traditional hazard risks

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.Business.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 Law.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.
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  •  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.
Created from apus on 2021-06-09 03:57:47.

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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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