Use of Flexibility in Supply Chain Risk Management

1. Use of Flexibility in Supply Chain Risk Management Yasemin Kahyaoglu Ahmet Satir

2. Outline • The Concept of Risk • The Concept of Flexibility as it relates to Risk/Uncertainty • Risks in Supply Chains • Risk Management Strategies in Supply Chains • Supply Chain Risk Management Framework • Examples of Using Flexibility as a Risk Mitigation Strategy in Supply Chains

3. Certainty/Risk/Uncertainty • No element of chance between decisions and outcomes • The link between decisions and outcomes is governed by probability distributions • Impossible to assign probabilities to outcomes of a decision • Randomness-random variables related to business as usual operations • Hazards-low probability/high impact unusual events • Deep Uncertainty-lack of information on plausible future extreme events Source: Klibi et al. (2010)

4. Flexibility vs Uncertainty

5. Various Conceptualizations of Flexibility • Operational Definition of Flexibility: Flexibility of a system is the outcome of the dynamic interaction of uncertainty, capabilities associated with system configuration and performance components (Kahyaoglu, Kayaligil and Buzacott, 2002) • Value Chain Flexibility: Flexibilities in product development/manufacturing/logistics/spanning as they relate to uncertainties with respect to customers, suppliers, technology and competitors (Zhang et al. (2002), Nair (2005)) • Supply Chain Flexibility: Lummus et al. (2005), Tan (2002), Olhager and Seldin (2004)

6. Risks in Supply Chains

7. Risk Management Strategies in Supply Chains • Avoidance Strategy – eliminate or significantly reduce the company’s exposure to particular (extreme) risks • Prevention Strategy – reduce the occurrence probability of a risky event • Mitigation Strategy – eliminate or minimize the negative impact of a risky event

8. Supply Chain Risk Management Framework Internal Operations Environment Marketplace External Stakeholders Source of Risk Identified Risk 1 Identified Risk 2 Identified Risk 3 Identified Risk 4 Avoidance Approaches Responsible Functional Areas/Supply Chain Stakeholders Prevention Approaches Mitigation Approaches Bandaly et al. 8

9. Example of Using Flexibility as a Supply Chain Risk Mitigation Strategy – with respect to Marketplace Uncertainties Bandaly et al. 9

10. Example of Using Flexibility as a Supply Chain Risk Mitigation Strategy – with respect to Uncertainties Originating from Internal Operations Bandaly et al. 10

11. Example of Using Flexibility as a Supply Chain Risk Mitigation Strategy – with respect to Uncertainties Originating from External Stakeholders Bandaly et al. 11

12. Example of Using Flexibility as a Supply Chain Risk Mitigation Strategy – with respect to Environmental Uncertainties Bandaly et al. 12