Supply Chain Risk Management

v

Contents

Preface ................................................................................................. xiii

About the Authors ...............................................................................xix

Chapter 1 Supply Chain Risk Management: Setting the Stage .........1

e Concept of Risk and Risk Management ...........................2

Dening Enterprise Risk Management ...............................3

Dening Supply Chain Risk Management .........................6

Why Focus on Supply Chain Risk Management? ...................7

Some SCRM Observations ..................................................10

Why Aren’t We Prepared for SCRM? ................................10

Some Important Risk Concepts ..............................................11

Risk Event ..............................................................................11

Risk Exposure and Vulnerability .......................................12

Risk Resilience ......................................................................13

Risk Appetite .........................................................................14

Risk Analysis or Assessment ...............................................15

Risk Response Plan ...............................................................15

Risk Compliance ................................................................... 15

Risk Governance ................................................................... 16

Categorizing Risk ......................................................................16

Other Ways to Look at Risk ................................................17

Generic Risk Management Approaches .................................18

Risk Mitigation .....................................................................18

Risk Avoidance ......................................................................19

Risk Prevention .....................................................................19

Risk Acceptance ................................................................... 20

Risk Sharing ......................................................................... 20

Prevention versus Responsiveness ......................................21

Concluding oughts ...............................................................21

Summary of Key Points .......................................................21

Endnotes .....................................................................................22

vi • Contents

Chapter 2 Supply Chain Risk Management: e As- Is Landscape ... 25

A Chronology of Supply Chain Risk Management ..............25

2009 ........................................................................................26

2010 .........................................................................................27

2011 ........................................................................................ 30

2012 .........................................................................................32

2013 ........................................................................................ 34

Four Pillars of Supply Chain Risk Management ...................36

Supply Risk ............................................................................37

Process Risk ...........................................................................37

Demand Risk .........................................................................37

Environmental Risk .............................................................37

e Supply Chain Risk Management Adoption....................39

SCRM Adoption .................................................................. 40

Concluding oughts ...............................................................41

Summary of Key Points ...................................................... 42

Endnotes .................................................................................... 43

Chapter 3 Building the Risk Management Foundation ..................45

Supply Chain Risk Management Enablers .............................45

A Supportive Organizational Design ................................ 46

Information Technology ...................................................... 51

Measurement Systems .......................................................... 53

Talent Management ............................................................. 54

Linking Supply Chain Risk Management and Supply

Chain Strategy .......................................................................... 56

Integrating Risk Management with Commodity

Strategy Development ..........................................................57

e Ultimate Risk—Improve or Else! .....................................59

Rallying around a Superordinate Measure ...................... 60

Reducing Supply Risk through a New Approach to

Contracting............................................................................61

Systems Contracting Benets .............................................62

Concluding oughts ...............................................................63

Summary of Key Chapter Points ....................................... 64

Endnotes .....................................................................................65

Contents • vii

Chapter 4 Strategic Risk ....................................................................67

What Is Strategic Risk? ............................................................ 68

Reducing Strategic Risk through Better Product

Development ..............................................................................69

New Product Development Best Practices ........................69

Bringing New Product Development and Risk

Management Together .........................................................73

e Art and Science of Not Getting Caught by Surprise .....74

Protecting Intellectual Property ..............................................79

When Strategic Risk Becomes Strategic Reality ...................82

Concluding oughts .............................................................. 84

Summary of Key Points .......................................................85

Endnotes .................................................................................... 86

Chapter 5 Hazard Risk ...................................................................... 87

e Traditional World of Hazard Risk and Insurance ........87

First- Party Commercial Property Insurance....................89

Cargo Insurance .................................................................. 90

Cyber Insurance ................................................................... 90

Business Interruption Insurance ....................................... 90

Contingent Business Interruption Insurance ...................91

Trade Disruption Insurance ................................................91

Global Logistics Insurance ..................................................92

Quantifying Traditional Hazard Risk Insurance

Requirements .............................................................................94

Looking at the ai Floods through a Risk

Quantication Prism ............................................................. 100

Concluding oughts .............................................................101

Summary of Key Points .....................................................102

Endnotes ...................................................................................102

Chapter 6 Financial Risk ................................................................. 103

Understanding Financial Risk ...............................................104

Supplier and Customer Financial Viability ....................104

Supply Market Volatility ....................................................105

A Case Study of Supply Market Volatility .......................106

viii • Contents

Getting Serious about Managing Financial Risk ................107

Supplier Financial Health Assessment through

Ratio Analysis .....................................................................108

Bankruptcy Predictors ....................................................... 111

Private Company ...........................................................112

Public Company ............................................................. 112

Qualitative Supplier Financial Risk Indicators ..............115

Assessment of Customer Creditworthiness .................... 116

Hedging ................................................................................118

Currency Risk Management Approaches ...................... 120

Concluding oughts ............................................................ 123

Summary of Key Points .................................................... 124

Endnotes .................................................................................. 124

Chapter 7 Operational Risk ............................................................ 127

Operational Risks ....................................................................127

Supply Risk ......................................................................... 128

Demand Risk ....................................................................... 131

Process Risk ........................................................................ 134

Environment/ Ecosystems Risk ......................................... 137

Business Continuity Planning ...............................................139

Business Continuity Planning Objective .............................140

e Business Continuity Life Cycle .................................141

BCP Exercises ......................................................................144

Concluding oughts .............................................................145

Summary of Key Points .....................................................145

Endnotes ...................................................................................146

Chapter 8 Supply Chain Fraud, Corruption, Counterfeiting,

and Theft ........................................................................ 147

Some Key Concepts ................................................................. 148

Bribery .................................................................................. 148

Counterfeiting .....................................................................149

Fraudulent, Corrupt, Coercive, and Collusive Practices ...150

Rules and Regulations ............................................................153

Consumer Financial Protection Bureau (CFPB) ............153

Customs Trade Partnership against Terrorism

(C- TPAT) ............................................................................. 154

Contents • ix

Dodd- Frank Wall Street Reform and Consumer

Protection Act .....................................................................155

Foreign Corrupt Practices Act ..........................................155

Tools, Best- in- Class Practices, and Countermeasures .......156

Fraud, Corruption, and e Tools .................................156

Supplier Co- Management .................................................158

Addressing Corruption with Best Practices ...................159

Counterfeit Countermeasures ..........................................161

Concluding oughts .............................................................162

Summary of Key Points .....................................................163

Endnotes ...................................................................................163

Chapter 9 Emerging Risk Management Frameworks for Success ... 165

What Is a Framework? ............................................................165

Frameworks Supporting the New Supply Chain Risk

Management Discipline ..........................................................166

Enterprise Risk Management (ERM) Framework .........166

COSO ERM Framework ....................................................167

ISO Standards .....................................................................168

Governance, Risk, and Compliance (GRC) ....................172

Risk Taxonomies—An Operational Framework For

SCRM ........................................................................................175

Leveraging ERM, GRC, and Risk Taxonomies ...................177

Benets of ERM and GRC Frameworks ...............................180

Concluding oughts .............................................................183

Summary of Key Points .....................................................183

Endnotes ...................................................................................184

Chapter 10 Using Probabilistic Models to Understand Risk .......... 185

Dening the Models................................................................185

Probabilistic versus Deterministic Modeling Tools ...........187

Risk Response Plans ................................................................ 191

Company Examples of Probabilistic Modeling...................192

Scenario Planning at DuPont............................................192

Stress Testing the Supply Chain at Bayer Material

Sciences ................................................................................194

Next- Generation S&OP at Huntsman .............................197