Risk Management in Supply

Chains
 Supply Chain Risks
• Ericsson lost 400 million Euros after fire in
supplier’s plant
• Apple faced shortages after DRAM
supplier was closed after earthquake in
Taiwan in 1999
• Supply Chain disruptions cause 35-40%
lower stock returns compared to industry
benchmarks
 Supply Chain Risks
• Supply Chain Risk Management
– Management of SC risk thru collaboration or
coordination among the supply chain partners so as
to ensure profitability and continuity
• Risk
– Operational
– Disruption
• Mitigation
– Supply management
– Demand management
– Product management
– Information management
 Supply Risk Management
• Supply network design
– Network configuration
– Product assignment
– Customer assignment
– Transportation planning
• HPs sourcing decision- Malaysia versus Singapore
– Exchange rate uncertainty
– Consignment versus turnkey decisions

• Supplier relationship
– Trade-offs between flexibility of short-term contracts and price stability
of long term contracts
– Globalization of supply chains allows firms to have multiple suppliers
• Supplier selection process
• Supplier order allocation
• Supply contracts
 Supply Risk Management
• Supplier order allocation
– Demand uncertainty
• Emergency orders
– Supply yields uncertain
– Lead times uncertain

• Supply contracts
 Demand Management
• Supply side inflexible
• Manage demand uncertainty to match
supply and demand
• Dynamic pricing
– Price Postponement strategy
• Shifting demand across time
• Shifting demand across markets
• Shifting demand across products
 Demand Management
• Shifting demand across time
– Service marketing
• Revenue management/yield management
• Peak load pricing
• Advance purchase strategies for assured demand
– SCM
• Advance commitment discount
– Retail discounts converting part of uncertain demand to known
demand
– Improves forecast
• Demand postponement
– Discounts for accepting late shipments
– Overbooking in airlines
 Demand Management
• Shifting demand across markets
– Product roll over strategy
– ‘Solo-rollover by market strategy’
• Selling new product in different markets in non-
overlapping seasons
• Primary and secondary market
• Decisions – how much to order in primary market,
how much to trans-ship
• With no secondary markets, optimal order quantity
is high
 Demand Management
• Shifting demand across products
– Large number of marketing models for pricing
and brand promotion strategies
– SCM
• Product substitution
– Reduces variance of aggregate demand
– Substitute high inventory product with stock out product
– Substitute high quality product with low quality product
– Substitute products through pricing
• Product bundling
 Product Management
• Component commonality

• Postponement strategy

• Make-to-Order systems

• Process re-sequencing
 Information Management
• Innovative Products
– Quick response (Sport Obermeyer)
• Functional Products
– Strategies based on reducing Bull-whip effect
– Information sharing
– Vendor Managed Inventory (Barilla)
– Collaborative Forecasting
– CPFR initiative