A recently published article in Supply Chain Quarterly offers some interesting points.
1. A growing number of natural disasters have been impacting supply chains in recent years.
2. Supply chain disruptions have a significant impact on stock market prices. For instance, the Nikkei index dropped by over 17% in the three days following supply disruptions caused by Japanese earthquake and tsunami. The terrorist attack on September 11, 2001 caused the Standard & Poor's index to lose nearly 12 percent over four days after the stock markets reopened following the incident.
3. Supply chain segmentation can be effectively used to manage supply chain risks. As per the SCOR (Supply Chain Operations Reference model) framework, supply chain segmentation identifies distinct supply chains within an organization based on geography/market channel and product offerings. The article offers the following example of applying supply chain segmentation of managing risk:
- A hypothetical company has three main product lines: food products, technology products, and durable products. Food products are distributed across five channels (U.S. retail, U.S. distributor, U.S. direct, U.S. government, and international). Tech products are distributed across three channels (U.S. retail, U.S. original equipment manufacturers [OEM], and international), and durables are distributed across two channels (U.S. direct and U.S. home). Supply chain segmentation suggests that there are 10 unique supply chains within each supply chain having its own risk profile.
- Next, it is important to identify the most important supply chains by developing a priority matrix. To develop the priority matrix, list the unique supply chains as identified in the previous step, and then identify key performance indicators (KPIs) that are most important for an organization. Suppose the organization cares most about rank in terms of revenue, gross margin percentage, number of stock-keeping units (SKUs), unit volume, and strategic importance. Weights can be assigned to each of these KPIs to reflect its importance to the organization. For each KPI, assign a rank to each product-channel group based on how well that group contributed to the KPI. The highest-ranking supply chain receives a high number, and the lowest-ranking supply chain receives a "1." In this example, food products that were distributed to U.S. government agencies had a revenue rank of 1 (worst), while tech products distributed to U.S retail had a revenue rank of 6 (best). Finally, complete this exercise for all product-channel and KPI combinations. The end result will be a listing of overall ratings for each of the organization's supply chains. In this example, food products-U.S. retail and tech products-U.S. retail scored the highest ratings, implying that these two supply chains were the most important for this organization. The supply chain priority matrix is shown below.
- The next step is to quantify risk across five internal (financial, production and inventory, transportation, labor, information technology) and four external (supply, demand, natural hazard, political) factors. Risk is quantified as: Probability of risk occurring * Impact of that occurrence. To apply this formula, first, create a 1-to-5 scale to measure both probability and impact, with 1 being the lowest and 5 being the highest. Given that the risk profile can vary anywhere from 1 to 25, the next step is to define levels of risk using the value ranges as shown below.
- Subsequently, each risk category, including both internal and external risks, should be assessed individually against the risk boundaries created. Each risk category will score a risk rating in the range of 1 to 25 and should be categorized as high, medium, or low risk based on the risk boundaries created earlier. Finally, assign a weight to each risk category based on its strategic impact on the organization's supply chain. The weights should be in the range of 0 to 100 percent, and the cumulative weight of all risk categories should total 100 percent. A simple dashboard can be created in a program such as Excel listing the risk categories, the weights, and the final risk score. For the given example, the weighted average risk calculates out to 9.56, which represents a "medium" risk level based on the risk boundaries created earlier.
Source: Mohamed, M. How to recognize and reduce risk. Supply Chain Quarterly, Quarter 3, 2013.