Risk Management Models for Supply Chain Outsourcing

1. Risk Management Models forSupply Chain Outsourcing David L. Olson University of Nebraska FAIM 2008 Conference, University of Skövde

2. Risk & Business • Taking risk is fundamental to doing business • Insurance • Lloyd’s 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 FAIM 2008 Conference, University of Skövde

3. 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 FAIM 2008 Conference, University of Skövde

4. 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 FAIM 2008 Conference, University of Skövde

5. 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 FAIM 2008 Conference, University of Skövde

6. 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 FAIM 2008 Conference, University of Skövde

7. Supply Chain Risk Sources • Giunipero, AlyEltantawy [2004] • Political events • Product availability • Distance from source • Industry capacity • Demand fluctuation • Technology change • Labor market change • Financial instability • Management turnover FAIM 2008 Conference, University of Skövde

8. 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 FAIM 2008 Conference, University of Skövde

9. Supply Chain Risks & Outsourcing FAIM 2008 Conference, University of Skövde

10. Continued FAIM 2008 Conference, University of Skövde

11. 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 FAIM 2008 Conference, University of Skövde

12. 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 FAIM 2008 Conference, University of Skövde

13. 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 FAIM 2008 Conference, University of Skövde

14. Monte Carlo Simulation FAIM 2008 Conference, University of Skövde

15. China vendor price distribution FAIM 2008 Conference, University of Skövde

16. Taiwan vendor price distribution FAIM 2008 Conference, University of Skövde

17. Simulation Output FAIM 2008 Conference, University of Skövde

18. MCDMj alternatives, I criteriaweights, scores FAIM 2008 Conference, University of Skövde

19. MCDM Weights FAIM 2008 Conference, University of Skövde

20. Scores FAIM 2008 Conference, University of Skövde

21. Values FAIM 2008 Conference, University of Skövde

22. Balanced Scorecard FAIM 2008 Conference, University of Skövde

23. 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 FAIM 2008 Conference, University of Skövde