Supply Chain Management (SCM) 101: Global Supply Chain - Risk in Global, SCM Geopolitical, Currency, Force Majeure, Piracy, Counterfeits

What This Is

Risk in Global Supply Chain Management (SCM) refers to the potential threats and uncertainties that can impact the flow of goods, services, and information across international borders. These risks can arise from various sources, including geopolitical events, currency fluctuations, force majeure, piracy, and counterfeits. For instance, consider Amazon's supply chain disruption due to the 2020 US-China trade war, which led to increased lead times and costs for the e-commerce giant.

Key Frameworks & Formulas

• Geopolitical Risk: The likelihood of a country's political instability affecting a company's operations or supply chain.
• Currency Risk: The potential loss due to fluctuations in exchange rates between two currencies.
• Force Majeure: An unforeseen event that prevents a party from fulfilling their contractual obligations, such as natural disasters or wars.
• Piracy Risk: The threat of cargo theft or hijacking during transportation.
• Counterfeit Risk: The likelihood of receiving fake or inferior products from suppliers.
• Supply Chain Vulnerability Index (SCVI): A framework to assess the risk of supply chain disruptions.
• Fisher's Model: A framework to categorize supply chain risks into three types: demand, supply, and external risks.
• SCOR (Supply Chain Operations Reference) Model: A framework to evaluate supply chain performance and identify areas for improvement.
• Safety Stock = Z ×-× ?L: A formula to calculate the optimal safety stock level based on service level, standard deviation, and lead time.
• EOQ (Economic Order Quantity) = ?(2DS/H): A formula to determine the optimal order quantity based on demand, ordering cost, and holding cost.

Step-by-Step Application

1. Conduct a Risk Assessment: Identify potential risks in the supply chain using frameworks like SCVI or Fisher's Model.
2. Develop a Risk Mitigation Strategy: Based on the risk assessment, develop a plan to mitigate or manage the risks, such as diversifying suppliers or implementing inventory management systems.
3. Monitor and Review: Regularly monitor and review the supply chain for potential risks and adjust the mitigation strategy as needed.
4. Communicate with Stakeholders: Keep stakeholders informed about potential risks and the mitigation strategies in place.
5. Review and Update: Regularly review and update the risk assessment and mitigation strategy to ensure it remains effective.

Common Mistakes

• Mistake: Failing to conduct a thorough risk assessment.
  • Correction: Conduct a comprehensive risk assessment using frameworks like SCVI or Fisher's Model to identify potential risks.
• Mistake: Not developing a risk mitigation strategy.
  • Correction: Develop a plan to mitigate or manage the risks identified in the risk assessment.
• Mistake: Not regularly monitoring and reviewing the supply chain.
  • Correction: Regularly monitor and review the supply chain for potential risks and adjust the mitigation strategy as needed.

Exam / Certification Tips

• Common question pattern: Case studies or scenarios that require the application of risk management frameworks and strategies.
• Tricky distinction: Between risk and uncertainty, where risk is a known probability of an event occurring, and uncertainty is a lack of knowledge about the probability of an event occurring.
• Incoterms responsibility: Understanding which Incoterm puts risk on the buyer at origin (e.g., FOB, FCA) or the seller at destination (e.g., CIF, CPT).

Quick Practice Problem

Scenario: A company imports electronics from China, and the lead time is 30 days. The standard deviation of demand is 10 units, and the service level is 95%. What is the reorder point?

Answer: Reorder point = Lead time × Average demand + Safety stock = 30 × 50 + 15 = 1575 units

Explanation: The reorder point is calculated by multiplying the lead time by the average demand and adding the safety stock.

Last-Minute Cram Sheet

• Geopolitical risk: The likelihood of a country's political instability affecting a company's operations or supply chain.
• Currency risk: The potential loss due to fluctuations in exchange rates between two currencies.
• Force majeure: An unforeseen event that prevents a party from fulfilling their contractual obligations.
• Piracy risk: The threat of cargo theft or hijacking during transportation.
• Counterfeit risk: The likelihood of receiving fake or inferior products from suppliers.
• SCVI (Supply Chain Vulnerability Index): A framework to assess the risk of supply chain disruptions.
• Fisher's Model: A framework to categorize supply chain risks into three types: demand, supply, and external risks.
• SCOR (Supply Chain Operations Reference) Model: A framework to evaluate supply chain performance and identify areas for improvement.
• Safety stock = Z ×-× ?L: A formula to calculate the optimal safety stock level based on service level, standard deviation, and lead time.
• EOQ (Economic Order Quantity) = ?(2DS/H): A formula to determine the optimal order quantity based on demand, ordering cost, and holding cost.
• 'Postponement' delays final configuration, not production – it's a push-pull boundary strategy.