Supply Chain Risk Management to Minimize Disruptions

Published by MBA Skool Team, Published on July 09, 2016

Supply chain risk management can be defined as the “end to end management of the flow of goods and services in the supply chain to ensure uninterrupted services at the promised level to the customer at known cost.” The objective of supply chain risk management is to design and maintain business continuity plans to ensure operations can be carried out without change if crisis hits. It is a process of systematically identifying, analyzing and dealing with risk in supply chain.

Best business strategies like increased outsourcing, globalization, lean manufacturing, just in time inventory has relived firms of worries to minimize cost and freed them to focus on core competencies. At the same time, these strategies designed with best intention can become fierce competitors and leave firm vulnerable. Supply chain disruption can reduce company’s revenue, cut into market share, inflate the cost, over run the budget, and threaten production and distribution. Such disruption also may damage credibility with investors and other stakeholders, thereby driving up the cost of capital.

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Given the devastation caused by Japanese Tsunami and Thai monsoon floods. It is no surprise that a recent survey of 100 executives at large multinational corporation (FM Global Supply Chain Risk Study 2011) revealed significant concerns that a large supply chain risk, more than any other, as having the greatest potential to disrupt their top revenue drivers. As per the analysts and scientists it can take at least two years or more for companies to recover from supply chain failure.

Risk to Supply Chain:

1. Political and currency risk

2. Cyber attack

3. Failed communication with supplier

4. Terrorism

5. Natural Disaster, Equipment break down, Power Grid failure

6. Short life cycle

7. Innovative competition

8. Limited capacity/bottleneck

9. Lack of collaborative planning and forecasting

10. Bullwhip effect

Supply Chain Risk Management:

Since the supply disruption cannot be predicted, hence goal of supply chain is to be prepared and able to respond in an informed and planned manner to minimize the impact of disruption.

Typical risk is described by both the chance of occurrence of event and is severity. First supply chain nodes must be mapped at to understand supply chain design and material flow. Through brainstorming the node going wrong can be listed out. The common tools used for risk identification are as following:

• Questionnaires

• Brainstorming session

• Interviews

• Audits or physical inspection

• Expert Judgement

• Value Chain Analysis

• Decision tree

Next is measuring supply chain risk. Supply chain risk is a function of probability of disruption at nodes and the severity of the impact on the entire network based on single node interruption. Further impact of disruption can be quantified using revenue loss or cost incurred on stabilizing the impact.

The below formula can be used for calculation of risk value:

Risk Management Methods:

After prioritization, management techniques can be worked out to manage the risks. Few organizations have supply chain risk management teams with specially trained team members to react in the event of shortage of any supplies. Organizations conduct exercise ‘mock drills’ to check how their supply chain team members react to unexpected shortage of critical raw material.

Some of the traditional risk management techniques are as follow:

1. Expediting

2. Safety stock

3. C-TPAT (Customer trade partnership against terrorism) and other customer program

4. Supply chain education and risk management training

5. Using insurance

6. Product or process redesign

7. Supply chain planning and collaboration

8. Risk monitoring system

9. Weekly meeting on potential new risk

10. Daily status meeting

11. Inventory visibility system

12. Event management system

13. Disruption discovery visibility system

14. Demand/supply forecast review across entire supply chain

Live examples of on risk management: Sundaram Fastner Limited long term focus:

Sundaram Fastner Limited supply to about 28 different plants of General Motors in North America. Basically SFL has to ensure zero defect and no delay in dispatch to any of the plants. SFL is responsible for the supply of four million Radiator Caps to General Motors every year. The SFL’s manufacturing plant of south India is well connected by sea and air to USA. The consignments are shipped from both Chennai and Tuticore ports. The products are supplied through US West Coast. Warehouses at USA and Europe take care of JIT supplies.

Few years back, strike on US West Coast ports halted cargo movement. The shipment had to come to halt. SFL, therefore, airlifted radiator caps to GM in Detroit, spending almost double the value of caps on just air-freight. General Motors has about 30,000 suppliers worldwide and every year there are about 150 to 180 suppliers in the fray for “The supplier of the year” Award. SFL has got this award for the third time. SFL was focused on long-term orientation and commitment to meet delivery schedule which was made possible through Flexible mode of transportation.

In today’s world competition is not between industries, but between different chains. A robust supply chain with contingency provisions will help in mitigating the exposed risk that a firm possesses due to increased globalization, supply chain ripple effect, customer’s changing orientation and environmental volatility.

This article has been authored by Saurabh Kumar from IIM Raipur


Book - “Supply Chain Risk Management: Minimizing Disruptions in Global Sourcing” by Robert Handfield, Kevin P. McCormack

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