Enterprise Risk Management in Supply Chain Environments

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Enterprise Risk Managementin Supply Chain
Environments

• David L. Olson
• University of Nebraska

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Enterprise Risk Management Definition

• Systematic, integrated approach
• Manage all risks facing organization
• External
• Economic (market - price, demand change)
• Financial (insurance, currency exchange)
• Political/Legal
• Technological
• Demographic
• Internal
• Human error
• Fraud
• Systems failure
• Disrupted production
• Means to anticipate, measure, control risk

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DIFFERENCES
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Supply Chain Perspective of ERM

• Historical vertical integration
• Standard Oil, US Steel, Alcoa
• Traditional military
• Control all aspects of the supply chain
• Contemporary
• Cooperative effort
• Common standards
• High competition
• Specialization
• Internet
• Service oriented architecture

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Supply Chain Problems

• Land Rover
• Key supplier insolvent, laid off 1000
• Dole 1998
• Hurricane Mitch hit banana plantations
• Ford
• 9/11/2001 suspended air delivery, closed 5 plants
• 1997 Indonesian Rupiah devalued 50
• Blocked out of US supply chains
• Jakarta public transport reduced operations, high
  repair parts
• Li Fung shifted production from Indonesia to
  other Asian sources

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More Problems

• Taiwan earthquake 1999
• Dell Apple supply chains short components a few
  weeks
• Apple had shortages
• Dell avoided problems through price incentives on
  alternatives
• Philips semiconductor plant in New Mexico burnt
  2000
• Ericsson lost sales revenue
• Nokia had designed modular components, obtained
  alternative chips

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Robust StrategiesTang 2006

• Postponement standardization, commonality,
  modular design
• Strategic stock safety stock for strategic
  items only
• Flexible supply base avoid sole sourcing
• Economic supply incentives subsidize key items,
  such as flu vaccine
• Flexible transportation multi-carrier systems,
  alliances
• Dynamic pricing promotion yield management
• Dynamic assortment planning influence demand
• Silent product rollover slow product
  introduction - Zara

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Supply Chain Risk Sources

• Giunipero, Aly Eltantawy 2004
• Political events
• Product availability
• Distance from source
• Industry capacity
• Demand fluctuation
• Technology change
• Labor market change
• Financial instability
• Management turnover

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ERM Process in Supply Chains

• Tang 2006
• Identify risks
• Estimate likelihoods
• Assess potential losses from each source
• Identify strategies to reduce risk
• ALTERNATIVES
• Risk avoidance
• Insurance, alliances, buffers
• Risk mitigation
• management of uncertainty variety, pricing,
  advertising

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Supply Chain Decisions

• Supply management
• Network design
• Relationships
• Vendor selection
• Order allocation
• Contracts
• Demand management
• Product management

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Risk Business

• Taking risk is fundamental to doing business
• Insurance
• Lloyds of London
• Hedging
• Risk exchange swaps
• Derivatives/options
• Catastrophe equity puts (cat-e-puts)
• ERM seeks to rationally manage these risks
• Be a Risk Shaper

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Types of RiskStroh 2005

• External environment
• Competitors Legal Medical Markets
• Business strategies policies
• Capital allocation Product portfolio Policies
• Business process execution
• Planning Technology Resources
• People
• Leadership Skills Accountability Fraud
• Analysis reporting
• Performance Budgeting Accounting Disclosure
• Technology data
• Architecture Integrity Security Recovery

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Early Supplier InvolvementRisk to Core

• Vertical cooperation design concept
• Reduce development time
• Better product quality
• Improved costs
• RISKS sequencing, shortages, incapable suppliers
• ROLLS ROYCE Aerospace
• New product development 3-4 years
• ESI 1999
• SUPPLY COST REDUCTION
• Reduced threat of excessive costs, easier to
  handle changes
• Reduced legal liabilities, fewer quality problems
• Less supplier capacity constraints, shorter
  development time

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Vendor RiskRisk to Suppliers

• Disintermediation US gas stations
• Motokov UK Ltd.
• European importer/distributor in agricultural
  market, tires
• Selected by Italian agricultural machinery
  manufacturer Landini to market Zetor tractors
• For 3 ½ years, exclusive UK distributor
• Then Landini formed an internal distributor
• Tires
• Mid-1990s dropped Matador Tyres for a Czech tire
  company
• 1995 Czech company went under, back to Matador
• 2002 Matador dumped Motokov
• Zetor Tractors (Czech)
• Production halted after dropped Communism

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Christiaanse, E. and Kumar, K. (2000).
ICT-enabled coordination of dynamic supply webs.
International Journal of Physical Distribution
Logistics Management

• Benefits from ICT-enabled flexible supply chains
• Internet cost savings available from the
  Internet
• On-line bidding processes for supplies
• more choices (I2)
• no bullwhip
• Time to market reduced
• could shift production to alternative plants
• Transaction cost argument from economics
• reduce coordination costs
• Yield pricing tools
• flexible pricing
• Allows mass-individualization (mass customization)

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Typical Inventory Costs Kelle Akbulut, Int. J.
Prod. Econ. 93-94 (2005) 41-52
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Supply Chain Coordination Effects

• Joint optimal policy will always save total
  system cost
• 1-30 for supplier
• 25-60 for buyer
• NEED TO NEGOTIATE

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Means to Control Enterprise Risk

• Honeywell (1997)
• Multi-year contract combining property,
  liability, option hedging risks against adverse
  currency exchange rates
• Dickinson 2001
• Holistic approach
• Extend contingency planning with comprehensive
  internal risk management systems
• CRO / CEA
• Chief Risk Officer / Chief Auditing Executive

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COSOCommittee of Sponsoring OrganizationsTreadwa
y Committee 1990sSmiechewicz 2001

• Assign responsibility
• Board of directors
• Establish organizations risk appetite
• establish audit risk management policies
• Executives assume ownership
• Policies express position on integrity, ethics
• Responsibilities for insurance, auditing, loan
  review, credit, legal compliance, quality,
  security
• Common language
• Risk definitions specific to organization
• Value-adding framework

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COSO Integrated Framework 2004Levinsohn 2004
Bowling Rieger 2005

• Internal environment describe domain
• Objective setting objectives consistent with
  mission, risk appetite
• Event identification risks/opportunities
• Risk assessment - analysis
• Risk response based on risk tolerance
  appetite
• Control activities
• Information communication to responsible
  people
• Monitoring

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Risk Management Tools

• Simulation (Beneda 2005)
• Monte Carlo Crystal Ball
• Multiple criteria optimization (Dash Kajiji
  2005)
• Goal programming - tradeoffs
• SYSTEMS FAILURE METHOD
• Information Systems Project Management
• INFORMATION TECHNOLOGY

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Conclusions

• Supply chains require IT
• Shared information
• Linked ERP systems
• Advanced planning systems
• Technologies like RFID
• Agility respond
• Need integrated real time data
• Lean pull
• Joint planning
• Variety of inventory control systems