Using the SCOR Model for Supply Chain Risk Management by fzs18703

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									  Using the SCOR Model for
Supply Chain Risk Management

         17 October 2008
Using the SCOR model as the foundation of a
SCRM program results in a more resilient
supply chain with fewer resources.

• 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
   – SCOR 9.0 includes Risk Management processes, practices,
     and performance indicators.
• Using SCOR as a Risk Management foundation provides 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

                                                          PAGE 2
         Supply Chain Risk Management (SCRM) is the
         systematic identification and mitigation of
         potential disruptions.

         • “Supply chain risk management is the systematic
           identification, assessment, and quantification of
           potential supply chain disruptions with the objective
           to control exposure to risk or reduce its negative impact
           on supply chain performance.”
         • “Potential disruptions can either occur within the supply
           chain (e.g. insufficient quality, unreliable suppliers,
           machine break-down, uncertain demand etc.) or outside the
           supply chain (e.g. flooding, terrorism, labor strikes, natural
           disasters, large variability in demand etc.).”
         • “Management of risk includes the development of
           continuous strategies designed to control, mitigate, reduce,
           or eliminate risk.”

                                                                PAGE 3
Source: Supply Chain Council, 2007
Supply Chain Risks can take multiple forms.

• Financial risks—supplier failure, customer default, bad
  debt, etc.
• Demand, supply, or market variability—unforeseen spike or
  drop in demand, market shifts, new technologies, etc.
• Natural disruptions—severe weather, natural disasters, etc.
• Accidental disruptions—transportation accidents,
  production accidents, etc.
• Man-made disruptions—labor disputes, protests, etc.
• Malicious disruptions—tactical strikes, vandalism, etc.

                                                     PAGE 4
 Supply chain managers have identified Risk
 Management as a significant improvement


• Supply Chain Council (SCC)
  members have reported that
  less than half of enterprises    • According to our research,
  have established metrics and       supply chain disruptions
  procedures for assessing and       (performance falling
  managing supply risks and          significantly below
  many procurement                   expectations) account for 50-
  organizations lack sufficient      80% of the supply chain
  market intelligence, skills,       managers time and 10-30% of
  and information systems to         the operating cost.
  effectively predict and
  mitigate supply risks.           • Reducing the frequency and
                                     impact of these disruptions is
                                     a tremendous opportunity to
                                     gain a competitive advantage.

                                                   PAGE 5
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 and Ericsson 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…

                                                     PAGE 6
         There is a direct impact between supply chain
         disruptions and poor business performance.

                                                                                                        PAGE 7
Source: The View of the Supply Chain From Wall Street – J. Stuart Francis - Lehman Brothers, February 2003
         Firms that manage supply chain risk tend to
         see improved business performance

                                                       PAGE 8
Source: Aberdeen Group, September 2005
         Ideally, supply chain risk management
         addresses the entire supply chain.
                                                  Global Environment

                                            Organization’s Environment

                   Suppliers’                                                 Customers’
                  Environment                                                 Environment

                                       Supplier                        Customer
                                        Facing                          Facing
                      (And outsource                                         Customers
                                                     Internal Facing

                                                                                            PAGE 9
Source: Supply Chain Council, 2007
         SCOR is a process framework for modeling
         end-to-end supply chain processes,
         performance, and practices.

         • Process frameworks deliver the well-known concepts of
           business process reengineering, benchmarking, and best
           practices into a cross-functional framework
               – Standard processes:
                 Plan, Source, Make, Deliver, Return, Enable
               – Standard metrics:
                 Perfect Delivery, Cash Cycle Time, Supply-Chain Cost, etc
               – Standard practices
                 SCRM, EDI, CPFR, Cross-Training, etc
         • Pre-defined relationships between processes, metrics and

                                                                     P A G E 10
Source: Supply Chain Council, 2007
         SCOR views the supply chain as built up of five
         distinct management processes.


                               Source   Make     Deliver



                                                           P A G E 11
Source: Supply Chain Council, 2007
            The five SCOR processes link together (the
            chain in supply-chain) seamlessly from
            supplier to customer.

            "Supplier"                    “Components"                                 "Product"                     “Customer”

            Casing Company

                                                Radiator Factory                        Retail HVAC

            Motor Company

       Refrigerant Company

                                                Cooling Factory                       Commercial HVAC

        Regulator Company

   source        make        deliver   source       make           deliver   source       make        deliver   source    make   deliver

                                                                                                                    P A G E 12
Source: Supply Chain Council, 2007
         The Supply Chain Council maintains SCOR as
         a robust, agnostic supply chain framework.

         • 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, 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

                                                                       P A G E 13
Source: Supply Chain Council, 2007
   The SCC recently added SCRM elements to the
   SCOR model.

         SCOR Enhancement                      Global Project Team

• SCC approved the project team to    • Formation of Global, Multi-industry
  enhance SCOR model with Risk          team who worked passionately for
  Management Capability.                almost one year to enhance SCOR
• Objectives :                        • Translated Objectives :
     To avoid/minimize Supply               To provide a process to identify
     Chain Costs,                          potential areas of risk
     To avoid/mitigate Supply Chain        throughout the supply chain,
     Disruption,                            To offer a competitive edge
     To manage risk in a proactive         through identification and
     manner                                acceptance of controlled risks,
                                            To enable companies to reduce
                                           impacts and to mitigate service

                                                                  P A G E 14
Where does SCRM fit within SCOR?

                                   P A G E 15
SCOR Enable Processes

                                       Plan    Source   Make   Deliver       Return

Manage Business Rules                  EP.1     ES.1    EM.1    ED.1         ER.1

Manage Performance of Process          EP.2     ES.2    EM.2    ED.2         ER.2

Manage Process Data Collection         EP.3     ES.3    EM.3    ED.3         ER.3

Manage Process SC Inventory            EP.4     ES.4    EM.4    ED.4         ER.4

Manage SC Capital Assets               EP.5     ES.5    EM.5    ED.5         ER.5

Manage Integrated SC Transportation    EP.6     ES.6    EM.6    ED.6         ER.6

Manage Process Configuration           EP.7     ES.7    EM.7    ED.7         ER.7

Manage Process Regulatory Compliance   EP.8     ES.8    EM.8    ED.8         ER.8

Manage Supply Chain Risk               EP.9     ES.9    EM.9    ED.9         ER.9

Manage Financial Plan Alignment        EP.10

Manage Supplier Agreements                     ES.10

                                                                P A G E 16
  The SCOR Model supports effective SCRM
  through a five phase approach.
Phase        Name                    Deliverable                         Resolves
                      • Organizational Support
Initial   BUILD                                                   Who is the sponsor?
                      • Risk Management Program
                      • Supply-Chain Definition
      I   DISCOVER    • Supply-Chain Risk Priorities              What will the program
                      • Project Charter/Risk Program definition
                      •   Scorecard
                      •   Benchmark                               What is the risk tolerance
                      •   Competitive Requirements                of your supply chain?
                      •   Customer service requirements
                      •   Geo Map                                 Initial Analysis – where
    III   ASSESS      •   Thread Diagram                          and how big are the
                      •   Risk assessment                         risks?
                      •   Mitigation plans                        Final Analysis – how will
    IV    MITIGATE    •   Level 3, Level 4 Processes              risk be eliminated or
                      •   Best Practices Analysis                 mitigated?
                      •   Opportunity Analysis
                      •   Mitigation Definition                   How to deploy
                      •   Deployment Organization                 mitigations?
                      •   Monitoring and response programs

                                                                          P A G E 17
    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
                                                                                      Configure to Reduce Risk :
  • Supply Chain Risk Assessment
                                                                                      • Supply Chain Business Rules
                                                                                      • Supply Chain Information
                               Visibility and                                         • Supply Chain Network
                                                                   Coordinated Risk
• Supply Chain Risk           Quantification of
  Management                       Risk

          Formal Risk                                                                      Supply Chain
          Management                                                                      Designed for Risk
                                                  Best Practices

                                  Supply Chain Risk Management

                                                                                                P A G E 18
Best Practices - Formal Risk Management

Supply Chain Risk Management (SCRM)
      Systematic identifying, assessing, and resolving of potential
      disruptions in supply chain networks with the objective to reduce
      their negative impact on the network’s performance

                                                            P A G E 19
Best Practices - Visibility & Quantification of Risk

 Supply Chain Risk Identification
         Creating of a list potential events that could disrupt or harm any
         aspect of the supply chain’s performance (more details included
         in exercises)

 Supply Chain Risk Monitoring
         Creating of a list potential events that could disrupt or harm any
         aspect of the supply chain’s performance (more details included
         in exercises)

 Supply Chain Risk Assessment
         – Quantifying risk to understanding of where the greatest risks
           may exist in order to prioritize resources for risk mitigation and
         – Measures include Likelihood and Impact (more details
           included in exercises)

                                                                 P A G E 20
Best Practices - Coordinated Risk Management

 Risk Management Program’s Coordination with Partners
        – Coordinating risk management with your supply chain partners
          by emphasizing cooperation among departments within a
          single company and among different companies of a supply
          chain to effectively manage the full range of risks as a whole
        – Establishing a Risk Management Coordination Committee

 Sourcing Risk Mitigation Strategies
        Includes strategies to address source risks, for example multiple
        sources of supply, strategic agreements with suppliers, and
        supplier partnerships (more details included in exercises)

 Crisis Communication Planning
        Creating a plan for managing a crisis when it occurs (more
        details included in exercises)
                                                              P A G E 21
Best Practices - Supply Chain Designed for Risk

 Supply Chain Business Rules
        Establishing business rules (e.g., customer priority, supplier priority,
        production routing, transportation routing, etc.) based on minimizing the
        risk to the supply chain

 Supply Chain Information
        Managing supply chain information networks to minimize the risk to the
        supply chain. This includes information sharing with partners as well as
        internal locations. This helps all parties to be quickly informed of a real or
        potential disruption and respond quickly and appropriately to minimize the
        disruption impact.

 Supply Chain Network
        Designing node locations, transportation routes, capacity size and
        location, number of suppliers, number of production locations, etc. in a
        fashion that mitigates potential disruptions to the ability to deliver product
        and service to the end customer

                                                                        P A G E 22
SCOR SCRM Roadmap Initial Phase: Build the

            Building Organizational Support
             – Identify appropriate Sponsors, Stakeholders, Evangelists
             – Create Steering, Design, and Analysis Teams
      Focus: Build a core steering group for the SCOR SCRM program
             Identification of Supply-Chain and SCRM Scope
             Communication of SCOR and SCRM throughout organization and to
             key supply chain partners
   Approach: Identification of key players
             • Outline of Complete Supply-Chain being examined
             • Core Steering Teams and Extended Teams
             • Communicate, Communicate, Communicate!
             • Creation of Analysis Team
 Deliverables: Sponsors & Stakeholders
  Stage gate: Kickoff Event

                                                                   P A G E 23
SCOR SCRM Roadmap Phase I: Discover Your
SCRM Requirements

              Discover the Opportunity
              •   Supply-Chain Definition
              •   Supply-Chain Risk Priorities
              •   Risk Program Definition
              •   Project Charter
       Focus: Supply Chain: generate a clear definition
              Risk Priorities: Align to Business Risk Management and Strategy
              Resources: identify and secure process owners/actors
    Approach: Sponsor and stakeholders interviews:
              • Work towards a problem statement based on metrics – current v.
                desired risk profile
              • Capture customer-identified solutions i.e. a technology or practice
  Deliverables: Program Charter
   Stage gate: Program Charter acceptance

                                                                     P A G E 24
    The SCOR Framework provides proven tools
    for mapping and defining supply chain

                     Single point of failure
                                                                                          Capacity constrained

      OEM Supplier                                                                                                   The SCOR Supply

                                                                             Motor Supplier
                                                                                                                     Chain diagrams
                                               Basic Units
                                             (P1, P2, P3, S1,                    (D1)                                also become a tool
  Commercial                                     M1, M2)
                                                                                                                     for identifying
                                                                                                                     potential risk
                      Commercial                                                        Excess perishable
                      Distribution                                                          inventory                sources.
                       (P4, D2)

                            Controls Plant                                (P4, D1)                   Retail
                             (P3, S1, M1)                                                          Customers
Location prone to                                             (D1)
 natural disaster
                                                                                                                 Lack of customer
                                                                                                                 demand visibility
                                                                                  Recent labor

                                                                                                                          P A G E 25
SCOR SCRM Roadmap Phase II: Analyze
Supply Chain Risks

               Analyze Basis for Risk Management
               •   Scorecard
               •   Benchmark
               •   Competitive Requirements
               •   Customer Service Requirements
       Focus: Scorecard: Appropriate Level Metrics
              Benchmark: Select and Use Industry Source
              Requirements: Prioritization and Ratification
    Approach: Initial Data and Risk Profile Capture
              Financial Validation
              Early exposure analysis of risk gaps
  Deliverables: Defined Metrics for program focus including risk tolerance
   Stage gate: Supply-Chain Selected and Metrics Described

                                                                      P A G E 26
 The enterprise’s tolerance for risk is dependent
 on the business strategy.

 • 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

What is the business impact of a broken supply chain?
          How much are you willing to risk?

                                                        P A G E 27

 Value-at-risk (VaR) is a category of risk metrics that describe
 probabilistically the market risk of a trading portfolio.

 Value-at-risk is widely used by banks, securities firms, commodity
 merchants, energy merchants, and other trading organizations.

 Such firms could track their portfolios' market risk by using
 historical volatility as a risk metric. They might do so by calculating
 the historical volatility of their portfolio's market value over a
 rolling 100 trading days.

 The historical volatility would illustrate how risky the portfolio had
 been over the previous 100 days.

                                                                   P A G E 28
    Risk Measures Hierarchy
                                                                                                                Total Supply Chain
                                                                                                                     Costs ($)
Level 1
                                Supply Chain                                                Supply Chain
                                Value at Risk                                            Residual Risk ($, %)
                                 (Gross VaR)

             Supply Chain                     Supply Chain          Supply Chain                              Supply Chain
          Value at Risk (VaR $)            Event Risk (EVAR $)   Mitigated Risk ($, %)                      Mitigation Costs ($)
                                                                      By PSMDR
Level 2
             Supply Chain                     Supply Chain                                                       Supply Chain
          Value at Risk (VAR $)            Event Risk (EVAR $)                                                  Mitigation Cost($)
               By PSMDR                        By PSMDR                                                            By PSMDR

          Value at Risk (VAR $)                 Risk by Event      Mitigated Risk                                  Mitigation
              By PSMDR &                           (EVAR $)        by Category ($)                                  Cost($)
               individual                        By PSMDR            By PSMDR                                      By PSMDR
                                                                    & individual                                      and
Level 3    performance metric                    & individual
                                                event category   performance metric                                  event
                                                                  & event category
             Internal Enabler
               Process and
               Data Quality

                                                                                                                     P A G E 29
VAR quantifies the value of potential
disruptions in terms of both probability and
impact on the supply chain.

                                 Value at Risk (VAR) = (P1 x I1/T) + (P2 x I2/T)
                                  Normalized as a percentage of the target

P1 - Probability                             I1
    10 out of
    100 total                   Impact 1
                                                   Impact 2
                                           Event              Event
                            T                1                  2

                                                                                   P A G E 30
SCOR SCRM Roadmap Phase III: Assess Risk
             Design Material Flow
             •   Create a common understanding of risk sources
             •   Document identified risks

      Focus: As-Is: SCOR Material Flow Model
             Risk identification: Deep Dive on sources of risk
             Risk assessment: Quantification of risk magnitude

   Approach: Facilitated workshops, dedicated design teams
             Geographic Mapping, Thread Diagrams
             Brainstorming, Risk profiling

 Deliverables: Process design documentation
               Sources and Significance of Risks

  Stage gate: Review captured information with key stakeholders

                                                                  P A G E 31
Risk mitigation starts with identifying potential

• Where are there high probability of natural disasters in the
  supply chain?
• Where in the network is there a single point of failure?
• Where is material or facilities not secure or at risk of tactical
• Where may traffic or other transportation problems occur?
• Where in the supply chain do potential labor dispute issues
• What market risks could occur?
• How financially secure is our company? Our supplier and
  customer partners?

                                                           P A G E 32
Risks should be assessed based on the
likelihood of occurrence and the impact on the
supply chain.
                      Risk Prioritization
                Moderate risk;        Critical risk; high
               medium priority for        priority for
                  mitigation              mitigation


                    Low risk; low     Moderate risk;
                     priority for    medium priority for
                     mitigation         mitigation


                             Likelihood of
              Low            Occurrence                     High

                                                                   P A G E 33
SCOR SCRM Roadmap Phase IV: Mitigate
Significant Risks

              Mitigation of Significant Identified Risks
              •   Collect and analyze detail risk data
              •   Create detailed risk mitigation action plan
      Focus: Mitigations: Active and Passive
             Process: Level 3 and Level 4 SCOR information
             Analysis: Mitigation Impact, Best Practices

   Approach: Facilitated workshops, interviews and modeling
             • Probability-Impact Approach
             • Cover all: process, technology, people, objectives
             • Practice Assessment

 Deliverables: Facilitated workshops, interviews and preliminaries
  Stage gate: Review captured information with key stakeholders

                                                                     P A G E 34
Once risks are assessed, the enterprise can
select which are critical enough to warrant
active mitigation.


               Likelihood of Occurrence

                                               P A G E 35
Risk mitigation is usually unique to the specific
risk, but can fall into several general

• Response plans that specify roles, responsibilities, and
  action should the disruption occur
• Redundant suppliers, distribution centers, or other supply
  chain nodes
• Active labor relations management or active monitoring of
  supplier labor relations
• Physical supply chain security
• Relocation of facilities to reduce likelihood of natural
• Demand sharing (e.g., CPFR) with customers and suppliers.
• Others…

                                                   P A G E 36
SCOR SCRM Roadmap Phase V: Implement
Mitigation Measures
             Implementation Planning
             •   Ensure the implementation or deployment teams have thorough
                 understanding of the mitigations
             •   Designs and plans are validated
             •   Institute Monitoring and Response Programs
      Focus: Projects: Aggregate Mitigations into Projects
             Impact: Decision Matrices
             Approach: Implementation, Charter, and Sequence
             Monitoring: What Data to Track and Responsibilities
   Approach: Establish detailed mitigation documentation and, if possible, integrate
             team members in deployment teams
             Establish Monitoring and Response Teams and Procedures
 Deliverables: High level deployment plans for mitigation projects, to-be process
               documentation/training materials and/or requirements documentation

  Stage gate: Release documentation to and education to (staffed, funded and
              named) process deployment teams

                                                                       P A G E 37
Once risks are identified and mitigations in
place, the environment must be monitored to
detect potential risks

• Fast identification of a disruption will help speed the
  recovery of the supply chain.
• Monitoring can take several forms.
   –   News and weather monitoring
   –   Market or tactical intelligence
   –   Metrics and financial data reviews
   –   Etc.

                                                       P A G E 38
Risk management protects the enterprise from
direct and indirect costs of supply chain

• Supply chain risks have been proven to not only disrupt
  deliveries to customers, but potentially the viability of the
• The cost of a supply chain disruption is not just lost
  sales or damaged inventory, but can include brand
  damage, recall costs, contract penalties, and other
• Active risk management helps identify where risks can
  occur and reduce the impact of those risks through
  active prevention methods.
• A risk-protected supply chain will be more reliable and

                                                        P A G E 39
The SCOR SCRM approach builds a more
reliable and resilient supply chain.

• Using a structured approach to risk management improves
  the ability to identify risks and put effective mitigation
  measures in place
   – SCOR provides a proven framework for defining and
     measuring the supply chain and assessing risks across the
     end-to-end supply chain.
• Structured approaches will also lead to effective and
  controlled responses to disruptions.
   – SCOR provides a framework for assessing and implementing
     effective response actions
• A structured program leads to a repeatable, ongoing risk
  management process and culture that can protect the
  enterprise from significant failures.

                                                        P A G E 40
One Day SCOR SCRM Workshop

                             P A G E 41

                                                      Taylor Wilkerson

                                                                                                             P A G E 42

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