Supply Chain Frontiers issue #60
Companies today attach much importance to risk management. Traditionally, they use a qualitative approach to assessing risks and assigning a low, medium, or high probably to the severity and likelihood of each threat. But this method is subjective because it is based on the opinions of the experts who rate the risk levels. The Center for Latin-American Logistics Innovation (CLI), based in Bogotá, Colombia, is developing a quantitative risk assessment methodology for deciding which risks represent the most serious threat to a company’s operations.
The methodology is based on the use of discrete event simulations as a tool to represent both the logistic processes of a supply chain and the consequences of the risks. To do this, the model determines the probability of each risk based on past occurrences and identifies the activities that enable a company to recover from the disruption. Based on this information, the model determines the impact of each disruption by comparing certain performance metrics such as cost or service level in two scenarios: when the risk occurs and when it does not occur.
Discrete event simulation software is used to represent a company’s supply chain. The physical flow of products such as raw materials, components, and finished goods is simulated. Disruptions interrupt these flows and add cost. For example, a supplier might have to make good on an order that was incomplete owing to a disruption.
The methodology was tested with two Colombian companies: a manufacturer of home appliances and an apparel manufacturer. The home appliances company has more than 3,000 employees and sells its products in various countries in the Americas. It uses raw materials in five main categories: steel, plastics, glass, compressors and gases that are sourced in several countries. The apparel manufacturer owns more than 50 stores in Colombia and represents a number of international brands. The fabrics it sources from a number of countries are checked for quality, cut, and sent to about 200 small garment makers. Finished garments are shipped from the small manufacturers to a distribution center, and from there are transported by road to direct sales outlets in Colombia, Ecuador, and Peru.
Nineteen high-priority risks that have the potential to disrupt deliveries from suppliers were identified for both companies. After evaluating the costs and delays involved, the risks were sorted according to the magnitude of the outcomes. The top five risks for each company are shown in Table 1.
Manufacturer of home appliancesTextile manufacturer
Quality issues in raw materialsChanges in design after the production process has started
Change in the definition of purchasing needs after the orders have been placedQuality Issues in raw materials
Errors in deliveries from suppliers (incorrect product quantities, colors, variety, etc.)Noncompliance of delivery date by raw materials providers
Quality issues in finished goodsShortages of raw materials at providers
Purchases not made on timeErrors in deliveries from suppliers (incorrect product quantities, colors, variety, etc.)
Table 1: Top five risks
CLI recommended a number of solutions such as searching for nearby alternative or back-up suppliers, more rigorous supplier assessments and monitoring, and requiring suppliers to certify deliveries (providers review their processes to make sure they are complying with buyers’ delivery requirements). Other possible measures are to revise order quantities as necessary, and implement quality control measures at supplier´s facilities.
The methodology allows companies to identify the most relevant risks to their supply chains, and to define mitigation strategies or contingency plans that help them avoid unexpected disruptions and recover rapidly when crises occur.
Also, the project highlights the importance of recording incidents that occur throughout the supply chain, in order to make more accurate estimations of the probability that such events will take place in the future. CLI encouraged the companies to carry out annual risk reviews to assess new threats and re-evaluate existing ones.
Camilo Soto, CLI Researcher, wrote this article. For more information, contact the Head of Public Affairs and Content at LOGYCA, lcuellar@logyca.com