Risk Management Tools and Techniques In supply chain management, the industry has shown that survival of the unexpected is not an accident. - IBM Risk Management study The Supply Chain Leadership Forum 2010 Dallas, Texas Track E-1 Facilitated by Roger Paulson Practice Director, UWEBC, University of Wisconsin Madison
Risk Events Which of the following events has your organization experienced during the past year? (Percentage of respondents) Source: Managing Supply Chain Risk for Reward, Economist Intelligence Unit, December, 2009 The Economist Intelligence Unit surveyed 500 executives with responsibility for risk management, from companies across Asia-Pacific, North America and Europe. 2
Session Scope This Session Will Focus On: Definition of risk Most significant supply chain risks General framework for risk management Risk management tools and techniques Discussion of participants approaches to supply chain risk management 3
Risk Defined Risk is the probability or threat of damage, injury, liability, loss or other negative occurrence caused by external or internal vulnerabilities, which also may be neutralized or minimized through premeditated action. Risk management is all about: Being proactive: Identifying potential events and their impacts Developing and implementing risk mitigation strategies Monitoring for changing risk situations Having an action orientation 4
Top 10 Most Impactful SC Risks 10. Customer-related (demand change, system failure, etc.) 9. Attracting and retaining skilled labor 8. Government regulations 7. Diminishing capacity 6. Strikes labor, buyers or shippers 5. Natural disasters or accidents 4. Commodity cost volatility 3. Logistics failure 2. Bankruptcy, ruin, or default of suppliers, shippers, etc. 1. Supplier failure/reliability What other SC risks has your company identified or experienced? Source: Supply Chain FMEA study, Western Michigan University, 2009 5
General Framework for Risk Management 1. Define risk management strategy 2. Identify and document risk factors 3. Analyze risks and impact 4. Prioritize risks 5. Develop risk mitigation plans 6. Implement risk mitigation actions 7. Track and control mitigation plans and risk metrics 8. Institutionalize the process Where do risk management plans fail most often in your experience? 6
Risk Management Tools & Techniques Tools & Techniques Failure Mode & Effects Analysis (FMEA) Fault Tree Analysis (FTA) Modeling & scenario analysis Affinity diagrams Risk plotting Supplier scorecards Supplier quality audits Supplier risk assessment Financial risk assessment Commodity price hedging Other Practices Strategic sourcing Initial supplier evaluations Capacity planning for operations & suppliers Contingency plans On-site capability review Safety stock Multi-sourcing Back-up carriers Develop local supply base Many others 7
Risk Management Tools & Techniques Failure Mode Effects Analysis (FMEA) an inductive approach to analyzing causes of failure in processes 8
FMEA Example Source: Mercedes Benz Technology LLC, 2009 9
Risk Management Tools & Techniques Fault Tree Analysis (FTA) a deductive method of logically and graphically representing combinations of events 10
Risk Management Tools & Techniques Risk Plotting graphical technique used to prioritize risks based on probability and impact 11
Risk Management Tools & Techniques Affinity Diagram technique for organizing verbal information into a visual pattern 12
Questions for Discussion 1. What approach has your company taken to managing supply chain risk? 2. What risk management tools and techniques have your company found to be most effective? What tools and techniques are not as effective? 3. What are the obstacles to designing and implementing an effective supply chain risk management strategy and how can these be overcome? 13