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MANAGING RISK PDM

MANAGING RISK PDM. Professional Development Meeting [insert date]. Introductions – Instructor. Introduce yourself!. Name. Company/Organization. Position. Background. Other Accomplishments. APICS Certifications. APICS Training. MANAGING RISK (RME1). Supply Chain Risk Definition.

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MANAGING RISK PDM

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  1. MANAGING RISK PDM Professional Development Meeting[insert date]

  2. Introductions – Instructor Introduce yourself! Name Company/Organization Position Background Other Accomplishments APICS Certifications APICS Training

  3. MANAGING RISK (RME1)

  4. Supply Chain Risk Definition What is supply chain risk?

  5. Supply Chain Risk Definition The variety of possible events and their outcomes that could have a negative effect on the flow of goods, services, funds, or information resulting in some level of quantitative or qualitative loss for the supply chain APICS Dictionary, 14th edition

  6. Basic Concept of Risk Management • Risk stems from uncertainty or lack of full and timely information • Risk must be evaluated relative to its potential cost exposure and the likelihood of occurrence High Very undesirable: High risk and low reward Y Level of risk X Very desirable: Low risk and high reward Low Low High Risk reward

  7. What Are the Forms of Supply Chain Risk? Disruptions caused by the inability of suppliers to deliver on time, quality failure, financial failure, compliance failure and channel complexity. Supply Disruptions caused by quality problems, inventory shortages, late deliveries, capacity shortages, industrial espionage and equipment breakdowns. Process • Disruptions caused by problems in distribution flows, computer glitches, actions of competitors, security breaches and product failures. Demand Disruptions caused by currency exchanges, recession, financial failure and stock market crashes. Finance • Disruptions caused by natural disasters such as hurricanes, floods, wind, drought and earthquakes. Environment

  8. Supply Chain Risks Survey Natural disaster disruption 63% Inadequate relationship management with customers or suppliers 50% Insufficient monitoring of supply chain performance 42% Lack of information sharing with suppliers and customers 54% 14% Liability due to lapses in materials safety 12% Losses due to theft or other criminal acts Partner underperformance 40% Supplier going out of business 40% Other 7% APICS 2011 Supply Chain Risk Challenges and Practices folio

  9. Why are These Risks Occurring? Low cost country sourcing Risks due to long lead times, exposure to political, security, regulatory and currency. Outsourcing Risks due to limits to supply chain visibility and coordination. Risks due to stock outs, and disruptions due to supply and delivery glitches. Lean and just-in-time Risks due to narrowing of the supplier base to a single supplier. Supply base rationalization Risks due to internal conflicts, cross-purpose objectives and lack of communication. “Siloed” business processes

  10. Financial Impact of Supply Chain Disruptions Operating Income Return on Sales Return on Assets Sales Growth Growth in Cost Growth in Inventories 10.66% 13.88% 107% Drop 114% Drop 93% Drop 6.9% Lower Over 10% Reduction Impact on Shareholder Value Source: Hendrick & Singhal, “The Effect of Supply Chain Disruptions on Long-Term Shareholder Value, Profitability, and Share Price Volatility,” Chain Link Research, January 2011

  11. Key Principles of Risk Management Supply chain disruptions have significant impact on company business and financial performance. Companies with mature supply chain and risk management capabilities are more resilient to supply chain disruptions. They are impacted less and they recover faster than companies with immature capabilities. Mature companies investing in supply chain flexibility are more resilient to disruption than mature companies that do not invest in supply chain flexibility. Mature companies investing in risk segmentation are more resilient to disruptions than mature companies that do not invest in risk segmentation. Companies with mature capabilities in supply chain and risk management do better along all surveyed dimensions of operational and financial performance than immature companies. Source: MIT and PwC Research Study, “Supply Chain Risk Management,” 2013

  12. MANAGING RISK Creating Resilient Supply Chains

  13. Managing Organizational Resiliency Failure Assess the potential causes of and risks from failure Plans to mitigate the effects of failure Recovering from the effects of failure Countermeasures to failures

  14. Nissan Motor Company – Case Study Disruptive Event:9.0-magnitude earthquake in Japan Result: 80% of Japanese auto plants suspended production Nissan’s quick recovery strategy: Nissan responded by adhering to the principles of its risk management philosophy. It focused on identifying risks as early as possible, actively analyzing these risks, planning countermeasures and rapidly implementing them. The company had prepared a continuous readiness plan encompassing its suppliers including: an earthquake emergency plan; a business continuity plan; and disaster simulation training. Nissan deployed these advanced capabilities throughout risk management and along the supply chain.

  15. Nissan Motor Company – Case Study (cont.) Management was empowered to make decisions locally without length analysis The supply chain model structure was flexible, meaning there was decentralization with string central control when required. This was combined with simplified product lines There was visibility across the extended enterprise and good coordination between internal and external business functions. Source: William Schmidt and David Simchi-Levi, “Nissan Motor Company Led: Building Operational Resiliency,” MIT Sloan Management: Case Number 13-150

  16. Controlling Risk Strategies Prevent an event from occurring Minimize the effects of an event Prevention Recovery Negative Consequences Disruptive Event Event Management Isolate the affects of an event Adapted from Nigel Slack and Michael Lewis, Operations Strategy, p. 477.

  17. Frequency and Impact of Supply Chain Risks Mitigate with preplanned action or with a rapidly devised action based on previous experiences and flexible processes. High Mitigate with agile response that may require innovation and originality. Absorb in normal operations or mitigate with preplanned action. Magnitude of frequency and impact Medium Low External Internal Natural Source of supply chain disruption Frequency Impact Reference: Richard E. Crandall, “Perceptions of Peril,” APICS Magazine

  18. Basic Risk Responses Avoidance • Avoid existing activities that give rise to risk. • Accept the chance of a risk occurring because of its low probability or benefit. Acceptance • Take action to reduce the likelihood or impact related to the risk. Transfer or Share • Take action to reduce the likelihood or impact related to the risk. Mitigate Redundancy • Have back-up processes or resources in case of failure.

  19. Risk Response Plans and Cost Contingent action: Risk response that occurs during or after a harmful risk event; intent is to minimize monetary, physical or reputation damage. Preventive action: Risk response that occurs before a harmful risk event occurs; intent is to reduce probability or severity of the risk. Risk event Best-Cost Outcome Cost of Occurrence × Probability vs. Cost of Response

  20. Risk Mitigation and Response Attributes Visibility Capability for forward-looking, predictive views of events occurring in the supply chain integrated into a single system of the supply chain. Event detection and alerting Capability to detect and trigger alerts based on the anticipated impact of a disruptive event. Analytics Capability to leverage analytics to model the event and determine its impact and the impact of potential response decisions and actions. Simulation Capability to use “what-if” simulation to model alternative mitigation strategies to ensure they provide the best response.

  21. Risk Mitigation and Response Attributes (cont.) Collaboration Capability to merge teams into the evaluation process to both validate the proposed strategy and to propose key improvements. Scenario comparison Capability of the risk team to make a joint decision on which mitigation or resolution alternative best meets organizational goals. Prioritized demand Capability to decide which demands to satisfy and then align the supply chain to execute this new prioritization. Integrated S&OP Capability to use S&OP to integrate all planning layers and functions to review the effect of near-term and long-term risk planning and simulation.

  22. Steps to Analyzing and Mitigating Risk Explore all avenues of risks (suppliers, logistics, environmental, etc.) affecting the company and assess types and likelihood of risks occurring. Visualize and understand risks Score each risk factor and prioritize each according to low and high likelihood of occurrence and business impact. Measure and prioritize Based on risk priority, develop an action plan. The mitigation strategies must be modeled and tested using robust, flexible “what-if” analysis capabilities. Take action Risks priorities will change. Both the risk and mitigation strategies need to be reviewed on a regular basis to ensure new factors are included. Monitor, review, and maintain

  23. Risk Response – Methodology Generating preventive action plans for each risk to be mitigated Coordinating and sharing risks among SC partners Implementing preventive action plans Preparing contingency plans • Assess • Transportation failures • Climate, weather • Variability/quality problems, incorrect orders • Loss of key asset/ supplier/customer • Licensing, regulations • Theft, vandalism, etc. • Manage • implementation • projects… • Set goals and expectations • Win project approval and funding • Exercise project management • Measure success • Prepare • Assign roles • Disseminate prioritized plans and practice them • Research best practices • Develop sourcing alternatives • Track shipments with RFID and GPS • Share • Work with partners • Ensure reliable roles • Coordinate response to crisis or problems • Transfer risk on basis of who in SC is best able to respond

  24. Risk Response – Methodology

  25. Supply Chain Capabilities to Manage Risk Ability to rapidly adjust supply chain by increasing or decreasing capacities, improving collaboration, formulating supplier contingency plans and implementing advanced technologies like predictive analytics. Agile Execution Adaptable Structure Ability to create products, processes and systems that are easily modified in response to channel conditions. Visibility Ability to sense, capture and analyze external and internal data and turn it into usable business intelligence. Ability to make design and development less rigid by reducing changeover times, increasing interchangeability and structuring ways to smoothly and rapidly rebalance order management, production and warehousing in response to changing conditions. Flexible Innovation

  26. Risk Management Maturity Levels Level 5 Sustained Sustained performance of risk management strategy and processes for more than one year. Level 4 Optimized Flexible supply chain, partner risk strategy alignment, quick response and adaptability. Level 3 Proactive Proactive risk management, use of quantitative tools, business continuity plans, and use of sensors and predictors. Level 2 Buffer Planning Anticipatory risk planning, build capacity and inventory redundancy, and basic risk governance. Level 1 Initial Ad hoc processes but not well-defined or documented. Level 0 No recognition No risk management strategy in place.

  27. Seven Enablers of Supply Chain Risk Maturity Risk governance Presence of appropriate risk management structures, processes and culture. Flexibility and redundancy in product, network and process architectures to absorb disruptions and adapt to change. Flexibility and redundancy Strategic alignment with supply channel partners regarding risk plans and alternative course of action. Channel partner alignment Presence of information sharing, visibility, and collaboration of demand and supply parts of the supply chain. Total supply chain integration

  28. Seven Enablers of Supply Chain Risk Maturity (cont.) Alignment and integration of risk plans and activities on a strategic, tactical and operational level. Internal functional alignment Ability to standardize, rationalize and simplify supply chain complexities to remove or dampen opportunities for disruptive events. Complexity management Development of intelligence and analytical tools to support supply chain and risk management functions. Data, models and analytics

  29. MANAGING RISK Additional Resources

  30. Resources to Learn More • APICS Risk Folios www.apics.org/riskfolios • APICS Supply Chain Risk Management Seminarwww.apics.org/seminars • APICS 2014www.apicsconference.org • APICS Risk Management Education Certificatewww.apics.org/risk

  31. Congratulations! • Participation in today’s session qualifies for one elective hour (RME1) toward the APICS Risk Education Certificate. • Download the transcript to track your progress and learn how you can qualify for the remaining hours at www.apics.org/risk.

  32. APICS Supply Chain Risk Management Seminar Thank you!

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