Andreas Norrman

Categorization of Supply Chain Risk and Risk Management

Daniel Dumke — Mon, 16 May 2011 14:13:00 +0000

Several questions I receive concern the very basic elements of supply chain risk management. Since reading “Categorization of Supply Chain Risk and Risk Management” by Norrman and Lindroth (2004) I often referred to it, to describe the different aspects.

Framework

Norrman and Lindroth suggest a three dimensional framework to analyze different supply chain risk management issues (figure 1). The dimensions are:

Unit of analysis, describing the levels which are affected by this issue (more local to the company or affecting the whole supply network)

Type of risk or uncertainty, describing if the issue is operational or strategic

Risk and business continuity management process, which shows the stage within the risk management process

Figure 1: Supply Chain Risk Management Framework (Norrman and Lindroth, 2004)

The framework can be applied to many supply chain problems, an example of which can be found in figure 2.

Figure 2: Application of Supply Chain Risk Management Framework (click to enlarge; Norrman and Lindroth, 2004)

Definition of SCRM

Supply chain risk management can be defined as,

… to collaboratively with partners in a supply chain apply risk management process tools to deal with risks and uncertainties caused by, or impacting on, logistics related activities or resources’ (Norrman and Lindroth, 2002)

Since SCRM is dealing with more than the risk from a single company it takes a broader perspective than the traditional risk management approach. It also considers the rippling effects of events connected entities.

There are several definitions for risk. The Royal Society defined it in 1992 as:

risk is the chance, in quantitative terms, of a defined hazard occurring. It therefore combines a probabilistic measure of the occurrence of the primary event(s) with a measure of the consequences of that/those event(s)

An important dimension of risk is its contextual association, which can be strategic, financial, operational, commercial or technical:

Strategic: the risk of plans failing or succeeding, e.g. marketing strategy, changes in consumer behavior or political/regulatory changes.

Financial: the risk of financial control failing or succeeding.

Operational: the risk of human error or achievement, e.g. design mistakes, unsafe behavior, employee practices risk, sabotage.

Commercial: the risk of relationships failing or succeeding, e.g. business interruption due to loss of key executive, supplier failure or lack of legal compliance.

Technical: the risk of physical assets failing/being damaged or enhanced, e.g. equipment breakdown, infrastructure failure, fires, explosion, pollution, etc.

But the locational source of the risk is as important and can be divided into (a) externally-driven or environmental risk, (b) internally-driven or process risk, © decision-driven or information risk.

Risk Management Process

After highlighting some basic aspects of SCRM and risks in the supply chain context, the authors present their risk management process, which contains three elements: Risk Analysis and Assessment, Risk Management and Business Continuity Management (BCM).

The process starts with a listing of the risks affecting the supply chain using Fault Tree Analysis (FTA) and assessing the effects of those events in case they happen on the supply chain using Event Tree Analysis (ETA). As the second step, the decision has to be made if the risk can be accepted or if the risks can be mitigated by reducing the likelihood or impact.

Thirdly, one can argue if BCM (see figure 3) has to be part of a risk management process, nonetheless it is related, since it covers the aspect of planning for when an adverse event happens.

Figure 3: Business Continuity Management (Norrman and Lindroth, 2004)

Conclusion

The framework combines several important aspects of risk management in general and specifically supply chain management. It is therefore very suitable for an introductory purpose on supply chain risk management.

Reference:

Norrman, A., & Lindroth, R. (2004). Categorization of Supply Chain Risk and Risk Management Supply Chain Risk (Ed. Clare Brindley), 14-27

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Risk, Information and Incentives in Telecom Supply Chains

Daniel Dumke — Wed, 09 Feb 2011 16:26:00 +0000

Supply chains risks can also be analyzed in a specific industry context and this is exactly what Agrell et al. (2004) did with telecom supply chains. They used a three tier SC (2nd tier supplier, EMS, OEM) to include the selection, coordination and motivation of independently operating suppliers in the model.

In terms of risk handling and sharing the telco industry is to some extent unique as well; there are several possible complications, like

differing business logic in the different stages,
individual relations between revenue and product life cycles
design of products and processes and
a lack of effective incentive structure to induce global supply chain optimization promotes the opportunistic and myopic behavior of the chain firms.

Figure 1: Historical Development within the Telco Industry (Agrell et al., 2004)

Telco Industry

The telco industry can be described using the following dimensions.

Figure 2: Diverging Business Logic in the Telco Industry (Agrell et al., 2004)

Demand uncertainty
- Level
- Timing
Changing Roles
- Outsourcing
- Unclear Interfaces
Growth vs. Consolidation
- Shifting power balance due to consolidation at supplier level
Heterogeneous Business Logic (see Figure 2)
- The cost and revenue functions are different

Model

The authors developed a three stage model with the 2nd tier supplier (for components), the EMS (Electronics Manufacturing Services Provider) and the OEM (Original Equipment Manufactur) in focus (gray box in Figure 3).

Figure 3: Base Supply Chain Model (Agrell et al., 2004)

The experiments with the model take place using a two period time horizon. The OEM tries to maximize the profit over this period.
Knowledge about the system is explicitly divided between the participants: Common knowledge: current demand, Supplier: its cost function and investment opportunities.
Information can be shared: The OEM can send a forecast to its suppliers and it sends order quantities for the first and second period to its suppliers.
The following alternative scenarios are then compared:

Centralized model
OEM coordinates with asymmetric information
Coordination by EMS

Results

The differences between the scenarios are quite low, nonetheless the following conclusions can be drawn:
The performance of the supply chain as a whole may be undermined by the shifting positions of bargaining strength (towards the suppliers).
And the model shows furthermore that simple price-quantity-only coordination (without long-term contracts) as some shortcomings which leads to reduced performance as well.

Conclusion

One question the article did not answer: Why specialize on the Telco industry? The above mentioned description of the industry might fit on others as well, so it would have been more straight forward to develop the model based on the abstract scenario description and use the telco industry as a case study.
Contrary to the description, the model is basically a four-tier model. Since also the customer of the OEM is taken into account as the final source of demand.
But in my view what stands out is not the number of tiers in the model, but the very explicit modeling of the knowledge distribution. Many papers only take a very brief detour on the knowledge that each participant has, or leave it out entirely. But not only for the quality of the model, but also its reproducibility it is important to take the information distribution into account.

Reference:

Agrell, P., Lindroth, R., & Norrman, A. (2004). Risk, information and incentives in telecom supply chains International Journal of Production Economics, 90 (1), 1-16 DOI: 10.1016/S0925-5273(02)00471-1

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Acting on Supply Chain Disruptions

Daniel Dumke — Thu, 22 Apr 2010 07:43:33 +0000

Supply Chain Risk manifests itself in many ways. Today the German airlines restored their regular flight schedule again after six days of no or limited air traffic, after the latest eruption of the Eyjafjallajökull vulcano on Iceland.

The consequences of such events only rarely become evident, but in the background emergency plans have to be executed (or developed).

Case

10 years ago a disruption affected the supply chain at Ericsson, luckily the effects of this event on Ericsson have been published. Its about the so called “Albuquerque accident” in 2000, which was documented by Norrman and Jansson (2004).

Disruption

The Albuquerque accident was a small (30 sqm area), short (10 minutes) fire within one of the clean rooms of a supplier at Ericsson. The supplier was responsible for a important RF-chip for the cell phone production. The consequences therefore were very severe. It took the supplier three weeks to get the production running again and after six month the yield was only 50% of the pre incident rate. The cost for Ericsson were estimated at $200 million (which was compensated by insurance companies).

Analysis

A review in the Wall Street Journal concluded that Ericsson

took too long to take action after the incident
its reporting to upper management was flawed
had no alternative suppliers for this component
has not been prepared for this kind of accident

So how did they react?

Results

The goal was to minimize the risk exposure within the supply chain.

To achieve this they took action on two sides:

Organisation
Assigning clear responsabilities and establish a matrix organization
Processes
Reinforce processes for risk identification, risk assessment, risk treatment, incident handling & business continuity planning

Business impact

Since the financial consequences of the disruption were carried by the insurance companies it was at first harder for Ericsson to renew the insurance policies, but just the other way around after implementing those strict SCRM program mentioned above. As a result Ericsson was paying less afterwards.

It is noteworthy, that after experiencing this disruption Ericsson percieves that the concepts of agility, responsiveness and leanness are inducing higher risks.

Conclusion

The article seams strongly influenced by Ericsson and the objective research and presentation might be questioned. I am definitively missing some more insights on the a priori analysis, since it is one corner stone of the design of the measures. Within the article only a short excerpt from the WSJ has been quoted.

Other authors (as Lockamy et al. (2008)) find a much more positive connection between business performance and supply chain risk management, so this should be further analyzed.

Reference:

Norrman, A., & Jansson, U. (2004). Ericsson’s proactive supply chain risk management approach after a serious sub-supplier accident International Journal of Physical Distribution & Logistics Management, 34 (5), 434-456 DOI: 10.1108/09600030410545463

Lockamy, A., Childerhouse, P., Disney, S., Towill, D., & McCormack, K. (2008). The impact of process maturity and uncertainty on supply chain performance: an empirical study International Journal of Manufacturing Technology and Management, 15 (1) DOI: 10.1504/IJMTM.2008.018237

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