Managing Risk in Your Organization with the SCOR

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Managing Risk in Your Organization with the
SCOR Methodology

• Dave Morrow, Taylor Wilkerson
• Melinda Davey
• On Behalf of
• Supply Chain Risk Management Team, Supply Chain
  Council, Inc.
• February 20, 2009

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Abstract

• SCC members have reported that less than half of
  enterprises have established metrics and
  procedures for assessing and managing supply
  risks and organizations lack sufficient market
  intelligence, process, and information systems to
  effectively predict and mitigate supply chain
  risks. 
• From this need arose the Risk Management Project
  Team approved by the SCC to enhance the SCOR
  model. The objective is to help organizations
  avoid/minimize costs, mitigate supply chain
  disruptions by managing risk proactively and
  thus, offering a competitive edge. 
• The session presents the outcome of a global
  multi-industry team that has worked passionately
  to integrate risk management into the SCOR model.

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Global Risk Project Team
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Supply-Chain Council

• The SCC is an independent, not-for-profit, global
  corporation with membership open to all companies
  and organizations interested in applying and
  advancing state-of-the-art supply chain
  management systems and practices.
• Founded in 1996
• Over 800 Company Members
• Cross-industry representation
• Chapters in Australia/New Zealand, Brazil,
  Europe, Japan, North America, South East Asia,
  South Africa and China with petitions for
  additional chapters pending.
• The Supply-Chain Council (SCC) has developed and
  endorsed the Supply Chain Operations Reference
  model (SCOR) as the cross-industry standard for
  supply chain management.

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Supply-Chain
Supplier processes
Customer processes
Product Management
Product Design DCOR
Sales SupportCCOR
Supply Chain SCOR
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The SCOR Framework
SCOR defines supply chain as the integrated
processes of Plan, Source, Make, Deliver and
Return, spanning your suppliers supplier to your
customers customer, aligned with Operational
Strategy, Material, Work Information Flows.
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SCOR Hierarchy
Level 1 Level 2 Level 3 Level 4 Level 5
Scope Configuration Activity Workflow Transactions

Differentiates Business Differentiates Complexity Names Tasks Sequences Steps Links Transactions
Defines Scope Differentiates Capabilities Links, Metrics, Tasks and Practices Job Details Details of Automation
Framework Language Framework Language Framework Language Industry or Company Specific Language Technology Specific Language
EDI
S1Source Stocked Product
Supply-Chain Source
S1.2Receive Product
XML
Standard SCOR definitions
Company/Industry definitions
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Maps to Organizations
Level 1 Level 2 Level 3 Level 4 Level 5
Scope Configuration Activity Workflow Transactions

CxOEvP, SVP SVPVP VP, DirectorLine Manager ManagerTeam Lead Team LeadIndividuals
Strategic Decision-Making Line of BusinessManagement Activities Management Job Management TransactionManagement
EnterpriseSupply-ChainRequirements OperationsStrategy Fine-TuningOperations AdjustingProcess Performance TuningTechnologyPerformance
EDI
S1Source Stocked Product
Supply-Chain Source
S1.2Receive Product
XML
Standard SCOR program
Company/Industry implementation
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The SCOR Model and Risk

• What is Supply Chain Risk Management?

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What is Risk Management?
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Risk Defined

• The International Organization for
  Standardization (ISO, 2002) defines two of the
  essential components of risk
• 1. losses (along with related amounts) and
• 2. uncertainty of their occurrence.
• In the financial industry, operational risk is
  defined as the risk of loss resulting from
  inadequate or failed internal processes, people
  and systems or from external events (New Basel
  Capital Accord, 2006).

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Risk Supply Chain
Risk in general can be defined as a collection of
pairs of likelihood (L) and outcomes / impact (O)
of events. The combination of all the
(likelihood outcome) pairs is called a risk
profile. Definitions of risk must also have a
time dimension or a specific time horizon (day,
month, year, etc.) and a specific perspective or
view that defines the scope (boundaries, whats
not included, etc.).
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Supply Chain Risk Perspectives
Relationship Risk Supplier Performance Risk Human
Resource Risk Supply chain disruption risk
Supplier Environment Risk Market Dynamics
Risk Disaster Risk Political / Country
Risk Supplier Financial Risk Regulatory Risk
Financial Risk Distribution Risk Relationship
Risk Market Risk Brand / Reputation Risk Product
Liability Risk Environmental Risk Political/
Country Risk
Operational Risk Technical Risk Financial
Risk Legal / Regulatory Risk Environmental
Risk HR / Health and Safety Risk Political/
Country Risk
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Supply Chain Risk Management Defined
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The SCOR Model and Risk

• Why is Supply Chain Risk Management Important?

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Supply Chain disruptions are a reality

• Mattel had massive recall due to lead content in
  paint.
• United States experienced significant disruptions
  from Long Beach longshoreman strike.
• United States experienced significant disruptions
  when borders and air transportation shut down
  after 9/11.
• Fuel distribution in the United Stated was
  disrupted after hurricane Katrina damaged
  pipelines.
• Nokia production shut down due to supplier plant
  fire.
• Kobe earthquake resulted in computer memory
  shortage, impacting multiple companies
• UPS strike severely impacted ability to ship
  small packages in the U.S.
• Others

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Large Reputation Impacts
Source The View of the Supply Chain From Wall
Street J. Stuart Francis - Lehman Brothers,
February 2003
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Mattel Toys to Be Pulled Amid Lead Fears
18.5 Decline
On a 10 Bil Market Cap Or 1.9 Bil loss
Verbal Report To CPSC
"We heard in early July that we had a possible
issue," said Mr. Walter, who added the company
stopped production in the Chinese factory around
July 7. After further investigation, Mattel
approached the Consumer Product Safety Commission
with a verbal report July 20. A written report
was filed July 26. The product is being recalled
under the "fast-track" recall program whereby
Mattel has admitted to the contamination and the
CPSC hasn't done additional testing.
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Supply Disruption Profiles
Detection and response
Recovery - minimized
Sustaining Impact 0
Initial Impact
Full Impact Avoided!
Sustaining Impact gt0
Initial Impact
Detection and Response
Preparation
Full Impact
Preparation
Performance
Recovery
Disruption Event
Time
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Strategies Risk Tolerance

• Strategies that focus on customer service (e.g.,
  reliable delivery) or where the cost of late or
  lost deliveries are high will have low tolerance
  for risk.
• Strategies that focus on cost reduction or where
  the cost of late deliveries is low will have a
  higher tolerance for risk.
• Ultimately, the tolerance for risk will determine
  how much the enterprise will invest in mitigation
  measures vs. reactive efforts.

What is the business impact of a broken supply
chain? How much are you willing to risk?
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The SCOR Model and Risk

• How does Supply Chain Risk Management fit in the
  SCOR Model?

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SCOR model as the foundation of SCRM

• Supply chain risk management (SCRM) is a means
  for ensuring uninterrupted customer service.
• The SCOR Model is a framework for modeling and
  managing supply chain processes, practices and
  performance.
• SCOR 9.0 will include Risk Management processes,
  practices, and performance indicators.
• Using SCOR as a Risk Management foundation will
  provide a better SCRM program.
• Faster implementation
• More comprehensive identification of potential
  risks
• Better application of SCRM best practices
• Better SCRM coordination with customers,
  suppliers, and stakeholders.

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Where does SCRM fit within SCOR?
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SCOR Enable Processes
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Risk Management utilizing the SCOR model
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Typical Enabler High Level Flow
Overall Supply Chain Risk Plan/Results
Overall Business Risk Management Program (Rules,
strategies, tools, etc. (Bus Strategy)
EP.9 Manage Supply Chain Plan Risk
EP
Suppliers
Internal
Rules Resources
Plan / Results
ES.9 Manage Supply Chain Source Risk
Customer Product
ES
Customer Supplier
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SCRM Best Practices
10 Best Practices under the following categories

• RM Programs Coordination with Partners
• Sourcing Risk Mitigation Strategies
• Crisis Communication Planning

• Supply Chain Risk Identification
• Supply Chain Risk Monitoring
• Supply Chain Risk Assessment

• Configure to Reduce Risk
• Supply Chain Business Rules
• Supply Chain Information
• Supply Chain Network

• Supply Chain Risk Management

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Best Practices - Formal Risk Management
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Best Practices - Visibility Quantification of
Risk
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Best Practices - Coordinated Risk Management
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Best Practices - Supply Chain Designed for Risk
Several things can be configured to reduce risk
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Risk Management Implementation using the SCOR
Model five phase approach.
Phase Name Deliverable Resolves
Initial BUILD Organizational Support Risk Management Program Who is the sponsor?
I DISCOVER Supply-Chain Definition Supply-Chain Risk Priorities Project Charter/Risk Program definition What will the program cover?
II ANALYZE Scorecard Benchmark Competitive Requirements Customer service requirements What is the risk tolerance of your supply chain?
III ASSESS Geo Map Thread Diagram Risk assessment Initial Analysis where and how big are the risks?
IV MITIGATE Mitigation plans Level 3, Level 4 Processes Best Practices Analysis Final Analysis how will risk be eliminated or mitigated?
V IMPLEMENT Opportunity Analysis Mitigation Definition Deployment Organization Monitoring and response programs How to deploy mitigations?
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Value-At-Risk Metric
Source www.riskglossary.com
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Risk Measures Hierarchy
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Value-at-Risk (VaR)
Quantifies the value of potential disruptions in
terms of both Probability (likelihood) and
impact on the supply chain.
P1
Value at Risk (VAR) (P1 x I1) (P2 x I2) P
percentage of total negative events I impact of
event
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Which supplier (AA or NW) has the highest risk
(likelihood of being late)?
Ave Late by Airline
Risk Event Late Arrival
NW
AA
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VaR - Illustration
VaR Table
AA    
Min Percent VaR
5 10.00 0.50
10 7.70 0.77
15 5.40 0.81
20 3.80 0.76
25 3.30 0.83
30 2.40 0.72
35 2.10 0.74
40 1.90 0.76
45 1.60 0.72
195 0.10 0.20
200 0.10 0.20
205 0.10 0.21
210 0.10 0.21
215 0.10 0.22
220 0.10 0.22
225 0.10 0.23
250 0.10 0.25
275 0.10 0.28
VaR   19.60
Assume 1 Min Late 1 USD
Value at Risk for AA
Value at Risk for NW
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AA and NW Comparison
Which supplier (AA or NW) has the most impact to
the business?
Which supplier (AA or NW) has the most risk?
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Case Study Bio World
Test Meter
Care Kit
Strips
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Case Study
Risk Identification
ID Process Area Risk Identification Risk Identification
ID Process Area Event Description
1 Source Plastic Strip supplier shut down by labor strike The main plastic strip supplier has been in talks with their worker's union. The talks have broken down and the union has gone on strike, shutting down all operations and shipments for 30 days
2 Plan out of stock incidents with the distributors The actual sales and distribution of kits is 50 higher than the forecast for the north eastern US. Distributors are out of stock leading to lost orders and emergency shipments from other regions. The Bio World plant is on over time and it will take 30 days to catch up.
3 Make Packing Equipment Failure Product cannot be packaged automatically. Increase labor costs due to additional overtime to package the products manually.
4 Deliver Increased delivery costs due to high price of fuel Higher delivery costs from Bio World to distributor resulting in higher costs per unit. Loss of competitive advantage as the low cost diabetes meter/strips.
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Risk Assessment
ID Process Area Risk Identification Risk Assessment Risk Assessment Risk Assessment Risk Zone (H,M,L)
ID Process Area Event Annual Probability () Impact VaR Risk Zone (H,M,L)
1 Source Plastic Strip supplier shut down by labor strike 10.0 5,000 500 H
2 Plan out of stock incidents with the distributors 25.0 1,000 250 M
3 Make Packing Equipment Failure 25.0 300 75 L
4 Deliver Increased delivery costs due to high price of fuel 65.5 400 262 M
Total Risk Magnitude (VAR) Total Risk Magnitude (VAR) Total Risk Magnitude (VAR) Total Risk Magnitude (VAR) Total Risk Magnitude (VAR) Total Risk Magnitude (VAR) 1087
Note All costs are in 000
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Risk Mitigation
ID Risk Mitigation Strategy Implement Cost New Prob (L) New Impact (I) New VARL I Original VAR ROI
1 Plastic Strip supplier shut down by labor strike Identify suppliers that are unionized and assess their relationship with their union. Need to certify back-up supplier and pay them an annual fee for stand by production capability. 50 10.0 1500 150 500 300
2 out of stock incidents with the distributors Maintain a central inventory at the Bio World plant equal to 2 weeks of 50 of demand for a region. Include the distributors in SOP meetings. 100 5.0 500 25 250 125
3 Packing Equipment Failure Follow a schedule of equipment retirement replacement with new equipment. 20 15.0 10 1.5 75 53.5
4 Increased delivery costs due to high price of fuel Purchase oil futures to hedge against an increase in fuel costs. 10 100 1 1 262 251
Total Mitigation Costs Total Mitigation Costs Total Mitigation Costs 180 178 1087 730
Note All costs are in 000
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Risk Mitigation Action Plan
ID Mitigation Action Person Responsible Status Due Date Risk(s) Addressed
1 Identify suppliers that are unionized and assess their relationship with their union. Need to certify back-up supplier and pay them an annual fee for stand by production capability. Supplier Liaison Manager Suppliers identified. Annual fee to be negotiated. End of Q208 Plastic Strip supplier shut down by labor strike
2 Maintain a central inventory at the Bio World plant equal to 2 weeks of 50 of demand for a region. Include the distributors in SOP meetings. Demand Planner New inventory level defined for the product. Done out of stock incidents with the distributors
3 Frequent maintenance of equipment. Follow a schedule of equipment retirement replacement with new equipment. Floor Manager In Progress Immediately Packaging equipment failure
4 Purchase oil futures to hedge against an increase in fuel costs. TBD Risk Management Team working with Finance Dept to obtain person responsible for mitigation action End of Q308 Increased delivery costs dues to high price of fuel
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SCOR model as the foundation of SCRM

• Supply chain risk management (SCRM) is IMPORTANT
• The SCOR Model is a framework for modeling and
  managing supply chain processes, practices and
  performance.
• Using SCOR as a Risk Management foundation will
  provide a better SCRM program.
• SCRM provides ROI, competitive advantage and
  improvement opportunities.

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The SCOR Model and Risk

• When where can I start to
• Manage Supply Chain Risk in Our Organization
  with the SCOR Methodology?

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SCRM with the SCOR Methodology - Resources

• Access to the SCOR model version 9.0
• SCC members can access the full model online
  which contains the recent additions for supply
  chain risk management processes, best practices,
  metrics
• Risk Project Phase 2
• Volunteer for the next phase of the Risk Project
  involving
• Risk in DCOR
• Research
• Additional enhancements to SCOR DCOR
• SCRM using SCOR training
• Next class offered on March 19, 2009 in Houston,
  Texas, USA)

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One Day SCOR SCRM Workshop

• Supply Chain Risk Management (SCRM) Fundamentals
• Introduction to each SCRM component and how each
  can support the firm's supply chain management
• Discussion of SCRM process and all components
• Presentation of several example projects and
  discussion of component use for each specific
  project
• The SCOR Model and Risk management
• Background, components, strategies and
  implementation
• Participants who complete this works will be able
  to
• Understand the purpose and goals of SCRM within
  the context of their firm and supply network
• Develop a basic SCRM strategy and plan for their
  organization
• Understand and articulate the business value of a
  SCRM program
• Prerequisite - Attendees must be conversant in
  the basic SCOR model in order to attend this
  workshop. The SCOR Framework training includes
  the required basics

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• Q A