Andrew M. Amalfitano

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"Impact of Risk Enablers and Realization on Supply Chain Disruptions"

Andy Amalfitano MSBC Seminar #4 Risk Management Week 9, Essay 8

Aug. 7, 2010

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Thesis Supply chain disruptions can dramatically and permanently affect the success of a

business. A shipment fails to arrive on time or is damaged enroute due to violent storms

suffered by the transport barge; political unrest in developing nations changes the

import/export policies; increasing piracy threatens to severely limit the source of parts

and supplies being delivered to your overseas factories. More recently, the eruption of

the Eyjafjallajokull volcano in Iceland demonstrated how vulnerable some industries are

to air transport disruptions.

“Nearly three-quarters of risk managers say their companies' supply

chain risk levels have increased since 2005,” according to Marsh's

survey of 110 corporate risk managers in January and February.[1]

Supply chain insurance demand grows each year, yet the types of insurance coverage

rarely account for more than physical damage. That's changing and businesses need to

reevaluate their supply chain insurance coverage.

This paper describes the financial challenges faced by a companies with global supply

chains and some suggested actions to realize and mitigate risks using among other

strategies understanding of options including joining the C-TPAT program.[2]

The Unexpected: We May Not be Ready?

Singhal and Hendricks in a study of 800 companies who incurred a supply chain

disruption between 1989 and 2000 found that 33-40 percent experienced lower stock

returns, share price volatility increased 13.5 percent, profits plummeted 7 percent, costs

rose 11 percent and inventories increased 14 percent.[3]

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Companies can hedge their investments by diversification which brings some comfort

level to the executives and shareholders. However, very little can prepare a company for

unforeseen and unexpected supply chain disruptions.

The conflation or confluence of disruptions can further exacerbate the impact and

significantly damage customer satisfaction. Conflation describes the sequential

occurrence of risk events that disrupt the enterprise. For example, a first event (major

earthquake) partially disables and weakens the supply chain; a second event (dock

workers' strike) cripples the supply chain causing significant delays. Confluence

describes the simultaneous occurrence of risk events that overwhelm the enterprise. In

the previous example, both events occur at the same time resulting in completely

undeliverable shipments.[4]

Insurance typically only covers physical losses due to transit or other damage incurred

from natural hazards. Conflation and confluence situations don't usually produce

physical damage and therefore a company does not have risk mitigation in the form of

financial reimbursement. In most cases, the risks caused by natural hazards, political

unrest and other modern day threats is not covered by insurance. Some companies are

now holding their subordinate supply chain and vendors accountable for implementing

their own risk management plans.[5]

Even if the company does have a way to cover financial losses, the impact on customer

satisfaction will be dramatic. Understanding and realizing options for risk mitigation can

have a profound effect on the how companies recover from such disruptions.

Intangible Risk

Another key issue is that beyond the physical and tangible risks are many more (and

worse) intangible risks. Members of the supply chain including employees may hold

attitudes and perceptions that undermine the process and inadvertently pose a risk.

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The intangible lack of confidence in a supply chain leads to actions and interventions by

supply chain members, which could increase the risk exposure. The bottom line is that

the company experiences a higher level of uncertainty with lower confidence. Typical

issues are no confidence in:

Order cycle time

Order current status

Demand forecasts given

Suppliers’ capability to deliver

Manufacturing capacity

Quality of the products

Services delivered[6]

This lack of confidence can compound the external risks described earlier and lead to

conflation and confluence. It's what Husdal (2009) calls a risk spiral which can lead to

increased reliance on inventory buffers which may not hold up under protracted supply

chain disruptions.[7]

Realize the Risk and Take Action

Two aspects of executive action may be simply the right and the wrong action. The

former leading to positive consequences and latter leading to negative consequences. In

either case, an altered state or risk is the result. To avoid the negative consequences a

great deal of critical thinking needs to take place which challenges the current risk

management plan and attempts to envision "Unexpected, Unanticipated, Unintended

Consequences." [8]

C-TPAT - Customs-Trade Partnership Against Terrorism

Of the top 10 potential benefits companies considered for joining C-TPAT, reduction in

insurance rates was only 10th with less than 4 percent indicating that as a motivator.[9]

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Two key motivators for joining C-TPAT included:

reducing the time and cost of getting cargo released by Customs

reduced time and cost in CBP secondary cargo inspection lines.[10]

The results seem beneficial as described by those companies responding to the survey:

"The vast majority (81.3%) of businesses that had a formal system in place for

assessing and managing supply risk agreed or somewhat agreed that their

businesses’ ability to assess and manage supply risk has been strengthened as a

result of joining C-TPAT.

Three quarters (75.2%) of businesses that had formal supply continuity and

contingency plans.[11]

Other actions suggested by C-TPAT guidelines include how to manage the supply chain

risk process in a way that ensures not only that the guidelines are met, but that

immediate control steps are enabled that help to provide better security.

1. Mapping Cargo Flow and Identifying Business Partners (directly or

indirectly contracted)

2. Conducting a Threat Assessment focusing on: Terrorism, Contraband

Smuggling, Human Smuggling, Organized Crime, and conditions in a

country/region which may foster such threats and rate threat –

High, Medium, Low

3. Conducting a Vulnerability Assessment in accordance with C-TPAT

Minimum Security Criteria and rate vulnerability – High, Medium,

Low

4. Preparing an Action Plan

5. Documenting How Risk Assessments are Conducted" [12]

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Contingency Planning

Contingency planning is a strategic risk management tool. It allows for flexibility to use a

generic set of plans to respond to unknown and unexpected events which pose a risk to

the business. Success in managing unexpected events requires flexibility. These four

contingency planning elements were found to be positively related to flexibility in

managing risk in the supply chain:

1. "Top management support

2. Resource alignment

3. Level of IT usage

4. Inter-organizational collaboration" [13]

Consideration of contingencies is still a worthwhile action for executives to include

among their strategic mitigation choices.

Conclusion

Studies show that major disruptions to supply chains can dramatically impact the long-

term survivability of businesses. Insurance plans typically cover physical damage and not

the wide variety of modern world disruptive events like volcano eruptions, earthquakes,

high-seas piracy, political unrest, and other unexpected events.

Some companies have found value in joining C-TPAT to help ensure more security in

their supply chain. Others realize that intangibles like the amount of confidence in

supply chain capability can help strengthen or erode management of risks.

Enterprise strategies should include multiple approaches and implement a process that

addresses risk in a way that is flexible and can more aptly handle unexpected

disruptions.

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Citations [1] Byrt, Frank, (2008). "The Endless Quest for Indestructible Supply Chain". Financial Week.com, Aug

2010. Retrieved 8-5-10: http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080505/REG/628194365/1003/TOC

[2] Department of Homeland Security, (2010). "C-TPAT: Customs-Trade Partnership Against Terrorism".

Retrieved 8-4-10: http://www.cbp.gov/xp/cgov/trade/cargo_security/ctpat/ [3] Bosman, Ruud, (2006). "The New Supply Chain Challenge: Risk Management in a Global Economy".

Factory Mutual Insurance Company. Retrieve 8-5-10: http://www.fmglobal.com/pdfs/ChainSupply.pdf

[4] Sikich, Geary. (2008). "The World of Risks and Opportunities". Norwich University MSBC Seminar 4

Lecture Week 8, 2010

[5] Byrt, Ibid [6] Husdal, Jan, (2009). "Supply Chain Confidence". Husdal.com. Retrieved 8-5-10:

http://www.husdal.com/2009/12/07/supply-chain-confidence/ [7] Husdal, Jan, (2010). "Contingent Flexibility". Husdal.com. Retrieved 8-5-10:

http://www.husdal.com/2010/03/08/contingent-flexibility/ [8] Sikich, Ibid

[9] Diop, Abdoulaye; Hartman, David, and Resrode, Deborah, (2007). "Customs-Trade Partnership Against

Terrorism: Cost/Benefit Survey". Retrieved 8-5-10: http://www.cbp.gov/linkhandler/cgov/trade/cargo_security/ctpat/what_ctpat/ctpat_cost_survey.ctt/ctpat_cost_surve.pdf pg 35

[10] Ibid. [11] Diop, Ibid, 4 [12] Department of Homeland Security, (2010). "C-TPAT: 5 Step Risk Assessment Process Program Guide".

Retrieved 8-4-10: http://www.cbp.gov/linkhandler/cgov/trade/cargo_security/ctpat/supply_chain/ctpat_assessment.ctt/ctpat_assessment.pdf

[13] Husdal, Jan, (2010). "Contingent Flexibility". Ibid Bibliography Continuity Insights, (2010). "Demand for supply chain insurance grows as a result of the volcanic ash crisis:

Marsh".. Retrieved 8-5-10: http://www.continuitycentral.com/news05155.html Husal, Jan, (2010). "Risk Disablers". Husdal.com. Retrieved 8-5-10:

http://www.husdal.com/2010/03/03/risk-disablers/