The University of Sydney Page 1
Supply chain risk management
Presented by
Dr Andrew Collins
Institute of Transport and Logistics Studies
ITLS5250
Foundation in Global Logistics
Semester 2, 2021
The University of Sydney Page 2
10.1 Key concepts in supply chain risk management
The University of Sydney Page 3
Supply chain risks and disruptions today
– What is the current health of global supply chains?
– What are some supply chains disruptions we are currently facing?
The University of Sydney Page 4
The goal of supply chain risk management
– The threat
– Risks can make good supply chains perform very poorly
– Dealing with the threat
– Supply chain risk identification
– Supply chain risk mitigation
– The end goal
– Robust, resilient supply chains
The University of Sydney Page 5
Categories of supply chain risk
– Supply risk
– Process risk
– Demand risk
– Corporate-level risk
The University of Sydney Page 6
Regular verses abnormal supply chain risks
– Regular risks and delays
– Arise frequently
– Each incident is small, but a big problem in aggregate
– Abnormal risks and disruptions
– Less frequent than regular risks
Probability may be hard to ascertain
Easier to dismiss or ignore
– But are regularly occurring somewhere to businesses and supply chains
– Often very large in magnitude
The University of Sydney Page 7
Correlation of risks
– Risks might be:
– Fully independent
– Correlated in some way
– Correlation may occur:
– Geographically (e.g. natural disaster)
– Due to some wider event (e.g. pandemic)
– Might impact:
– Supply, e.g. industry cluster impacted by natural disaster
– Demand, e.g. customer base all impacted by a recession
– Process, e.g. high oil price affects all transportation
– Broad mitigation strategy: diversification
The University of Sydney Page 8
Upside and downside risks
– Downside risk
– Something gets worse
– Upside risk
– Something gets better
– But may produce own challenges
The University of Sydney Page 9
10.2 Types of risk
The University of Sydney Page 10
Supply risk: supplier failure
– Supplier might go bankrupt
– Abnormal risk
– Example: Apple, GT Advanced Technologies, and sapphire glass
– GT to provide Apple exclusive supply of sapphire glass
– Large prepayment given by Apple
– GT filed for bankruptcy
– Apple left without valuable new product
feature in the very competitive
smartphone market
The University of Sydney Page 11
Supply risk: cost
– Price hikes
– Fluctuating exchange rates
– Downside and upside risk
– E.g. if we enter a long term contract, spot price may drop over the term
– Number of suppliers
– Price hikes more likely with single supplier
– But more suppliers may compromise economies of scale
The University of Sydney Page 12
Supply risk: compromised supply
– Tampering
– Food and pharmaceuticals are vulnerable
– E.g. needles in strawberries in Australia,
September 2018
– Counterfeiting
– E.g. premium wines
– Questionable provenance
– What is it and where did it
come from?
– E.g. impure honey
The University of Sydney Page 13
Other supply risks: quality, communication, coordination,
delays, etc
– Supplier might not deliver the right product, or at the right time
– Particularly problematic for complex products with high levels of component
interdependency
– Example: Boeing 787
– Over budget and behind schedule
– Technical problems with some suppliers that led to delays
– Quality issues, e.g. batteries
– Coordination and communication problems
– Regular and abnormal risk
The University of Sydney Page 14
Process risk: design
– Faulty design or production, deceptive reporting
– Recalls and legal settlements can be hugely expensive
– Example: General Motors ignition switch defect
– Loss of control of engine and brakes
– Knowledge of the risks for some time
– Fix rejected in 2005 on cost grounds
– 5+ million car recall, hugely expensive
– $900 million fine, various lawsuits
The University of Sydney Page 15
Process risk: long development time
– Most likely for complex products
– In the interim:
– Cannot meet demand
– Demand may change
– Competition may increase
– Example: COVID vaccines
The University of Sydney Page 16
Process risk: transportation
– Disruptions to transportation networks
– What geographic area is covered?
– Weather
– Ash clouds, snow storms, etc
– Crime
– Piracy, theft, etc
– Congestion
The University of Sydney Page 17
Process risk: yield
– How much production output for given input
– Uncertainty in output?
– Reduced output?
– Particularly common with new production processes
The University of Sydney Page 18
Demand risk: economic cycles and demand shocks
– Slowdowns
– Recessions
– Depressions?
– Often wide scale impacts on demand
The University of Sydney Page 19
Demand risk: forecasting
– May be too high or too low
 Stockouts
 Inventory costs and reduction in revenue
– Information distortion
– Shortages  over-ordering, pushing up forecasts
– Promotions and incentives not accounted for
– Bullwhip effect
The University of Sydney Page 20
Demand risk: change in technology and consumer preference
– Longer term changes in supply:
– Technological frontier
– Research and development (R&D) of industry and competitors
• Example: Apple - new/refined market segments like tablets and
smart phones
– Longer term changes in demand:
– Consumer preference changes
– Often influenced by developments in supply
– Risk of obsolescence
– Uncertainty about which innovations will succeed
The University of Sydney Page 21
Demand risk: supply chain visibility – by customers/the public
– Customer visibility into the supply chain could influence their demand
– Workplace conditions
– Regular workplace conditions (e.g. Nike factories)
– (Ab)normal workplace events (e.g. factory fires in Bangladesh)
– Animal welfare
– E.g. Live cattle exports from Australia to Indonesia
– Supplier welfare
– E.g. Supermarket chain pricing pressure on dairy farmers
The University of Sydney Page 22
Corporate-level risk: supply chain visibility – by supply chain
partners
– More partners  less (or harder) visibility and control
– Example: once again, Boeing 787
– Poor communication of demand or inventory levels downstream
– Can result in gaming of the system
The University of Sydney Page 23
Corporate-level risk: IT systems risks
– Particularly vulnerable when new systems are introduced
– Security issues and virus disruptions
– Example: WannaCry ransomware
The University of Sydney Page 24
Corporate-level risk: intellectual property (IP)
– Outsourcing may be low cost, but IP may be stolen
– Can be especially damaging when knowledge or tooling is utilized by
suppliers
– Long term implications for profitability
The University of Sydney Page 25
Corporate-level risk: political/governmental
– Trade wars
– Tariffs
– Sanctions
– Military conflict
– Changes in environmental and other regulations over time
– Government enforced recalls and bans
The University of Sydney Page 26
Corporate-level risk: exchange rate
– Short term verses long term fluctuations
– Impacts on supply costs, demand, revenue, etc
The University of Sydney Page 27
10.3 Mitigating risks
The University of Sydney Page 28
Mitigating risks
– How might we assess each mitigation strategy?
– Does the strategy manage supply or demand?
– How does it help mitigate:
• Regular risks and delays?
• Abnormal risks and disruptions?
– Some broad strategies
– Flexibility
– Buffers and redundancies
– Diversification
– Alignment of incentives
The University of Sydney Page 29
Postponement and modular design
– What is it?
– Postponement
• Delay final configuration of product until demand is better known
– Modular design
• Design products so that parts are interchangeable
• Can support postponement
– How does it help mitigate regular risk?
– More demand certainty
• Generate forecasts at component level, with greater accuracy
• Allows a company to compete on product variety and
customizability, at a lower risk profile than without postponement
– How does it help mitigate abnormal risk?
– Can reconfigure products more easily if there are disruptions
– Example: Microprocessors in the Samsung Galaxy series
The University of Sydney Page 30
Flexible supplier base
– What is it?
– Use multiple suppliers
– Allows rapid shift if there is a disruption
– Other suppliers may need to ramp up production, but they already have
experience producing that product
– Example: COVID19 vaccine procurement in Australia
– AstraZeneca Vaxzevria
– Pfizer Comirnaty
– Moderna Spikevax
– Negatives
– Additional cost and management overhead
– May reduce economies of scale
The University of Sydney Page 31
Flexible supplier base
– How does it help mitigate regular risk?
– Some plants could fulfil regular demand
• Low flexibility
• Low cost
– Other plants could meet high demand (random, seasonal, etc)
• More flexible
• Higher cost
• Potentially boost responsiveness through proximity to market
– More likely for high value or less certain items
– Example: HP printers in Singapore and US
– How does it help mitigate abnormal risk?
– Provides continuity after disruptions
– ‘Flexible manufacturing process’ useful here
– Correlation of risks important
The University of Sydney Page 32
Make-and-buy
– What is it?
– Keep some/most production in-house
– Have flexibility to buy in
– How does it help mitigate regular risk?
– Flexibility in supply as with ‘Flexible supplier base’
– May have greater control and visibility with in-house production
– How does it help mitigate abnormal risk?
– Can reduce number of outsiders who learn production techniques/IP,
whilst maintaining flexibility; then use trusted partners
– Ensure production knowledge is maintained if suppliers go bankrupt
The University of Sydney Page 33
Flexible manufacturing process
– What is it?
– The following are designed to be flexible during production:
• Plants
• Machines
– Generally less specialized, more expensive, slower
• Labour
– May provide additional training, or seek higher skilled labour
– More cost
The University of Sydney Page 34
Flexible manufacturing process
– How does it help mitigate regular risk?
– Can help respond to yield and supply problems
– Can better handle regular demand fluctuations
– Can result in better use of capacity (even if more expensive)
– Helps facilitate postponement and modular design
– How does it help mitigate abnormal risk?
– Reduce supply risks
• Make up for disruptions elsewhere
• Could ration limited supply over more products
– Reduce demand risks
• Switch production to a product if demand is high, or disruptively
large (e.g. competitor exits the market)
• Switch production from a product if demand is low, perhaps after a
major shock
The University of Sydney Page 35
Change or diversify the product offering
– What is it?
– Sell something we weren’t selling before
– How does it help mitigate regular risk?
– Reduces demand risks
– Ideally negative correlation in products
– How does it help mitigate abnormal risk?
– Reduces impact on business turnover if some demand reduces
dramatically
The University of Sydney Page 36
Strategic stock
– What is it?
– Hold some stock centrally for high priority purposes
– Different to just more stock – limited locations only
– May be shared by multiple supply chain partners
(e.g. retailers, repair centers, hospitals)
– How does it help mitigate regular risk?
– Useful for very lumpy demand of important products, e.g. mining spares
– How does it help mitigate abnormal risk?
– Can allow quick response in a disruption or major spike in demand,
perhaps for high priority purposes
– Examples: petroleum reserves, medicine and medical supply stockpiles
– Rationing principles might be employed
The University of Sydney Page 37
Build reserves for redundancy
– What is it?
– Hold extra reserves of:
• Inventory
• Capacity
– Negatives
– Can be very expensive for rare events
– Disguises inefficiency
– How does it help mitigate regular risk?
– Utilise extra inventory and capacity to handle demand and supply
fluctuations
– Have their place, for regular risk, if economically informed
– How does it help mitigate abnormal risk?
– Best if used for strategic purposes (‘Strategic stock’), or in combination
with ‘Flexible manufacturing’
The University of Sydney Page 38
Economic supply incentives
– What is it?
– May be a limited number or no suppliers in the market
– Or existing suppliers might be at risk of failure
– Try and cultivate additional or support existing suppliers through
economic incentives, e.g. purchasing minimums
– How does it help mitigate abnormal risk?
– Provides continuity after disruptions
– Ensures important, economically marginal industries remain
– E.g. vaccine development
The University of Sydney Page 39
Flexible transportation
– What is it?
– Allow for shift:
• Between modes
• Between carriers
• Between routes
– How does it help mitigate regular risk?
– Route changes to avoid congestion
– Mode choice to expedite delivery
– How does it help mitigate abnormal risk?
– Can shift any of these after disruptions
– Multiple carriers similar to ‘Flexible supplier base’
The University of Sydney Page 40
Improve traceability
– What is it?
– Use technologies and information systems to trace movements through
the supply chain
– How does it help mitigate regular risk?
– Provides customers with confidence
– How does it help mitigate abnormal risk?
– Better manage product recalls
• E.g. pharmaceutical item, tampered products, tainted food
– Verify integrity, provenance
• E.g. cold chain logistics
The University of Sydney Page 41
Rationing
– What is it?
– Limit purchases by quantity or eligibility
– Might prioritise customers on some criteria
• Value of customer
• Customer loyalty
• Customer need, e.g. vaccines
• Criticality of component
– How does it help mitigate regular risk?
– Can reduce onselling, e.g. concert tickets
– How does it help mitigate abnormal risk?
– Helps manage large supply/demand mismatches
The University of Sydney Page 42
Revenue management via dynamic pricing and promotion
– What is it?
– Dynamic pricing
• Use price as a mechanism to match demand and supply
• Can alter price of alternative products, to entice product switch, but
not to competitor
– Promotion
• Raise awareness of product alternatives
– How does it help mitigate regular risk?
– Let price adjust based on usual supply and demand fluctuations
– E.g. airline seat inventory
– How does it help mitigate abnormal risk?
– Proactively promote or discount non-affected products under own
control
– E.g. Dell when certain components unavailable
The University of Sydney Page 43
Assortment planning
– What is it?
– Involves controlling:
• What products are on display
• Where they are on display (e.g. aisle ends)
• Quantity of facings
– How does it help mitigate regular risk?
– Increase display impact if demand is low
– How does it help mitigate abnormal risk?
– Promote alternatives under own control
The University of Sydney Page 44
Anticipate and manipulate consumer preferences
– What is it?
– Invest in research and development to make more appealing products
– Market research to watch trends for products and logistics services
• Not just tracking demand
• Surveys, social media etc
– How does it help mitigate regular risk?
– Identify early on consumer influences on demand fluctuation
– Looking for structural influences amongst random fluctuations
– How does it help mitigate abnormal risk?
– Shape demand through R&D to avoid long-term downside demand risk
– Examples: Apple developing the iPad
The University of Sydney Page 45
Diverse customer base
– What is it?
– Ensure plants or facilities serve multiple or diverse customers
– Seek more customers to reduce impact of customers leaving/defaulting
– Proactively monitor financial health of high value customers
– How does it help mitigate regular risk?
– May smooth out demand for products from each facility
– How does it help mitigate abnormal risk?
– Reduces impact of systematic downturn in certain markets
The University of Sydney Page 46
Financial instruments
– What is it?
– Various forms of contracts (forward, futures, options contracts) that
provide some certainty about input material costs and labour costs
– Can help with exchange rate risk
– Reduces cost volatility, but doesn’t eliminate risk
– How does it help mitigate regular risk?
– Provides some certainty over the short term
– How does it help mitigate abnormal risk?
– Can prevent large downside risks in the short term
– Can also lose out if the situation improves
– Might need new strategies in the long term
– E.g. hedge against input material costs in the short term, relocate if
they stay high
The University of Sydney Page 47
10.4 Other considerations with risk management
The University of Sydney Page 48
Need to be proactive
– Need to be proactive in:
– Anticipating future problems
– Identifying current problems
– Responding to problems
– Reviewing and updating response if needed
– Example: Nokia and Ericsson
The University of Sydney Page 49
Communication and marketing
– Maintain good relationships with customers and suppliers
– Could use social media, websites etc
– Good communication can give use extra insights
The University of Sydney Page 50
Quantifying the benefits
– Costs are readily observed
– Risk mitigation costs will always be incurred
– Benefits can be less obvious
– Benefits will only be realized if risky outcome eventuates
– A priori probability of occurrence can be hard to quantify, especially
when very low
– Can be difficult to quantify the benefits, or get buy-in
The University of Sydney Page 51
The importance of getting management buy-in
– Need to get management buy-in to:
– Progress risk mitigation strategies
– Get acceptance of cost and other implications
– Can be difficult, especially for low probability events
– Stress testing
– What-if scenarios, testing parts of the supply chain and risk types
– Can demonstrate the consequences of risky outcomes to management:
costs, service levels etc
– Don’t get too caught up on probabilities of occurrence, it is a “thought
experiment”














































































































































































































































































































































































































































































































学霸联盟