SUPPLY CHAIN AND OPERATING RISK

Transcription

1 SUPPLY CHAIN AND OPERATING RISK 1

2 Supply Chain Management The management of the flow of goods and services from point of origin to point of consumption Movement and storage of raw materials work-in-process inventory finished goods Objective: maximize customer value and gain sustainable competitive advantage 2

3 Supply Chain Management Customer service Product quality and assortment Right location On time delivery After sale service Reduce operating costs Reduce fixed assets Warehouses, transportation fleet Increase cash flow Faster product flow to customer Decrease inventory 3

4 Supply Chain Design Typically not strategic Supply chains typically evolve through ad hoc responses to specific problems Can lead to supply chain problems Long time to market for new products Long delivery lead times Inventory shortages/excess safety stock Production bottlenecks Leads to higher costs Leads to unnecessary risks 4

5 Supply Chain Design Align supply chain with strategy What are your core competencies/comparative advantages? What is incidental? What are the tradeoffs? E.g. Speed vs cost Air freight is fast but expensive Transoceanic ship is cheap but slow 5

6 Supply Chain Risk Management Supply chain risk management process Identify risks Measure risks Prioritize risks for mitigation Evaluate risk mitigation tactics Implement risk mitigation tactics 6

7 Supply Chain Risk Management Identify risks Interviews/brainstorming Good for known risks, less effective for unknown risks Bill of materials (BOM) List of raw materials, sub-assemblies, intermediate assemblies, sub-components, components and quantities needed to produce final product Supply chain map Software, consultants 7

8 Supply Chain Map 8

9 Supply Chain Map 9

10 Supply Chain Map 10

11 Supply Chain Risk Management Hazard and Operability (HAZOP) analysis Team based approach (from chemical industry) Piping and instrument drawing (P&ID) graphical representation of process Systematic review of process Identify potential failures and their causes Failure Modes and Effects Analysis (FMEA) Team based approach (from reliability engineering) Review components, assemblies and subsystems Identify failure modes, causes of failure, effects on the rest of the system Both approaches include potential remediation of causes of failure 11

12 Supply Chain Risk Management 12

13 Supply Chain Risk Management 13

14 Supply Chain Risk Manaegment Measure risks Frequency Severity FMECA: C is for criticality Create Risk Map 14

15 Supply Chain Risk Management Frequent vs Rare Risks It is difficult to obtain good estimates of the probability of rare risks ( tail risk ) Good estimates require data There is little data on the occurrence of rare risks What is the probability of X > 5? What is the probability of X > 25? 15

16 Supply Chain Risk Management 16

17 Supply Chain Risk Management Prioritize risks Need to find ways to mitigate high severity risks These have the potential to disrupt the supply chain, reduce firm value Risk Mitigation Tactics: High frequency, high severity Avoid Low frequency, high severity Risk transfer High frequency, low severity Loss control Low frequency, low severity Retain Implement and monitor risk mitigation tactics 17

18 Supply Chain Risk Management Loss detection Can you anticipate the event? E.g West Coast dock strike How long after the event before you become aware of it? E.g Fukushima earthquake Anticipation, early detection allow earlier response, which mitigates damage E.g Phillips fabrication plant fire Nokia: had multiple suppliers who increased production Ericsson: sole supplier, slow response, eventually left handset market 18

19 Operating Risk Management Risks arising from day-to-day operation of the business Compliance risks Legal Tax Accounting Regulatory Business process risks Governance Payment processing (AR/AP, payroll, cash disbursement) HR (employee hiring, training, termination) Hazard risks Fire, flood, etc, 19

20 Operating Risk Management Problem is similar to supply chain risk management Same risk management process Identify risks Measure risks (frequency and severity) Risk prioritization Risk mitigation tactics Implement and monitor RM tactics Need to understand business processes Work flow: e.g., Hourly employee payroll: How are hours recorded? Pay calculation, payroll and income taxes, benefits accrual/usage? Loss detectability How long does it take to discover process failure? 20

21 Operating Risk Management Two main approaches International Organization for Standardization (ISO) Quality Management System (QMS) meet the needs of customers and other stakeholders while meeting statutory and regulatory requirements related to a product or service Introduced 1987, most recent update 2015 Committee of Sponsoring Organization (COSO) A process, effected by an entity s board of directors, management and other personnel, designed to provide reasonable assurance of the achievement of objectives in the following categories: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations Introduced 1992, most recent update

22 Operating Risk Management: ISO Principle 1 Customer focus Organizations depend on their customers and therefore should understand current and future customer needs, should meet customer requirements and strive to exceed customer expectations. Principle 2 Leadership Leaders establish unity of purpose and direction of the organization. They should create and maintain the internal environment in which people can become fully involved in achieving the organization's objectives. Principle 3 Engagement of people People at all levels are the essence of an organization and their full involvement enables their abilities to be used for the organization's benefit. Principle 4 Process approach A desired result is achieved more efficiently when activities and related resources are managed as a process. 22

23 Operating Risk Management: ISO Principle 5 Improvement Improvement of the organization's overall performance should be a permanent objective of the organization. Principle 6 Evidence-based decision making Effective decisions are based on the analysis of data and information. Principle 7 Relationship management An organization and its external providers (suppliers, contractors, service providers) are interdependent and a mutually beneficial relationship enhances the ability of both to create value. 23

24 Operating Risk Management: COSO 1. Control Environment Integrity and Ethical Values Commitment to Competence Board of Directors and Audit Committee Management s Philosophy and Operating Style Organizational Structure Assignment of Authority and Responsibility Human Resource Policies and Procedures 2. Risk Assessment Company-wide Objectives Process-level Objectives Risk Identification and Analysis Managing Change 24

25 Operating Risk Management: COSO 3. Control Activities Policies and Procedures Security (Application and Network) Application Change Management Business Continuity/Backups Outsourcing 4. Information and Communication Quality of Information Effectiveness of Communication 5. Monitoring Ongoing Monitoring Separate Evaluations Reporting Deficiencies 25

26 Operating Risk Management: COSO 26

27 Operating Risk Management From Sadun/Bloom/vanReenen: Core Managerial Practices are: Operations Management Use of lean techniques Reasons for adopting lean techniques Performance Monitoring Process documentation Use of key performance indicators KPI reviews Discussion of results Consequences for missing targets 27

28 Operating Risk Management Target Setting Choice of targets Connection to strategy Extent to which targets cascade down to individual workers Time horizon Level of challenge Clarity of goals and measurement Talent management Talent mindset at the highest levels Stretch goals Management of low performance Employee value proposition Talent retention 28

29 Operating Risk Management Both ISO and COSO can be viewed as systematic approaches to implementing good management practices e.g., performance targets, KPIs for business processes Both tend to focus on Performance Monitoring Most managers think they are above average Lake Woebegon Effect: where all the women are strong, all the men are goodlooking, and all the children are above average. Implementing good management practices can lead to sustainable competitive advantage 29