Reflection Paper

•   You should read the article carefully in relation to the chapter covered for the particular week.
•   Also try to find the examples that relate to the material covered for the session.
•   You can do further library and Internet search to find additional information.
•   First, briefly summarize the article, synthesize the information presented in the paper and the chapter, and then add your opinions as an International

Operations Management student.
• You can give examples from your own culture, experience, knowledge from other classes etc.
• There is not always a particular question to answer each time you write a reflection paper, I would like to see how you can relate the information presented in

the paper to the topics covered in this class (i.e. What is the relevance of the article to the chapter material?)
• This activity aims to help you improve your research and essay writing skills.

3 Copyright © 2003 by Harvard Business School Publishing Corporation. All rights reserved.
Outlier events “raise the frequency-consequence question,” says Steve
Harris, vice president of ABS Con-sulting (Oakland, Calif.). Risk can be
viewed as the product of frequency
times consequence. That means a
high-frequency/low-consequence
event, such as the regular fluctuation
of currency exchange rates, can be
viewed as similar to a low-frequency/
high-consequence event, such as the
sinking of a cargo ship laden with crit-ical parts. But depending on the par-ticular company’s risk tolerance, such
apparently similar risks can have
vastly different qualitative effects. “At
some level, severe events can lead to
insolvency,” Harris explains, “whereas
low-severity events seldom do. Hence
the need for insurance or other meth-ods for transferring or mitigating cata-strophic risks.”
Meanwhile, risks that are more mun-dane, but also more likely, may
receive far less attention. “Outlier
events have much more influence than
they should,” says Harvard Business
School professor Ananth Raman.
Their influence is akin to the danger
of drivers rubbernecking at the scene
of a highway accident. In the days
after 9/11, says Raman, the retailing
executives with whom he’s in regular
contact discovered that their initial
concerns that they would have too few
dresses were misplaced. In fact, the
terrorist attacks led to a severe short-age of customers and thus a problem
of too many dresses on the market.
So don’t be led astray by the sensa-tional risks that grab attention and beg
for resource-consuming mitigation.
“Managers will often consider the
giant risk but ignore the smaller risks
that create friction in the supply
chain,” says M. Eric Johnson, director
of the Center for Digital Strategies at
Dartmouth College’s Tuck School of
Business in Hanover, N.H. “They’ll
look at savings in the Third World,
say, but maybe not the cumulative cost
of deliveries that are frequently late
ack in the early 1990s,
managers of U.S. companies
were justifiably proud of the
well-oiled machines they’d made of
their supply chains. Over the previous
15 to 20 years, they’d wrung costs
from the mechanisms and processes
by which they got components and
inputs to the right places at the right
times. They’d done it by implement-ing techniques and technologies at an
unprecedented pace; among them, the
lean production method introduced by
W. E d wa r d s D e m i n g , j u s t – i n – t i m e
manufacturing, single-source suppli-ers, and global outsourcing.
But more recent events—terrorist
strikes, political instability in Third
World countries, and last year’s shut-down of West Coast shipping docks—
have awakened managers as never
before to supply chain risks, some of
which had been introduced or height-ened by the very actions companies
had taken to drive costs out of their
supply chains. “Many of the key risk
factors have developed from a pres-sure to enhance productivity, eliminate
waste, remove supply chain duplica-tion, and drive for cost improvement,”
says William L. Michels, CEO of con-sulting firm ADR North America
(Ann Arbor, Mich.).
Now that this inverse relationship
between risk and efficiency has been
cast in high relief, supply chain man-agers realize that they can no longer
focus solely on cost reduction—any
calculation of a supply chain’s return
on investment must also take customer
satisfaction into account. “We’re try-ing to make sure we operate the supply
chain more efficiently and decrease
B
costs as we increase service levels to
customers,” says Nathaniel Leonard,
supply chain director for the Engi-neered Products Division of Goodyear
Tire & Rubber (Akron, Ohio). Taken
together, the company’s objectives
represent “competing priorities,” he
says, “which we view as a triangle”
representing cutting working capital,
reducing transaction costs, and pro-viding world-class customer service.
Balancing these competing priorities
means that it’s impossible to eliminate
risk entirely. But there are steps you
can take to mitigate risk while keeping
your supply chain costs as low as pos-sible. First, however, a little back-ground on the nature of risk and how
companies seek to deal with it.
The types, frequency,
and complexity of risk
Risks lurk along the entire length of
supply chains, and are as diverse as
political instability, exchange rates,
carriage capacity, shelf life, and cus-tomer demand. Such risks aren’t new.
In fact, “the underpinnings of prob-lems today started two decades ago,”
says Craig Holmes, director of busi-ness continuity planning for Aon Risk
Consultants (Southfield, Mich.). But
the dangers associated with these risks
are now in the forefront of managers’
minds.
There’s no small irony in this reawak-ening to long-standing risks being
caused by high-profile events such as
the attacks of 9/11. Based on statisti-cal probabilities, risk managers view
9/11 as an “outlier” or exceptional
event; but even so, it has spurred a host
of defensive reactions.
Risk: The Weak Link
in Your Supply Chain
Because a lean operation can also be a vulnerable one,
you need to think about efficiency and risk in tandem.
STRATEGY IMPLEMENTATION ■ BY DAVID STAUFFER
Risk in Your Supply Chain, continued
HARVARD MANAGEMENT UPDATEMARCH 2003 4
tion] requires process change, cultural
change, and brute-force effort.”
Fortunately, none of the complexities
of dealing with supply chain risks pre-clude measures that can reduce the
risks. Here is some advice that can aid
mitigation efforts companywide.
Think strategically.Effective supply
chain risk management must be holis-tic and integrated. “A company with a
strategic source-planning process will
deliver risk management; a lean,
effective supply chain; cost and value
improvement; speed to market; and
innovation,” says ADR’s Michels. “It
is the lack of a strategic source plan
that can result in a conflict of cost ver-sus risk.” A strategic source plan, he
explains, can be thought of as “a busi-ness plan for a key commodity.”
Although supply chain cost-efficiency
measures can increase risk, says
Rawlinson, “cost efficiency can also
reduce supply chain risk,” provided
that “cost-efficient processes focus
on core trading partner relationship
management.” The principal tool for
managing this relationship is the con-tract, which can be written to include
“transaction compliance measure-ment, milestone and obligation moni-toring, rebate and charge-back
management, and supplier scorecard-ing.” These mechanisms increase the
“visibility” of your trading partners’
performance, thereby reducing risk.
Broaden cooperation. Supply chain
and risk managers regularly work
with colleagues in purchasing, logis-tics, traffic, and other departments.
But sorting out the issues involved in
mitigating complex risks requires a
greater degree of collaboration. John
Marren relates that when he held a
risk management position with a pre-An appropriate regard for
cost is one that doesn’t
exclusively address cost.
only by a week or so.” What’s the
harm? Small disruptions can cause a
big hurt if they result in a temporary
stock-out and a frustrated customer.
The potential frequency of any hazard
raises what Holmes calls “the risk
manager’s dilemma”: “Frequency is
never unarguable. You can’t guarantee
we’ll have an earthquake, so what do
you do about it?” The appropriate
response when a critical supplier may
be put out of commission by such an
event is to identify an alternate sup-plier. But such steps double back on
the very measures implemented to
remove supply chain costs. “Because
everyone operates more leanly today,
the cost of a [supply chain] disruption
is greater,” says Gordon Eiland, vice
president of strategy and new business
development for books and entertain-ment retailer Borders Group (Ann
Arbor, Mich.). “There’s not as much
slack as there once was.”
“Slack” in the supply chain refers
primarily to inventory. Traditionally,
the easiest way of managing supply
chain risk, Raman explains, has been
through inventory. But “for numerous
reasons, inventory became very
expensive.” Shorter product life cycles
contribute to higher expenses, for
example, in the personal computer
market, where the cost of carrying
inventory can run as much as 1% of
the product’s price per week. “The
cost of obsolescence has gone up.”
Although obsolescence is a risk inher-ent in maintaining inventory, many
potential causes of supply chain dis-ruption are risks inherent in minimiz-ing inventory. They’re like bulges in a
balloon: Lessening one can raise
another. “Certainly there are risks in
going with a single supplier,” says
Tuck’s Johnson. But a single supplier,
he adds, better ensures protection of
the company’s intellectual property.
“In that case, you’re trading off risks.”
Trying to cover your risks through
insurance is no longer as feasible as it
once was. Insurance carriers, which
made huge payouts to cover losses
related to the 9/11 attacks, have re-examined the risks implicit in today’s
leaner supply chains. As a result,
“what was insured in the past may not
be insured as much or at all” today,
Holmes observes. “And one way a risk
manager can almost certainly get sen-ior management’s attention is to tell
them, ‘We’re not insured.’”
Also contributing to the difficulty of
addressing supply chain risk is supply
chain complexity. “One key factor is
the increased pressure to differentiate
products in the marketplace,” says Peter
Rawlinson, director of product man-agement for contract-management
software company I-many in Edison,
N.J. Increased product differentiation
has also “increased the dependency
on third parties in the supply chain.
Wherever dependencies outside of
the corporation exist, risks are intro-duced.” And the dependencies them-selves are more complex than ever.
“The part you get from Taiwan may
go through five or six modes of car-riage,” says Holmes. “Think of the
possibilities for disruption. I’m not
sure that anyone could fully under-stand the true risk involved at any sin-gle point of failure.”
Technology can help you cope with
this complexity, but the high hopes
some companies placed in supply
chain management software have
been dashed, resulting in near-total
write-offs. Mark J. Colombo, vice
president of strategic marketing for
Memphis-based FedEx, attributes
these failures not to the technology
per se, but to a “lack of recognition of
the degree to which [IT implementa-Inventory-related risks
are like bulges in
a balloon: Lessening
one can raise another.
brittle” if a company single-mindedly
pursues reduction of overt costs, as in
“chasing low-cost labor” anywhere in
the world, without sufficient regard
for the many risks that can create.
An appropriate regard for cost is one
that doesn’t exclusively address cost.
Thus, “the idea isn’t just reducing
inventory to a ridiculous value,”
Raman says. “Inventory protects
against unanticipated events. So you
need less of it if you find a way to fore-cast better or manage processes better.
Some companies cut inventory with-out such improvements. That is
fraught with risk.” Goodyear’s
Leonard concurs: “You can only meet
an inventory reduction objective if
you improve forecasting,” he says.
“Otherwise you’ll increase risk.”
Don’t ignore a risk just because you
can’t quantify it.For example, what
are the costs of a supply chain disrup-tion that results in a stock-out? Not
just lost sales, which might be readily
quantified, but lost customers, too.
“It’s not just the loss of those sales, but
the way customers view you,” Bor-ders’ Eiland observes. “If a customer
is looking for an obscure title that
we’re out of, there’s likely no long-term damage done. But customers
looking for the latest Harry Potter
Risk in Your Supply Chain, continued
5 HARVARD MANAGEMENT UPDATEMARCH 2003
vious employer, the increased report-ing requirements imposed by insurers
“got me working with people inside
the company with whom I’d previ-ously not had much contact.” Marren,
who is now director of risk man-agement at Henkel in Gulph Mills,
Penn., explains that the objective was
to answer fundamental questions
about the supply chain: “Is it sound?
Where are the vulnerabilities? How
are you planning for contingencies?”
Getting the answers was not only
beneficial in itself, but “got us into
more of a team approach” to examin-ing supply chain risks. Departments
better understand not just the risks,
but also one another.
Consider the tradeoffs. Experts
agree that there are right and wrong
ways of incurring and addressing sup-ply chain risk. Think of cost and risk
as variables that exist along a contin-uum; reducing one often comes at the
expense of increasing the other. “You
may increase your risks by lowering
costs, because there’s less redundancy
in the system,” says Marren. “But that
doesn’t necessarily mean you’ve
increased risks imprudently, [pro-vided] you’ve examined the supply
chain up and down before implemen-tation.” Johnson agrees, noting that
“the supply chain becomes more
Transform Your Supply Chain:
Releasing Value in Business
by Jon Hughes, Mark Ralf, and Bill Michels
International Thomson Business Press • 1998
“Learning from Toys: Lessons in
Managing Supply Chain Risk
from the Toy Industry”
by M. Eric Johnson
California Management Review • Spring 2001
“Targeting a Just-in-Case Supply Chain
for the Inevitable Next Disaster”
by Joseph Martha and Sunil Subbakrishna
Supply Chain Management Review • Sept.–Oct. 2002
RESOURCES
book expect us to have it and may
never come back if we don’t.”
It’s not hyperbole to describe the risk
of disappointing customers as one of
corporate life or death. The apparel
industry’s sales of marked-down
items represented less than 10% of all
sales 30 years ago, notes Raman;
today they make up more than one-third of all sales. Meanwhile, one in
three women shoppers fails to find the
garment she wants in her size. “That’s
our true supply chain risk,” he says,
“making too much of what doesn’t
sell and too little of what does.” ❖
Red Lodge, Mont.–based writer
David Stauffercan be reached at
MUOpinion@hbsp.harvard.edu
Harvard Business Review Notice of Use Restrictions, May 2009