Supply Chain Management: Risk and Resilience

Resilience in Supply Chain Management

• Resilience refers to the ability of a system to return to its original or desired state after being disrupted.
• This concept encourages a whole system perspective, accepts that disturbances happen, and implies adaptability to changing circumstances.

Types of Risks

• Inherent Physical Risks:
  • Global supply chain is susceptible to loss, damage, and delay problems due to longer distances, greater product handling, multiple border crossings, and more intermediaries.
• Human-caused Security Risks:
  • Motivated by political, ideological, or criminal intent, including theft, weapons, illicit trade, and illegal entry of stowaways.

Risk Management Process

Step 1 - Risk Identification

• Identification of potential threats and disruptions to which the organization is susceptible.
• Techniques used: brainstorming, interviews, and historical information analysis.

Step 2 - Risk Assessment

• Evaluation and prioritization of risks to determine how serious each risk is to the organization.

Risk Reduction Strategies

• Developing practices to reduce the likelihood of a disruption and/or limit the severity of financial loss.
• Examples: hiring armed guards to travel with high-value freight, diversification of transport activity, and buffering strategy.

Risk Transfer

• Sharing responsibility for risk management with trading partners or reassigning risk to third-party logistics service providers (3PLs).
• Examples: purchasing insurance coverage from a third party, contracting with 3PLs.

Risk Retention

• Deciding to accept the consequences of occurrence when risks have limited potential to negatively affect the supply chain.

An Holistic Approach

Known Knowns

• Refers to something we are aware of and understand, with no uncertainty.
• Example: Y2K (millennium bug).

Known Unknowns

• Refers to something we are aware we do not know, with recognized uncertainty or gap in our knowledge.
• Examples: climate change, foot and mouth disease in British livestock (2001).

Unknown Unknowns

• Unexpected and unpredictable factors or events that can impact a situation because they lie outside the realm of our awareness and understanding.
• Examples: COVID-19 pandemic, 9/11 attack.

Wicked Problems

• Societal problems that involve multiple stakeholders, generate waves of consequences, and require consideration within valuative frameworks.
• Requires a mentality of the CSO (Chief Supply Chain Officer).

Levels of Supply Chain Risk Management

Level 1 - Process Operations and Inventory Management

• Focuses on process operations and inventory management, including visibility of demand and inventory, velocity, and control of supply chain operations.

Level 2 - Assets and Infrastructure Dependencies

• Considers the assets and infrastructure, including nodes in the networks (ports, factories, distribution centers), and links (transport and communications infrastructure).

Level 3 - Inter-Organisational Networks

• Views supply chain risk at inter-organisational networks, including organisations that own or manage assets and infrastructure.

Level 4 - The Macro-Environment

• Views the macro environment, including green environmental and legal regulatory changes, socio-political factors, and geo-political factors.

Risk Management – A Big Picture

• Risk: exposure to the chance of injury or loss; a bad event that is known to occur someday
• Disruption: disturbance or problems that interrupt an event, activity, or process
• Vulnerability: something is at risk; likely to be lost or damaged
• Uncertainty: situations under which either the outcomes and/or their probabilities of occurrences are unknown to the decision-maker

Types of Risks

• Inherent Physical Risks: global supply chain is susceptible to loss, damage, and delay problems due to longer distances, greater product handling, multiple border crossings, and more intermediaries
• Human-Caused Security Risks: motivated by political, ideological, or criminal intent, including theft, illegal entry of stowaways, and currency laundering

Risk Management Process

Step 1 - Risk Identification

• Identification of potential threats and disruptions to which the organization is susceptible
• Techniques used: brainstorming, interviews, and historical information analysis

Step 2 - Risk Assessment

• Evaluation and prioritization of risks to determine how serious each risk is to the organization

Step 3 - Risk Reduction

• Developing practices to reduce the likelihood of a disruption and/or limit the severity of financial loss
• Examples: diversification of transport activity, buffering strategy, hedging strategy

Step 4 - Risk Transfer

• Sharing responsibility for risk management with trading partners or reassigning risk to third-party logistics service providers
• Examples: purchasing coverage from insurance companies, contracting with 3PLs

Step 5 - Risk Retention

• Accepting the consequences of occurrence when risks have limited potential to negatively affect the supply chain

An Holistic Approach

Level 1 - Process Operations and Inventory Management

• Focuses on process operations and inventory management
• Includes: visibility of demand and inventory, velocity to reduce the likelihood of obsolescence and optimize asset utilization, and control of whole supply chain operations with process coordination

Level 2 - Assets and Infrastructure Dependencies

• Considers the assets and infrastructure dependencies
• Includes: nodes in the networks (e.g., ports, factories, distribution centers) and links (e.g., transport and communications infrastructure)

Level 3 - Inter-Organisational Networks

• Views supply chain risk at inter-organisational networks
• Includes: loss of a sole supplier or customer, trading relationships, and power dependencies

Level 4 - The Macro-Environment

• Views the macro environment within which the assets and infrastructure operate
• Includes: green environmental and legal regulatory changes, socio-political factors, and geo-political factors

Risk Management - A Big Picture

• Risk refers to exposure to the chance of injury or loss, a bad event that is known to occur someday.
• With supply chains spanning the globe, the risk of disruptions has never been greater, and any disruption can ripple through the supply chain.
• Multiple suppliers, manufacturers, distributors, and logistics service providers create difficulties that can hide vulnerabilities and problems.

Similar Terms

• Disruption: a disturbance or problem that interrupts an event, activity, or process.
• Vulnerability: something that is at risk, likely to be lost or damaged, or in danger of being harmed or damaged.
• Uncertainty: situations under which either the outcomes and/or their probabilities of occurrences are unknown to the decision-maker.
• Robust: strong in constitution, hardy, or vigorous, implying a supply chain strategy that can manage regular fluctuations in demand efficiently.

Risk Management Process

• Evaluates risk through qualitative or quantitative analysis.
• Qualitative Analysis: provides a baseline evaluation of risks, classifying each risk as low, medium, or high on two dimensions - probability and impact.
• Quantitative Analysis: builds on the foundation created by qualitative analysis, incorporating numerical estimates of frequency or probability and consequence.
• Risk management process involves three steps: risk assessment, risk management strategies, and risk mitigation.

Risk Management Strategies

• Risk avoidance: eliminating a risk by not performing an activity that carries risk.
• Risk reduction: developing practices to reduce the likelihood of a disruption and/or limit the severity of financial loss.
• Risk transfer: sharing responsibility for risk management with trading partners or third-party logistics service providers.
• Risk retention: accepting the consequences of a risk occurrence, often when the potential impact is limited.

An Holistic Approach

• Known known: information that is recognized and understood, with no uncertainty.
• Known unknown: a recognized uncertainty or gap in knowledge.
• Unknown unknowns: unexpected and unpredictable factors or events that can impact a situation.
• Risk management focuses on visibility of demand and inventory, velocity to reduce obsolescence and optimize asset utilization, and control of the whole supply chain operations.

Levels of Risk Management

• Level 1: focuses on the risk management process.
• Level 2: considers assets and infrastructure dependencies, including nodes in networks (ports, factories, distribution centers) and links (transport and communications infrastructure).
• Level 3: views supply chain risk at inter-organisational networks, including organisations that own or manage assets and infrastructure.
• Level 4: views the macro environment within which the assets and infrastructure operate, including green environmental and legal regulatory changes, socio-political factors, and geo-political factors.