127
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,.often.showing.an.unwillingness.to.share.
information. publicly,. particularly. about. labor. problems.. If. this. scenario.
sounds. operationally. risky. (and. strategically. risky. as. well),. you. just. fig-
ured.out.why.Apple.has.made.a.decision.to.diversify.its.supplier.base.by.
expanding.its.outsourcing.to.a.second.supplier.located.in.Taiwan.
This.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.profile.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.. This.
section.discusses.the.operational.risks.that.are.part.of.supply.risk,.demand.
risk,. process. risk,. and. environmental. risk.. The. two. prevalent. horizons.
affecting. supply. chain. risk. management. are. the. operational. horizon,.
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
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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.briefly.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..That’s.
a. huge. portion. of. the. total. cost. of. finished. 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. buffer. 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.. This. 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.
This.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..
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
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Operational Risk • 129
Buyers. assumed. a. bit. too. much. in. terms. of. continued. performance. and.
found.out.through.disruptions,.supplier.insolvency,.supplier.quality.issues.
and.much.more,.that.relying.on.one.supplier.for.a.major.portion.of.a.com-
pany’s. purchase. needs. might. not. be. the. best. strategy. when. it. comes. to.
managing.risk.across.an.entire.organization.
Logistics Risks..Around.the.year.2000,.during.the.Internet.and.e-.business.
boom.came.the.concept.of..Process.Outsourcing.(BPO)..IBM.was.
a.big.proponent.of.this.concept.within.its.own.supply.chain.and.promoted.
doing.what.you.do.best.and.outsourcing.the.rest..Why.did.IBM.and.many.
other. companies. embrace. this. approach. to. supply. chain. management?.
taBle 7.1
Supply.Risks
Supply Risk Cause Horizons Traditional Remedies
Supplier.lead.
times
Material/.capacity.issues Both Buffer.stock,.larger.order.
quantities
Supplier.
quality
Manufacturing.processes Both Contract.verbiage,.
penalty.clauses,.inbound.
inspection
Transportation.
lead.time
Breakdowns,.acts.of.God,.
customs.issues
Both Contract.verbiage,.
penalty.clauses
Subcontractor.
availability
Initial.source.can’t.deliver Both Contracts.for.potential.
capacity.reservation
Supplier.
pricing
Performance.issues,.contract.
changes,.breach.of.contract
Tactical Due.diligence,.phone-.fax,.
and.possible.visits
Time.delay Customs,.lack.of.
performance
Both Buffer.stock,.rescheduling.
final.delivery
Disruption Labor.issues,.natural.
disasters,.terror
Both Buffer.stock,.safety.stock,.
second.source.capacity
Import.delays Customs.paperwork,.port.
strikes,.labor.issues
Both Additional.freight.
forward.companies,.calls.
to.government.contacts
Supplier.
insolvency
Poor.management,.acts.of.
God,.force.majeure
Both Loans,.law.suites,.
litigation,.and.second.
sourcing
Fraud/.
corruption
Poor.government.oversight Both Fines,.penalties,.and.
operating.restrictions
Counterfeit.
material
Poor.government.oversight Both Fines,.penalties,.and.
operating.restrictions
Supplier.
delivery
Manufacturing.issues,.
quality.issues,.customer.
requirement.changes
Both Buffer.stock,.warehouse.
inventory,.second.source
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
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130 • Supply Chain Risk Management: An Emerging Discipline
One. reason. was. companies. found. that. there. were. many. organizations.
around. the. globe. that. could. do. certain. business. functions. better,. faster,.
and.cheaper..And.at.that.time,.as.the.Internet.was.exploding.on.the.sup-
ply.chain.scene,.there.was.renewed.interest.in.exploiting.the.World.Wide.
Web.to.collaborate.with.these.new.BPO.organizations.and.new.partners.
to.drive.overwhelming.top-.line.growth.
With.that.belief,a.new.industry.called.third-.party.logistics,.or.3PLs,.was.
born..A.quick.story.about.the.chemical.industry.in.2000.will.perhaps.pro-
vide.some.context.regarding.the.growth.of.3PLs..During.this.period.the.
chemical.industry.was.still.vertically.(i.e.,.functionally).aligned.in.terms.of.
supply.chain.management..There.were.several.reasons.that.many.organi-
zations.had.not.embraced.the.concept.of.supply.chain.management..First,.
many.organizations.had.very.good.profit.margins.and.did.not.see.the.need.
for. change.. Second,. the. “chemists”. were. still. running. chemical. compa-
nies.and.lacked.supply.chain.knowledge..And.third,.the.chemical.industry.
was.still.an.asset-.intensive.industry.that.believed.in.the.benefits.of.verti-
cal.integration.
During. this. time,. a. few. leading-.edge. chemical. organizations. began.
benchmarking.their.total.logistics.costs.associated.with.inbound.and.out-
bound.material.delivery.as.a.percent.of.total.sales..The.numbers.were.alarm-
ing.. On. average,. the. chemical. industry’s. transportation. costs. were. more.
than.10%.of.sales..As.the.industry.benchmarked.against.other.industries,.
it. came. to. the. conclusion. that. while. chemical. companies. were. good. at.
breaking.down.hydrocarbons,.these.companies.were.not.so.good.at.logis-
tics.. As. a. result. these. companies,. like. so. many. in. other. industries,. out-
sourced. their. logistics. to. companies. that. could. service. their. needs. at. a.
much.reduced.rate.
If.we.scan.Table 7.1.and.view.the.logistics.risks,.we’re.not.saying.the.BPO.
approach. has. totally. eliminated. logistics. risk.. However,. these. outsource.
providers. have. developed. many. tools. and. techniques. to. manage. risk. for.
their.customers..Many.of.the.traditional.remedies.are.still.being.leveraged.
but.by.a.new.industry.that.tends.to.have.much.more.experience.in.global.
trade.and.has.invested.in.more.advanced.tools.and.techniques.
Fraud, Corruption, and Counterfeiting Risks. The.European.Banking.
Board.has.developed.a.set.of.baseline.definitions.for.their.employees.and.
their.customers.to.follow..Fraudulent.practice.means.any.action.or.omis-
sion,. including. misrepresentation,. that. knowingly. or. recklessly. misleads.
or. attempts. to. mislead. a. party. to. obtain. a. financial. benefit. or. to. avoid.
an. obligation.. Corrupt. practice. means. the. offering,. giving,. receiving,. or.
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
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Operational Risk • 131
soliciting,.directly.or.indirectly,.of.anything.of.value.to.influence.improp-
erly.the.actions.of.another.party.1.Counterfeiting.occurs.when.something.
is.made.in.imitation.so.as.to.be.passed.off.fraudulently.or.deceptively.as.
genuine.2.This.portion.of.supplier.risk.is.far.too.large.to.dig.deeper.into.at.
this.time,.but.we.will.talk.at.length.about.fraud,.corruption,.and.counter-
feiting.in.Chapter 8.
demand Risk
Demand. management. has. always. been. a. difficult. discipline. by. defini-
tion..Part.of.this.is.due.to.the.tendency.of.forecasts.that.are.almost.always.
wrong.to.some.degree..Demand.management.and.forecasting.techniques.
and.solutions.have.been.available.to.the.supply.chain.profession.for.over.
80 years..There.are.hundreds.of.deterministic,.statistical.solution.provid-
ers.that.provide.companies.with.the.ability.to.scan.historical.sales.to.arrive.
at. a. forecast. using. techniques. such. as. least. squares,. time. series. analysis,.
and.regression.analysis..We’ll.talk.in.more.detail.about.these.techniques.
in.Chapter 10,.but.for.now.we’ll.segment.the.demand.risk.discussion.into.
customer.risk,.product.risk,.and.logistics.risk.
Customer Risk..As.shown.in.Table 7.2,.there.are.plenty.of.risks.on.the.
customer. side. of. the. equation.. The. demand. issue. tends. to. get. the. most.
focus.because.the.purpose.of.demand.estimation.is.to.project.what.a.cus-
tomer.will.buy,.when.they.will.buy.it,.and.how.many.they.will.buy..With.
complex.supply.chains.and.large.product.portfolios,.not.even.considering.
global.markets,.seasonal.products.and.other.extraneous.factors,.the.task.
is.somewhat.daunting.
Forecast.error.is.a.key.risk.in.demand.management.that.requires.atten-
tion.. The. reason. we. focus. on. this. risk,. is. that. it. runs. from. 10%. error. of.
forecast. versus. actual. at. the. aggregated. product. family. level. to. more.
than.40%.error.at.the.stock-.keeping.unit.or.item.level..(Forecasts.almost.
always.become.less.reliable.as.the.forecasts.become.more.granular.rather.
than.aggregated.)
The.traditional.remedy.to.mitigate.forecast.error.has.been.to.statistically.
calculate.safety.stock.and.develop.buffer.stocks.at.choke.points.through-
out. the. supply. chain.. The. supply. chain. profession. has. been. working. for.
more.than.50 years.to.mitigate.the.risk.of.attempting.to.project.what.their.
customers.will.buy.and.balancing.supply.to.ensure.superior.service.levels.
to.those.customers..And.industrial.customers.are.in.no.way.exempt.from.
providing. additional. risk. to. this. pillar. of. supply. chain. risk.. Customers.
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
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132 • Supply Chain Risk Management: An Emerging Discipline
taBle 7.2
Demand.Risks
Demand Risk Cause Horizons Traditional Remedies
Forecast.error Seasonal.issues,.lead.
times,.poor.information,.
inadequate.systems,.
poor.communications,.
inadequate.skills
Both Statistically.derived.safety.
stock,.buffer.stock.points,.
excess.inventory.
throughout.supply.chain
Time.delays Customer.changes,.
systems.issues,.product.
issues
Both Rescheduling,.price.
concessions
Outbound.
transit.times
Carrier.issues,.acts.of.
God,.customers’.issues
Both Carrier.discussions,.
customs.calls,.freight.
forwarding.follow-.ups
Customer.
pricing
Poor.communication,.
inadequate.contract.
verbiage,.poor.
performance
Operational Concessions,.Rescheduling.
deliveries
Customer.
promotions
Poor.communications,.
poor.execution.on.both.
sides
Operational Constant.conference.calls,.
rescheduling.
manufacturing.and.
deliveries,.stealing.product.
form.other.customers
Customer.
bankruptcy
Poor.execution,.fraud,.
corruption,.sell.out.by.
owner
Both Possible.loans,.possible.
merger.or.partnership
Product.
failure
Poor.quality.control,.
material.issues,.
incorrect.specifications
Both Rescheduling,.modifying.
the.specifications,.price.
concessions
Warranty.
issues
Poor.communications,.
poor.specification.
management,.recall.of.
product,.death.and.more
Both .suites,.litigation,.
government.involvement,.
fines.and.penalties
Customer.loss All.of.the.above.issues.
and.more
Both Sell.off.material.designated.
for.customer,.write.off.if.
specific.and.scan.for.new.
customers
New.product.
introduction
Poor.planning,.poor.
communication.
throughout.organization,.
poor.execution,.poor.
assumptions
Both Ad.hoc.meetings,.excessive.
overtime,.price.
modifications,.new.
promotions,.rescheduling.
of.manufacturing.plans
Fraud.and.
corruption
Poor.government.
oversight
Both Fines,.penalties,.and.
operating.restrictions
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
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Operational Risk • 133
have. a. nasty. habit. of. continually. arguing. about. changes. to. pricing. and.
delivery.dates.and.have.a.propensity.to.surprise.suppliers.with.unplanned.
or.poorly.communicated.product.promotions.of.the.supplier’s.products.at.
their.stores.
When.a.customer.surprises.a.supplier.with.a.promotion.of.the.supplier’s.
product,.the.resulting.demand.tends.to.be.at.least.three.to.four.times.the.
forecasted. level. of. sales,. something. that. wreaks. havoc. on. the. supplier’s.
supply.chain..The.typical.approach.to.respond.to.this.situation.is.to.reallo-
cate.product.within.the.supplier’s.bill.of.material.to.satisfy.the.promotion..
This. approach. tends. to. result. in. excessive. overtime. at. the. supplier,. total.
disruption.of.the.supplier’s.supply.chain–.planning.processes,.and.aggra-
vation.to.other.customers.when.their.delivery.promises.are.rescheduled..
And. finally,. if. this. risk. is. perpetuated,. or. becomes. chronic. at. a. supplier,.
the. outcome. tends. to. be. a. reduction. in. customer. relationships. and. ulti-
mately.a.loss.of.customers.
Product Risk..Poor.product.portfolio.management.is.another.important.
aspect. of. this. risk. pillar.. By. far. the. largest. risk. in. this. category. is. product.
failure. and. warranty. issues.. An. example. we. all. have. witnessed. over. the.
last. couple. of. years. is. Toyota’s. issues. with. braking. systems,. accelerators,.
and. massive. product. recalls.. Automobile. manufacturers. run. the. num-
bers. on. their. risks. associated. with. product. liability. and. warranty. prob-
ably. better. than. most. manufacturers.. Their. risk. appetite. is. usually. quite.
high. and. they. utilize. many. diverse. liability,. tort,. and. warranty. insurance.
packages. to. mitigate. those. risks.. However,. continued. product. recalls,.
regardless. of. the. industry,. can. lead. to. customer. loss,. fines,. penalties,. and.
potential.bankruptcy..Witness.what.has.happened.at.General.Motors.
One.of.the.most.difficult.elements.in.this.pillar.is.new.product.introduc-
tion.. Forecast. error. for. products. continually. produced. and. sold. to. cus-
tomers.can.become.as.large.as.40%.for.a.given.product..Forecast.error.and.
the.impact.on.the.company.of.poorly.launched.new.products.can.be.even.
more. dramatic.. We. mentioned. this. aspect. of. demand. management. and.
supply.chain.management.in.Chapter 4..Poor.assumptions.for.poor.plan-
ning.and.poor.communications.relative.to.new.product.launches.can.be.
devastating..An.example.is.the.growth.of.Apple’s.iPhone.and.Samsung’s.
Galaxy.products.at.the.expense.of.Blackberry’s.product.portfolio.
There. are. traditional. approaches. to. mitigate. product-.planning. risks.
including.collaborative.planning,.forecasting,.and.replenishment.(CPFR).
tools. that. provide. a. vehicle. for. demand. collaboration. between. suppliers.
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
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134 • Supply Chain Risk Management: An Emerging Discipline
and. customers.. CPFR. is. utilized. in. the. consumer. packaged. goods. and.
retail. industries.. The. sales. &. operational. planning. (S&OP). process. acts.
as.a.framework.to.assist.companies.in.their.efforts.to.balance.supply.with.
demand.to.minimize.surprises.and.maximize.profits.for.the.entire.enter-
prise..We.will.discuss.these.in.more.detail.in.Chapters.9.and.12.
Logistics Risk.. In. this. risk. pillar,. logistics. relates. to. outbound. mate-
rial.that.perhaps.goes.to.a.final.assembly/.package.partner,.a.distribution.
or.warehouse,.or.the.final.customer..Most.of.the.logistical.discussion.we.
engaged.in.within.our.supplier.risk.segment.applies.in.this.arena.as.well..
Most.manufacturers.do.not.maintain.their.own.truck,.barge,.rail,.or.ship.
fleet..As.mentioned.earlier,.thousands.of.3PL.companies.will.haul.freight.
better,. faster,. and. cheaper. than. most. manufacturers.. One. nuance. is. the.
approach. that. utilizing. 3PLs. to. deliver. finished. goods. to. customers. is. a.
form.of.risk.mitigation.due.to.better.performance,.or.if.contract.verbiage.
with.that.carrier.includes.sharing.or.pooling.of.the.risk.in.case.of.an.acci-
dent.. In. the. chemical. industry,. contracts. specify. not. only. what. we. call.
service.level.agreements.(SLAs).but.also.language.that.shares.the.liability.
risk.of.an.accident.with.both.parties..This.has.been.a.traditional.remedy.
to.improve.service.deliveries,.reduce.the.cost.of.transportation,.maximize.
profits,.and.minimize.risk.
process Risk
In.this.risk.pillar,.which.a.cursory.glance.at.Table 7.3.reveals.to.be.exten-
sive,.the.risks.are.inherently.positioned.within.an.organization..Another.
way.to.think.about.this.is.that.the.organization.has.better.control.of.these.
risks.because.they.occur.within.their.own.domain..The.frequency.of.occur-
rence.and.the.remedies.many.organizations.utilize.to.solve.these.issues.lie.
within.their.own.four.walls..Our.categories.for.this.risk.pillar.discussion.
will.be.known.or.hard.risks,.unknown.or.soft.risks,.and.chronic.risks.that.
can.arise.within.a.company’s.four.walls.
Known Risks..These.are.risks.that.are.measurable.and.can.be.planned.
for.. Known. risks,. also. called. hard. risks,. include. process. breakdowns,.
poor. material,. poor. quality. control,. criminal. activity,. poor. and. unreli-
able.systems,.and.failure.of.a.company’s.facilities.and.assets..Known.risks.
from.Table 7.3.could.include.manufacturing.yield,.capacity,.information.
delays,. systems,. receivables,. payables,. inventory,. and. planning.. Most. of.
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
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Operational Risk • 135
taBle 7.3
Process.Risks
Process Risk Cause Horizons Traditional Remedies
Manufacturing.
yield
Equipment.failure,.
material.issues,.human.
error
Operational Reschedule.run,.cut.into.
existing.capacity.plan
Capacity Equipment.failure,.poor.
performance,.poor.
communications,.poor.
planning
Both Reschedule.runs,.
reschedule.deliveries,.
possible.use.of.
contractors
Information.
delays
Poor.planning,.
inadequate.systems,.
outages
Both Backup.systems,.ad.hoc.
meetings,.extreme.
overtime
Time.delays All.of.the.above.and.
below
Both Ad.hoc.meetings.and.
excessive.overtime
Disruption Labor.issues,.systems,.
material,.inbound.
material,.natural.
disaster.or.act.of.God
Both Ad.hoc.meetings.and.
excessive.overtime
Systems Outages,.terror,.hackers,.
internal.errors
Both Backup.systems,.ad.hoc.
meetings,.vendor.
outreach.and.excessive.
overtime
Receivables Poor.execution,.poor.
contract.verbiage,.poor.
relationships,.customer.
financial.issues
Both Phone.calls,.e-mails,.faxes,.
visits.and.possible.
collection.agencies
Payables Cash.flow.issues.
in-.house,.cash.flow.
strategy,.poor.
relationships.with.
suppliers,.poor.supplier.
performance
Both Phone.calls,.e-.mails,.visits.
and.possible.contract.
renegotiations
Inventory Forecast.error,.product.
life.cycles,.poor.
planning.systems,.poor.
supply.chain.
management.execution
Both Excessive.safety.stock,.
write-.downs.and.
write-.offs
Intellectual.
property
Outsourcing,.contractors,.
partnerships,.and.
espionage.
Both Vertical.integration,.
contract.verbiage,.fines.
and.penalties
continued
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1680353.
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136 • Supply Chain Risk Management: An Emerging Discipline
these. risks. are. known,. albeit. not. particularly. popular,. because. they. are.
indicative. of. a. management. style. and. attitude. or. a. lack. of. investment.
of.time.and.resources..Many.of.the.risk.remedies.are.reactive.and.many.of.
the.risks,.without.proper.attention.can.become.chronic,.which.we’ll.dis-
cuss.shortly.
The.critical.issue.with.known.risks.is.that.without.addressing.them.with.
permanent.solutions,.an.organization.tends.to.be.plagued.with.these.risks.
daily.to.the.point.where.they.lose.visibility,.confidence,.and.commitment,.
leading.to.a.potential.major.internal.disruption..This.breakdown.within.a.
company’s.processes.can.be.as.impactful.as.a.catastrophic.event.emanat-
ing.externally.
Unknown Risks.. These. risks. are. difficult. to. determine. and. are. some-
times. called. soft. risks.. Examples. of. soft. risks. might. be. a. radically. new.
product.or.technology.that.renders.a.company’s.existing.approach.to.the.
taBle 7.3 (continued)
Process.Risks
Process Risk Cause Horizons Traditional Remedies
Human/.
process.error
Operator.issues,.fraud,.
corruption,.systems.
breach
Both Process.revalidation,.
employee.reeducation,.
law.suites/.or.discharge
Planning Inadequate.systems,.
inadequate.training,.
poor.supervision,.poor.
management.style
Both Systems.upgrades,.
reeducation,.additional.
collaboration,.and.
metrics.of.success
Product.failure Poor.material,.poor.
quality.control,.poor.
communication,.poor.
management.oversight
Both Enhance.communications,.
customer.visits,.supplier.
visits,.contract.
renegotiations
Equipment.
failure
Poor.maintenance.
schedules,.operator.
error,.material.issues,.
component.failure
Both Perform.assessment,.
revalidation.of.alternative.
equipment/.routings,.
vendor.visits.in-.house
Organizational.
management
Poor.performance,.poor.
communication,.
inadequate.
measurements,.fraud
Both Ad.hoc.meetings,.
assessment.of.skill.sets.
and.possibly.
enhancement.of.roles,.
goals.and.measurements
Strategy Poor.planning,.poor.
execution,.poor.
communication,.
competition
Both Same.as.above.with.
possible.change.in.
strategy
Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014.
ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1680353.
Created from apus on 2021-06-09 03:57:47.
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Operational Risk • 137
market.obsolete..Unknown.risks.could.also.be.a.fire.that.destroys.a.plant,.
an.attack.on.a.plant,.a.weather.event,.and.from.Table 7.3,.areas.such.as.time.
delays.or.any.unforeseen.disruption..An.effective.way.to.respond.to.these.
risks.is.to.develop.and.practice.response.scenarios,.what.we.call.business.
continuity. planning. (BCP).. The. disconcerting. aspect. of. soft. risks. is. that.
most.companies.do.not.develop.or.practice.scenario.response.plans.or.risk.
response.plans..In.fact,.as.you.scan.down.the.traditional.remedies.column.
for.the.soft.risks.in.Table 7.3,.you.will.notice.that.almost.all.are.reactive.
rather.than.proactive.
Chronic Risks..The.primary.characteristic.of.chronic.risks.is.that.when.
these.occur.they.tend.to.cause.only.minor.internal.disruptions..They.may.
occur.continually.and.because.of.the.nature.of.their.low.impact,.organiza-
tions.tend.to.absorb.the.risk.and.develop.work-.arounds..The.disruptions.
could.be.persistent.and.the.root.causes.may.not.be.obvious.and.therefore.
become. tolerated. over. time.. Some. of. the. risks. from. Table 7.3. that. could.
fall.into.this.category.include.manufacturing.yield,.capacity.issues,.time.
delays,.human.errors,.and.equipment.failure.
environment/ ecosystems Risk
The.fourth.risk.pillar.is.probably.the.most.immature.pillar.since.there.are.
so.many.new.government.rules.and.regulations,.weather.events,.and.fraud.
and. corruption. possibilities. emerging. around. the. globe.. Furthermore,.
most. organizations. are. operating. global. supply. chains. in. areas. where.
they’ve.never.operated.before..This.is.all.in.an.effort.to.grow.top-.line.reve-
nues.and.penetrate.new.markets..Globalization.strategies.bring.additional.
risk,.which.Table 7.4.profiles.
Known …
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