirector at Institute of Supply Chain Management, University of St. Gallenerik.hofmann@unisg.ch

Heiko SchwarzCRO & Founder, riskmethodshs@riskmethods.net