Risk
Topic 7: Risk management in the supply chain
- Explain the core functions and processes of risk management within supply chains and networks
- Critically discuss the emergence and consequences of risk management.
Chopra and Sodhi (2004) “Managing risk to avoid supply chain breakdown”
The mainstream risk management approach 9 Risks → Delay, Disruption, Systems, Forecast, Intellectual Property, Procurement, Receivables, Inventory, and Capacity
Types of Risk - The importance of managing supply chain risks.
Disruption Risks
Disruptions to material flows anywhere in the supply chain are unpredictable and rare but often quite damaging (e.g. natural disasters, labor strikes, fires, and terrorism). In addition, supply chain distribution can also increase prices.
Systems Risks
A breakdown of information infrastructure can devastate today's highly networked environments.
Procurement Risk
Procurement risk refers to unanticipated increases in acquisition costs resulting from fluctuating exchange rates or supplier price hikes (e.g. the weaken of U.S. dollar drove up cost for U.S. companies sourcing in Europe).
Receivables Risk
Receivables risk, the possibility of being unable to collect on receivables, filtering customers for creditworthiness is a very prudent and powerful way to reduce receivables risk. Another approach is to spread the risk across more customers.
“The big challenge for managers [is] mitigating risk by intelligently positioning and sizing supply-chain reserves without decreasing profits” - “The managers’ role is akin to that of a stock portfolio manager: Attain the highest profits (reward) for varying levels of supply-chain risk and do so efficiently”
Before companies can devise effective means of reducing supply-chain risks, managers must first understand the universe of risk categories as well as the events and conditions that drive them”
• Understanding the impact of risks, and the organization’s risk profile and risk appetite allows for the effective balancing of risk and reward
• Impact assessments undertaken via: stress testing, scenario planning or ‘war-gaming’
Approaches:
Performing stress test and tailoring risk management approaches are suggested ways in dealing with risks.
The goal of the manager is to achieve the highest level of profits for varying levels of supply chain risk and do so efficiently.
Stress Testing should be seen as thought experiment, preparing the SC for any unforeseen events that may or may not occur and lowering the risk of them.
Risk management tools and techniques
Risk mitigation and hedging:
“Global supply chains should generally use a combination of mitigation strategies designed into the supply chain along with financial strategies to hedge uncovered risks” (Chopra and Sodhi, 2016, p. 159).
Its all about finding the right trade offs.
There are 3 relationships that influence the optimal between trade-off and risk
Unknown unknowns can be mitigated through the creation of the ability to adapt, re-interpret, and respond to surprise:
Kaplan, R. and Mikes, A (2012) “Managing Risks: A new framework”
3 Types of Risk: preventable risk, strategy risk and external risk.
Types of Risk: While preventable risk can be managed by rules, strategy risks will have to managed according to the company’s strategy. External risks are derived from events outside the company, and cannot be controlled. Therefore, the focus on external risks should be on identification and mitigation strategies.
Approaches:
It is important to know that a risk in one area might affect many other areas. There are three distinct approaches to managing strategy risks. Which approach is appropriate for a given firm depends largely on the context in which an organization operates. - Independent experts, Facilitators, Embedded experts
Stress testing, Scenario planning, War-gaming is a third technique, that assesses a firm’s vulnerability to disruptive technologies or changes in competitors’ strategies.
Power, M. (2007) Organized Uncertainty.
Sociological perspective
Example of actors approaches
Power (1997): Shows the phenomenon of risk management not to originate from ‘risks’ but from specific social processes (the demand for comfort and corporate blame avoidance).
Nature about how we think about Risks has changed. theoretical distinction between risk and uncertainty
How do we differentiate between risk identification just in order to have a competitive advantage (communication tool) and when do we actually implement risk management and do anything about it?
This is because risk is today something we manage, and not something we analyze (Which is was in former time)
“Can we know the risks we face, now or in the future? No, we cannot: but yes, we must act as if we do” (Power, 2007)
• How we deal with risk is a social and historically specific outcome
• Its primary task today is not risk management, but the documentation and demonstration of processes of risk management
Instead of actually reduce risk, we pretend as if we do - which makes risk dealing mainly a communication tool. We identify to make us feel safer rather then being safer.
Why cannot we know or manage risks, according to Power:
• Because there is no incubation or ability to detect it
• Because risk objects are not given
• Because risk management obscures risks
•What is the result:
• Risk management becomes a kind of organizational blame deflection process, and a kind of social catharsis.(make us feel safer rather then being safer.)
Risk vs. Uncertainty The distinction between uncertainty and risk in this book is an institutional and managerial distinction between those events and issues, which are expected to be treated within management systems as risk and those, which are not. Uncertainty is therefore, transformed into risk when it becomes an object of management, regardless of the extent of information about probability. When uncertainty is organized it becomes a risk to be managed. However, not all risk are manageable.
The rise of risk manage- ability: “The emergence of rational designs for risk management systems reflect social, economic and cultural influences [...] Discourses have become more explicitly managerial and regulatory, a mode of governing as such” (Power, 2004, 4)
Case: Managing risk to ensure business continuity at Maryland and Virginal Milk Producers Cooperative Association
Critical discussion on the basis of:
– Kaplan and Mikes (2012)
– Power (2007)
Difficulties faced: what is the probability of certain events. How specific should we get - how to define the different risks. Identifying the risks that we are not thinking about!!!! Each risk will be addressed by a different set of tools and there are interactions between the different risks.
Risk management is often described as a cybernetic management process.
Risk identification
=>Risk knowledge=>Risk mitigation=> Risk control
• However...The ability to “identify the risks the faced and properly evaluate, communicate, and address them” is a fundamentally challenging task. (Kaplan and Mikes, 2012)
- Overconfidence (to the risk identification process (you spent time thinking about what you know but not what yoú do not know)
- Anchoring, confirmation bias, and escalation of commitment (Its hard to agree for a lot of different people (not all speak their opinion out loud)
- Groupthink
- Normalization of deviance
Thus there is a need for different approaches to risks that might include:
• The organization of confrontation
• The privileging of the outsider view
• Guards against ‘going native’
Different calculative cultures exist, and will impact the outcome of risk management and assessment exercises (see Nocera, 2009!)
milk plant that was damaged in a fire over the weekend could take months to get back to full capacity, according to a spokeswoman for the company. - they conduct risk screening.
“Global supply chains today are subject to more risk factors than localized supply chains of the past”
(Chopra and Meindl, 2016, p.259)
Risk Mapping:
Risk mapping has become the primary means of identifying, communicating, and managing risks
• Illuminates relation between probability and impact of event
• Represents all organizational risks in common metrics: allowing trend identification as well as comparison
• Offers a starting point for the rationalization of risk responses
Topic 7: Risk management in the supply chain
- Explain the core functions and processes of risk management within supply chains and networks
- Critically discuss the emergence and consequences of risk management.
CORE FUNCTIONS & PROCESSES
learning objective 1: “Global supply chains today are subject to more risk factors than localized supply chains of the past”
(Chopra and Meindl, 2016, p.259)
e.g. fire in chip manufacturing plant (Phillips) → distrupted costumer (Ericsson) who only had a single sourcing strategy and lost $400 million in sales → one reason why companies must manage their supply chains to reduce their risk exposure. ⎯
Difficulties of managing risk in a supply chain stems from the fact that risks are interconnected (actions are taken to reduce one risk, can exacerbate another risk)
⎯ At the same time, reducing risks in my company might increase risks in a partner company
⎯ Main Challenge: find the optimal balance to manage those risks without decreasing profits.
LEARNING OBJECTIVE 2
Risks cannot be managed until they are known, and if they are unknowable then organizations can still be resilient → But: There are risks of risk management
Chopra and Sodhi: “Managing risk to avoid supply chain breakdown”
Identify Risks: analyse whole supply chain processes/interactionsUnderstand Risks:
9 types of Risks:
⎯ Disruptions (external): natural disaster, supplier bankruptcy
⎯ Delays: inflexibility/poor quality of supplier’ products,
⎯ System: IT breakdown, e-commerce
⎯ Forecasting: inaccuracy, bullwhip effect
Know own Risk Profile/AppetiteBalance Level of Risk & Reward: Trade-offConduct Risk Impact Assessments
a. Stress Testing
b. Scenario Planning
c. Risk Mapping (most popular)