2013 Supply Chain Risk Management The globalisation of supply chains & the trend towards outsourcing have

increased the supply chain vulnerability, exposure to risks and aggravated the impact of any supply chain disruptions.
Supply chain risk management is the identification and management of supply-chain risks, through coordination of supply chain members, to reduce supply chain vulnerability as a whole.

Drivers of Supply-Chain Risks

Sources of Supply-Chain Risks Supply-Chain Risk Consequences Risk Mitigation Strategies

The following analysis will be based on the digital camera manufacturing sector, in high-tech industry. The digital camera manufacturing (DCM) sector primarily consists of large manufacturing companies, such as Canon, Nikon, Sony, Panasonic and Fujifilm. These companies are global brands, with global operations and supply-chain extended over the globe. As these companies compete in high-tech sector, characterised by shorter product lifecycle, constant product development (thus importance of speed to market), high-value product, innovation-driven, high capital (intellectual, technology and physical capital), continuous innovation The competition in the industry is very intense. Failure to keep-up will cause severe cost or damage to a company. An example of this is; Kodak. In early 2012, Kodak announced its exit from the digital camera market as it struggled badly to adapt as digital photography in the brutally fast-paced market.

DRIVERS OF SUPPLY CHAIN RISK

Globalisation of the Supply Chain Pressure to lower cost Trends towards outsourcing Supply base optimisation Leaner supply chains and JIT operations Strategic Alliances

As mentioned previously, companies in the DCM sector are big global brands and companies, with operations extending all over the world. For example, Canon is headquartered in Japan with its R&D subsidiaries and affiliates1 in Europe, Asia and Oceania; Manufacturing2 subsidiaries and affiliates in many regions of Japan (majority) and the USA, as well as Asian (majority of manufacturing) and European countries; while other globalised operations also include marketing operations and procurement activities. The nature of competition (innovation-driven) and market dynamics (fast-paced and constant product development) have played a major role3 in driving the industry towards all of the other drivers of supply chain risk listed above. Companies within the industry are focused on innovation and technological developments, and hence outsource other key operations to their supply-chain partners 1 Atiqah Ismail

2013
(or alliances). Outsourcing is also driven by the reliance of companies survival and existence on their ability to innovate. Innovation is very expensive; therefore, they are pressured to keep cost low, which are achieved through outsourcing. The pressure to keep cost low is also reflected in supplybase optimisation or rationalisation. Speed to market is imperative in this high-tech industry, where product life cycles are short and product development is almost continuous. Thus, companies are removing stages from the supplychain (supply-base optimisation) to further reduce cycle time and lead time. The shorter life cycle also leads to the need for JIT manufacturing, as inventory can quickly become obsolete. Strategic alliances are very common in the DCM industry, as companies realise forming strategic alliance are far more beneficial than acting alone, and that competitive advantage now emerge from the ability to develop lasting relationship with suppliers, and to manage this network of partnerships to achieve mutual advantage. For example, in September 2012, Sony and Olympus have entered a strategic alliance (business and capital alliance)4 to seek working collaboration and exchange of technologies; Olympus to take advantage of Sonys strengths in image sensors and other imagerelated technologies, on the other hand, Sony seek to pursue growth in medical imaging market, where Olympus has a long-standing experience and established foundations in the medical market. Competition in the DCM sector is primarily based on intense innovation or intellectual capability, and research and development, coupled with ability to reduce cost. Paradoxically, technology, innovation or research and development are not typically seen as an inexpensive operation, thus finding the balance to reduce cost and operate in this industry is complex. Core competency is in tacit and explicit knowledge of digital imaging technologies learnt over the years.

SOURCES OF SUPPLY CHAIN RISKS5

Environmental risk sources Organisational risk sources Network-related risk sources

Environmental risk sources are concerned with any uncertainties arising from the interaction between the supply-chain and its environment. These are often largely beyond the control of the supply-chain. In the DCM sector, these could be: 1. 2. 3. 4. Technological environment risk sources Direct and Indirect Competition Economic environment risk sources Natural environmental sources6

Economic environmental risks: Manufacturers with weak financial standing or liquidity are high risks to recession or economic downturn. For example, economic downturn can significantly affect customer demand, as cameras are primarily discretionary expenses and not necessity products. Natural environmental risks: In October 2011, flooding in Thailand has affected the production of cameras for Canon, although it does not manufacture (and does not own manufacturing facilities) in Thailand, Canon does have part suppliers based in the country that have been adversely affected, affecting and delaying digital camera production. In March 2011, the major earthquake in Japan7 2 Atiqah Ismail

2013
had adversely affected Canons critical operation and facilities. This had caused suspensions in operations, as the earthquake had caused considerable damages; power-cuts, damages to buildings, injuries and stoppages in production equipments in several sites. In general, environmental risks are relatively high in the high-technology and automated industry as Japanese companies supply more than 20% of critical electronic components8 to companies across the globe (e.g. Apple and General Motors).

Note: Japan is prone to natural disasters, primarily earthquakes and tsunamis.

Organisational risk sources are those which exist within the boundaries of the supply-chain partners. Organisations operational and production uncertainties (e.g. machine failures) or labour strikes. Poor organisational management: Poor financial management or low strategic and innovative outlook, are highly damaging in this industry. Extremely high capital equipment requires the need to operate at the lowest possible cost. Management needs to balance the return on capital investments, with low-cost production, and constant pace of innovation. Management needs to be proactive, as competition is based on intellectual capabilities to innovate. For example, the demise of Kodak from the industry is due to low liquidity (e.g. inability to pay dividends to shareholders) and inability to keep up in the digital camera market (e.g. core competency was in analogue cameras).

Network-related risk sources are those which arise from the interactions between organisations within the supply chain. Often, network-related risk arises from suboptimal interaction between the supply chain organisations. Three different types of network-related risk9 sources: i. ii. iii. Lack of ownership Chaos, and Inertia

Identifying network-related risks requires thorough understanding of the supply-network structure, flows, operations dynamics and complexities. Lack of ownership is concerned with the blurring of organisational boundaries, from complex networks of business relationships with confused lines of responsibility. Chaos effects result from lack of understanding of supply-chain partners and dynamics. Lack of understanding could result to chaos effects such as: over-reactions, unnecessary interventions, second-guessing, mistrust and distortion of information throughout the supply chain. Inertia is the general lack of responsiveness to changing environmental conditions and market signals. The problems of inertia arise from environmental and/or organisational risk sources. Global supply chains are often exposed to inertia, where it is difficult to control suppliers flexibility and ability to change to changing environments, or own flexibility to match those of supply-chain partners. 3 Atiqah Ismail

2013
Patent wars; possible patent wars may arise from specific buyer-supplier investments and information-sharing in supply-chain integration or alliances, as intellectual properties and technologies are shared among key suppliers or customers within the supply chain. Lack of efficient or robust information-sharing systems and technologies, and lack of communication can cause suboptimal interaction and communication between supply chain partners. Essentially, all the three types of risks arise from poorly managed relationships and lack of understanding between supply chain partners, and the dynamics of the complex supply chain or network.

SUPPLY CHAIN RISK CONSEQUENCES

For example, the aforementioned example of Canons rubber hand-grips issues had caused consequences such as: Financial or cost consequences (e.g. litigations, warranties, refunds from recalls and returns) Commercial consequences (e.g. loss sales) Reputation damage (e.g. well-established image of high-quality cameras and accessories) Quality

RISK MITIGATION STRATEGIES

Manufacturers should opt for a more proactive approach where risk implications are anticipated at an earlier stage of the strategic alliance or partnership. A robust and agile supply chain could be achieved by implementing and designing risk management, collaboratively, at the early stage of a strategic integration. Avoidance Control Co-operation Flexibility

Avoidance strategies are often undertaken to deal with risks that are considered to be unacceptable. It is aimed to completely preventing the risk to occur. Example, Canon10 would refuse to accept a potential supplier with no accreditation from ISO14000 or with lack of environmental awareness, and no CSR, as it conflicts with Canons environmental commitments and values and strategy to create a completely green supply chain. Another example could be, eliminating suppliers or partners who are performing undesirably or are no longer reliable.

Control strategies are undertaken when companies seek to control, rather than completely reject or eliminate uncertainties. Control strategies are common within the DCM sector usually in the form of vertical integration and in-house production. For example, Canon has been able to reduce cost in every aspect of its value chain by full ownership and control over its value chain and production 4 Atiqah Ismail

2013
operations. Canon also has fully-automated in-house production system for products and components such as: Proprietary key components and devices Circuit boards, Moulds, and Its own manufacturing equipments, tools and intelligent robots.

This allows Canon to have full control over its own production and operation, especially in proprietary technologies and key, high-value components. This reducing risks of uncertainties.

Cooperation strategies are cooperative, joint-collaborations and agreements with and between two or more supply chain partners to mitigate or reduce uncertainties. This is the most common strategy within the high-tech sector between key suppliers of critical components (i.e. strategic partners and alliances), due to high-value and complex operations, processes and technologies, supply chain partners recognise the effectiveness cooperation to mitigate risks and uncertainties. This strategy focuses on: Visibility (or transparency), Understanding, and Information-sharing ... on specific risk sources.

This is based on benefiting of specific knowledge of a partner, who is more experienced in some technology or processes. For example, Sony is more competent in the design and development of image sensors in the DCM industry, and hence is more knowledgeable in this area, including risks associated with their own production or technologies. Without cooperation with Sony, partners like Nikon and Olympus (customers) would not able to fully identify potential problems or even mitigate them. Cooperative risk managements are mutually beneficial to supply chain partners.

Flexibility11 strategies involve managerial moves to increase the flexibility or agility of organisations. Unlike control and cooperative strategies to increase the predictability of external uncertainties, flexibility strategies aimed to increase internal responsiveness while leaving predictability of external uncertainties unchanged. Product-market diversification, Multiple-sourcing, Localised-sourcing,

Flexibility strategies most common in the industry are product-market diversification12 (e.g. compact digital camera, hybrid or bridge camera, DSLRs, mirrorless camera) and multiple-sourcing (reducing risks associated with over-dependence on single-supplier). Multiple-sourcing is normally undertaken with non-strategic partners or suppliers supplying low-value and less-critical components (marketexchange relationships). Localised sourcing are also common, especially in research and development functions, and manufacturing of key proprietary components (e.g. Canon). Canon had taken measures in production diversification for future risk mitigation problems in response to the natural disasters (i.e. earthquake, and the subsequent tsunami) that had affected the

5 Atiqah Ismail

2013
companys operations and the country (i.e. Japan). This strategy involves expansion of production facilities and factories for its critical components in the Southern part of Japan.

1 2

Research and Development Subsidiaries and Affiliates (Canon, 2011) Manufacturing Subsidiaries and Affiliates (Canon, 2011) 3 Catalysts 4 Announcement of Agreements between Olympus and Sony to Form Business and Capital Alliance (Sony, 2012) 5 Any risk of variations or disruptions, potentially affecting the flows of information, material and/or products from the original supplier to the delivery of the product for the end user (Juttner et al., 2003). 6 http://www.canon.com/news/2011/mar13e.html 7 Major earthquake report of damage by Canon (Canon, 2011) 8 Canon Expects 600 million Boost in Revenue from Supply Chain (Strategic Sourceror, 2011) 9 Juttner, U., Peck, H. and Christopher, M., (2003). Supply Chain Risk Management: Outlining an Agenda for Future Research. International Journal of Logistics: Research and Applications, 6(4), pp.197-X. 10 Canon an environmentally conscious company (Canon, 2012) 11 "Strategic flexibility may be defined as the ability of the organization to adapt to substantial, uncertain, and fast-occurring (relative to required reaction time) environmental changes that have a meaningful impact on the organization's performance (Aaker and Mascarenhas, 1984; in Miller, 1992)
12

Diversification spreads business risk.

6 Atiqah Ismail