Week 13 Risk Management - Unknown Unknown PDF

WEEK 13 RISK MANAGEMENT – A BIG PICTURE The nature of transportation risk and disruptions. Process for managing transportation risk. Key factors in risk assessment.  2 Overview What is risk? Risk—exposure to the ch...

WEEK 13 RISK MANAGEMENT – A BIG PICTURE The nature of transportation risk and disruptions. Process for managing transportation risk. Key factors in risk assessment.  2 Overview What is risk? Risk—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. Any disruption, from terrorist threats to weather delays, can ripple through the supply chain Multiple suppliers, manufacturers, distributors, and logistics service providers also create difficulties that can hide vulnerabilities and problems. They must actively work to limit exposure to legitimate hazards.  3 Similar terms Disruption - disturbance or problems that interrupt an event, activity, or process. Vulnerability - This means something is at risk. Something is likely to be lost or damaged. So in danger of being harmed or damaged We should identify vulnerabilities by asking questions as below. What ‘near misses’ have we experienced? What would be the effect of a shortage of a key material? What would be the effect of the loss of our distribution site? What would be the effect of the loss of a key supplier or customer? Uncertainty - This refers to situations under which either the outcomes and/or their probabilities of occurrences are unknown to the decision- maker. Counter terms Robust: strong in constitution, hardy, or vigorous This concept implies that everyday SCM strategy play a part so focus needs to be moved from a range of eventualities to SCM structure. A robust SCM strategy enables a firm to manage regular fluctuations in demand efficiently under normal circumstances regardless of the occurrence of a major disruption This is not always the case. Even if your organizations implanted the best practice supply chain, your supply chain may fail due to the uncertainties. Counter terms Resilience – the ability of a system to return to its original (or desired) state after being disrupted This concept adopted in risk and resilience in SCM with following effects. It encourages a whole system perspective It explicitly accepts that disturbances happen It implies adaptability to changing circumstances Type of risks Inherent Physical Risks Global supply chain is susceptible to loss, damage, and delay problems. Longer distances Greater product handling Multiple border crossings More intermediaries Human-caused Security Risks Human-caused risks are motivated by political, ideological, or criminal intent. Theft Nuclear, chemical, biological, radiological & high explosive weapons Illicit trade of drugs Currency laundering Illegal entry of stowaways  7 Risk management process Step 1 - Risk Identification Identification of the potential threats and disruptions to which the organization is susceptible. This involves a concerted effort to discover, define, describe, document, and communicate risks before they become problems and adversely affect freight flows. Techniques such as brainstorming, interviews, and historical information analysis can be used to highlight risks.  8 Risk management process Step 2 - Risk Assessment Evaluation and prioritization of the risks to determine how serious each risk is to the organization. Three parameters are typically evaluated: Probability—the likelihood of the risk occurring Impact—the consequences if the risk does occur in terms of service time, cost, and/or quality Proximity—the anticipated timing of the risk  9 Risk management process Risk can be evaluated via qualitative or quantitative analysis. Qualitative Analysis Provides a baseline evaluation of risks. Classifies each risk as low, medium, or high on two dimensions – probability and impact. Rapid and cost effective. Quantitative Analysis Builds on the foundation created by qualitative analysis (e.g., major risks). Incorporates numerical estimates of frequency or probability and consequence. Required data are expensive to acquire or may not be available.  10 Risk management process Qualitative Analysis – Risk Assessment Matrix  11 Risk management process Step 3 - Risk Management Strategies To develop proactive risk management and mitigation strategies. 1) Risk avoidance The simplest way to eliminate a risk is to not perform an activity that carries risk. Ex1) a company avoid transportation hazards by refusing to accept a customer’s high-value freight. Ex2) if an investigation revealed that all thefts occurred at a specific international port, the simple solution would be to never flow product through that port again.  12 Risk management process Ex3) In the case of freight loss or damage, the seller could choose to work only on an Ex Works (EXW) basis.The buyer bears all risk, costs, and responsibilities after picking up the products at the seller’s location. Ex4) In contrast, a buyer may want to minimize his or her risk by purchasing goods on a Delivered Duty Paid (DDP) basis. In that scenario the seller bears all transportation risk, cost, and responsibility.  13 Risk management process 2) Risk reduction Developing practices to reduce the likelihood of a disruption and/or limit the severity of financial loss For example, a company could attempt to reduce the risk of theft or hijacking by hiring armed guards to travel with high-value freight. This strategy could be effective at reducing risk to a more acceptable level, but it may be expensive and/or raise other risks.  14 Risk management process * An hedging strategy Diversification of transport activity. This is to offset the risks presented by a single option. For instance, companies can disperse their freight among multiple carriers to reduce the financial risk of a sole sourced carrier bankruptcy. * A buffering strategy To have additional resources to reduce risks related to capacity shortages. For example, an air cargo company may have extra jets available to reduce the impact of equipment failures. They may also have a few pilots on call each day to be prepared for volume spikes.  15 Risk management process 3) Risk transfer To share responsibility for risk management with trading partner or reassign risk to third party Ex1) For commercial vehicle accidents most transportation companies purchase coverage from insurance companies (a third party) Ex 2) To transfer risk to third party logistics service providers (3PLs). Companies contract with 3PLs because these service providers have the knowledge, capacity, technologies, and capability to mitigate some risk factors.  16 Risk management process 4) Risk retention When risks have limited potential to negatively affect the supply chain, the organization may decide to “do nothing” and accept the consequences of occurrence. Those issues falling in the minor risk categories, particularly the low-probability, low-impact issues, warrant little attention. These risks have limited potential to negatively affect the supply chain. They present an acceptable level and the organization will retain the risks  17 Risk management process Step 4 - Risk Review and Monitoring Risk review A repeatable, measurable, verifiable validation process that can be run from time to time to continually verify the organization’s ability to manage risk. Risk Monitoring Regularly reassess likelihood and expected impact of risks. Update mitigation strategies and action plan. Risk environment is not static, requiring regular review of risks and update of action plan.  18 An holistic approach Many different elements and functions are embraced by SCM – products, services, relationships, process, network Risks can be arise from - a product / Service / the performance of a process or activities / the well being of an organization / a trading relationships / the wider networks as a whole. It is no longer unacceptable to acknowledge that bad practice may still suddenly flourish elsewhere in the network. It must be remembered that known’ problems are only part of the picture.  19 An holistic approach § The words of former US Secretary for Defense Donald Rumsfeld has invited wider public attention the idea of ‘known knowns알려진 기지수’, ‘known unknowns알려진 미지수’, ‘unknown unknown 알려지지 않은 미지수’ § Rumsfeld stated There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones.  20 An holistic approach  21 An holistic approach Known Known A "known known" refers to something we are aware of and understand. It is information that is recognized and understood, with no uncertainty. Ex) Y2K: the millennium bug The 'millennium bug' was controlled once identified, but since it caused no major issues, many managers doubted if the costly prevention was necessary. This shows that proactive measures can lead to questions about their value if nothing goes wrong.  22 An holistic approach Known unknown A "known unknown" refers to something we are aware we do not know. It's a recognized uncertainty or gap in our knowledge. Ex1) We know that there are aspects of climate change we don't fully understand, such as its precise future impacts on specific regions. Ex2) The foot and mouth disease in British livestock 2001 resulted in damage to whole sectors of the Economy. The shortage of high-quality leather affected automotive manufacturers and fashion industry across Europe.  23 An holistic approach Unknown unknowns Unexpected and unpredictable factors or events that can impact a situation because they lie outside the realm of our awareness and understanding. Ex1) COVID-19 pandemic was an unknown unknown before it emerged, as no one anticipated its occurrence or the extent of its impact. Ex2) 9/11 attack were so far outside the risk managers’ field of reference. After 9/11, new security measures were introduced Container Security Initiative (CSI) - pre-screens high-risk containers at foreign ports to enhance the security of cargo entering the United States. Customs-trade partnership (C-TPAT) - Businesses apply to join C-TPAT and conduct a comprehensive self-assessment of their supply chain security practices based on C- TPAT criteria.  24 An holistic approach ‘Wicked Problems’ Societal problems are inherently different from the problems that scientists and some engineers tackle Involve multiple stakeholders Any solution, after being implemented, will generate waves of consequences Should be considered within ‘valuative’ frameworks where multiple and differing perceptions retained. Such framework recognise problems as the links tying open systems into large and interconnected networks of systems and that the outputs from one become the inputs from another. This is the mentality of the CSO (chief supply chain officer)  25 An holistic approach A simple framework for a ‘wicked problem Supply chain can be broken down into its component parts and can be looked at each of the following levels to manage risk: Level 1 – Process operations and inventory management Level 2 – Assets and infrastructure dependencies Level 3 – Inter-organisational networks Level 4 – The macro-environment This framework enables the inclusion of many different functional and hierarchical perspectives, their respective interpretations.  26 An holistic approach Level 1 - Process operations and Inventory Management This level focuses on process operations and inventory management What is being carried? – work, cash, and information flows Process design within and between organisations is required This perspective underlies lean manufacturing and the end to end visibility for the agile supply chain concept. Risk management focuses on – Visibility of demand and inventory – Velocity to reduce the likelihood of obsolescence and optimise asset (material, inventory flow) utilisation – Control of the whole supply chain operations with process coordination  27 An holistic approach Level 2 – Assets and Infrastructure Dependencies Considers the assets Nodes in the networks may be ports, factories, distributions centres Links are transport and communications infrastructure, such as roads, rails, flight paths and sea lanes. Loss on links or nodes in the production / distribution and infrastructure network, poorly managed IT, physical network reconfiguration, site closure, relocations are often to blame. Insurance for tangible assets or insurable interest is a well known asset based risk management.  28 An holistic approach Level 3 – Organisations and Inter-Organisational Networks Level 3 views supply chain risk at inter-organisational networks These are organisations that own or manage the assets and infrastructure, that create or carry the freight, information and cash flows. The loss of a sole supplier or customer is the most obvious danger and risk to trading relationships and power dependencies are critical factors to monitor. Partnering, dual sourcing and outsourcing are likely to be put forward as risk management solutions.  29 An holistic approach Level 4 – The Macro-Environment Level 4 views the macro environment within which the assets and infrastructure. Green environmental an legal regulatory changes are included in this level. Socio political factors such as actions by pressure group can be considered Geo political factors such as war can be considered. The Political, Economic, Social and Technological (PEST) analysis of environmental changes used in strategic management is considered at this level. https://guides.newman.baruch.cuny.edu/c.php?g=379111&p=3107903  30 An holistic approach A supply chain as an interactive system