Risk Management Models for Supply Chain Outsourcing

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Risk Management Models forSupply Chain
Outsourcing

• David L. Olson
• University of Nebraska

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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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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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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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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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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 Risks Outsourcing
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Continued
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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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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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Monte Carlo Simulation
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China vendor price distribution
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Taiwan vendor price distribution
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Simulation Output
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MCDM j alternatives, I criteriaweights, scores
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MCDM Weights
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Scores
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Values
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Balanced Scorecard
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Conclusions

• Outsourcing provides competitive access
• Broader opportunities
• Demonstrate 3 tools
• Monte Carlo simulation
• Evaluate probabilistic elements
• MCDM
• Consider multiple criteria
• Select vendor by decision maker preference
• Balanced Scorecard
• Measure effectiveness of selected vendor