Supply Chain Risk Management

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7

Operational Risk

Imagine a company that sells some of the hottest products on the planet

with just a few products representing a disproportionate share of revenues.

Imagine further that this company has relied on a single Chinese sup-

plier and location to build these products. And imagine even further that

this Chinese supplier is secretive, oen showing an unwillingness to share

information publicly, particularly about labor problems. If this scenario

sounds operationally risky (and strategically risky as well), you just g-

ured out why Apple has made a decision to diversify its supplier base by

expanding its outsourcing to a second supplier located in Taiwan.

is chapter will discuss the many potential operational failures through

the prism of the four pillars of supply chain risk—supply risk, demand risk,

process risk, and environmental risk. We will prole operational risks that

happen every day in these four areas. We’ll also discuss these risks in the

context of two basic operation horizons and present a program that tradi-

tionally has been utilized to mitigate and manage operational risks.

OPERATIONAL RISKS

By far, a disproportionate set of supply chain risks will be categorized

as operational since this category includes internal and external quality

problems, late deliveries anywhere in the supply chain, service failures due

to poorly managed inventory, problems related to poor forecasting, and a

thousand other events related to operational performance failures. is

section discusses the operational risks that are part of supply risk, demand

risk, process risk, and environmental risk. e two prevalent horizons

aecting supply chain risk management are the operational horizon,

128 • Supply Chain Risk Management: An Emerging Discipline

covering 0–45days into the future, and the tactical horizon, which nor-

mally covers 1–18months into the future.

Supply Risk

Referring back to the discussion in Chapter2 regarding the four pillars

of supply chain risk, the supply management profession is by far the most

mature discipline within the supply chain arena when it comes to iden-

tifying, assessing, mitigating, and managing risk. Procurement profes-

sionals have been leveraging techniques to mitigate and manage risk for

more than 50years. Let’s briey identify operational and tactical risks that

reside within this risk pillar every day. In no particular order, we have sup-

plier lead times, supplier quality, supplier prices, supplier insolvency and

bankruptcy, supplier delivery issues, fraud, corruption, counterfeit parts

and components with subtier suppliers, and inbound logistics. To further

focus our discussion, we’ll classify these risks into supplier, logistics, and

fraud, corruption, and counterfeiting. Table7.1 can be used as a reference

throughout the supply risk discussion.

Supplier Risks. As mentioned, procurement professionals have been

trained for many years to think about risk and contingencies, probably

much more so than any other discipline within the supply chain commu-

nity. One of the main reasons is most manufacturers’ cost of raw material

represents approximately 50%–70% of their total cost of goods sold. at’s

a huge portion of the total cost of nished products and an abnormally

large risk element to the organization.

As shown in Table 7.1, the traditional approach to handling sup-

plier risk has been to use buer inventory or statistically derived safety

stock to absorb volume shocks or delays or supplier delivery and quality

issues. One of the traditional techniques many procurement professionals

have been trained to execute to ensure better pricing and better delivery

has been placing more and more of their raw material requirements with

one supplier. is traditional thinking and training was driven by the

premise that when a company’s purchase requirements become a larger

portion of a supplier’s order board, that supplier will bend in terms of

price and do its best to demonstrate solid delivery performance because

of the risk of losing those orders and volume.

is procurement strategy worked well in a stable environment before

globalization and supply market volatility. What actually took place is

many companies got a bit complacent performing their due diligence.