Supply Chain Risk Management

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IBM Global Business Services
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Supply Chain Risk Management: A Delicate Balancing Act
A multi-faceted view on managing risk in a globally integrated enterprise

Risk Management

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Table of Contents

Risk and Consequence: Tales from the Industry Supply Chain Risk Categories Disruptive Events, Uncertainty and Impact Models and Methods for Supply Chain Risk Management Example of Risk Management for IBM’s Product Supply Chains An Approach for Measuring the Impact of Identified Supply Chain Risks Key Lessons from IBM’s Supply Chain Risk Management Approach The Landscape: Supply Chain Risk Management Supply Chain Risk Management: Getting Started In Summary Authors Footnotes

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Volume risk would be particularly high during product launches and phase-outs. Although during product launches inventory cost can

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be remedied, during the phase-outs, manufacturers face significant component obsolescence risks. The dilemma is that high customer service targets might require prohibitively high levels of safety stock during these periods.

Figure 2: Profit Loss due to Supply Disruptions

23% 22% 21% 20% 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 0 1 2 3 4 5 6 7 Safety Stock (days of supply)

Fixed Cost = 25% Fixed Cost = 50% Fixed Cost = 75%

Profit Loss




Next, consider a manufacturer that keeps safety stock for a product it makes. In many commodity products, profit margins are low. Suppose profit margin is 10%. The chart above shows the impact of a 10 day supply disruption on profits. Since safety stock can cover for some of the supply disruption, the higher the safety stock the lower the profit loss. For instance, if safety stock is 8 days, only 2 days of revenue is lost and hence the profit loss is for 2 days of sales only. The corresponding profit loss varies from 2% to 4% depending on how high the fixed costs are. Figure 2 (above) shows that a manufacturer with 75% fixed costs (in some manufacturing industries such as semiconductors, fixed costs can be very high) can lose more than twice as much as a manufacturer with
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