Risk Hedging Supply Chain Strategy: L7

Summary

In this video, Dr. Rodney Thomas explores the concept of risk hedging in supply chain management, a strategy designed to mitigate supply disruptions. He explains how it builds upon Fisher's efficient and responsive supply chain strategies, addressing the limitations when supply is unpredictable. Thomas introduces Professor Lee's uncertainty matrix, emphasizing the importance of considering both demand and supply uncertainty. The video illustrates practical applications of risk hedging, such as using multiple suppliers, increasing safety stock, transshipping, and coopertition, to ensure supply chain resilience. It concludes by identifying when to use risk hedging, which is suitable for scenarios with low demand uncertainty and high supply uncertainty, particularly for functional products with stable demand.

Takeaways

• 🛠️ Risk hedging in a supply chain context is a strategy to deal with supply disruptions, not just a finance concept for trading stocks or currencies.
• 🔄 Risk hedging aims to share and pool resources to collectively minimize supply disruption risks, requiring coordination, collaboration, and cooperation.
• 📈 The concept builds on Fisher's work, which identified efficient and responsive supply chain strategies that address demand certainty or uncertainty.
• 🔄 Dr. Lee's uncertainty matrix proposes considering both demand and supply uncertainty, which is crucial for effective supply chain management.
• 🚫 When supply is uncertain, making assumptions based on supply stability can lead to problems, hence the need for risk hedging strategies.
• 🔑 A risk hedging strategy is recommended when demand uncertainty is low but supply uncertainty is high.
• 🔗 The strategy involves seeking out multiple sources of supply to spread out the risk and minimize supply disruptions.
• 🏭 In cases of unreliable suppliers or manufacturers, a risk hedging strategy discourages single sourcing and encourages diversification.
• 📦 Increasing safety stock levels at various locations can create inventory buffers that help during short supply disruptions.
• 🔄 Transshipping, or moving inventory from one location to another to address supply disruptions, is an effective part of risk hedging.
• 🤝 Coopertition risk hedging involves competitors cooperating to share resources and reduce the risk of supply chain failure, leveraging the concept of aggregation.

Q & A

What is the primary goal of a risk hedging supply chain strategy?

The primary goal of a risk hedging supply chain strategy is to share and pool resources to collectively minimize supply disruption risks.

How does risk hedging in supply chain management differ from its concept in finance?

While finance hedges some types of trading risks, in supply chain management, risk hedging is about dealing with supply disruptions rather than financial instruments like stocks or currencies.

What are the two basic supply chain strategies identified by Fisher?

Fisher identified the efficient supply chain strategy and the responsive supply chain strategy as the two basic approaches to supply chain management.

What is the significance of Professor Lee's uncertainty matrix in supply chain strategies?

Professor Lee's uncertainty matrix emphasizes the importance of considering both demand and supply uncertainty when developing supply chain strategies, rather than focusing solely on demand.

Why is it inappropriate to use efficient and responsive supply chain strategies when supply is uncertain?

Using efficient and responsive supply chain strategies when supply is uncertain is inappropriate because these strategies assume supply characteristics are stable, and making assumptions based on supply stability can lead to problems in unstable conditions.

What is the recommended supply chain strategy when demand uncertainty is low but supply uncertainty is high?

When demand uncertainty is low but supply uncertainty is high, a risk hedging strategy is recommended.

How can a supply chain manager mitigate supply disruptions caused by a single supplier?

A supply chain manager can mitigate supply disruptions by seeking out multiple sources of supply to spread out the risk and minimize supply disruptions.

What is the role of safety stock in a risk hedging strategy?

Safety stock plays a crucial role in a risk hedging strategy by creating inventory buffers at various locations to help the supply chain function during short supply disruptions.

Can you explain the concept of coopertition in the context of risk hedging supply chain strategy?

Cooperatition in risk hedging supply chain strategy refers to the cooperation between competitors to share resources, such as a common pool of inventory or distribution facilities, to minimize the risk of supply disruptions.

What are the conditions under which a risk hedging supply chain strategy is most appropriate according to Lee's uncertainty matrix?

According to Lee's uncertainty matrix, a risk hedging supply chain strategy is most appropriate when there is low demand uncertainty and high supply uncertainty.

Why is aggregation an advantage in a risk hedging supply chain strategy?

Aggregation is an advantage in a risk hedging supply chain strategy because it reduces demand variability by accumulating demand across locations or products, allowing high demand in one location to be offset by low demand in another.

Outlines

00:00

🛠️ Risk Hedging in Supply Chain Management

Dr. Rodney Thomas introduces the concept of risk hedging in supply chain strategies, explaining that it's about managing supply disruptions rather than financial trading risks. He builds upon Fisher's work on efficient and responsive supply chain strategies, which address demand certainty or uncertainty. However, these strategies assume stable supply characteristics. When supply is uncertain, a risk hedging strategy is more appropriate. This strategy involves sharing and pooling resources to minimize supply disruption risks, requiring coordination and cooperation. It is particularly useful for supply chains prone to frequent supply problems. Dr. Thomas also introduces Professor Lee's uncertainty matrix, which considers both demand and supply uncertainties, and highlights the importance of managing supply uncertainty alongside demand uncertainty.

05:02

🔄 Implementing Risk Hedging Strategies

This paragraph delves into the practical application of risk hedging strategies. It discusses the discouragement of single sourcing, especially from unreliable providers, and the benefits of having multiple supply sources to spread risk and minimize disruptions. The paragraph also explores the use of safety stock levels as inventory buffers against short-term supply disruptions, akin to personal preparation for a snowstorm. It further discusses the concept of transshipping, where one store can share inventory with another to address local supply disruptions. Additionally, it introduces the idea of 'coopertition', where competitors cooperate to share resources and inventory, leveraging the statistical benefits of aggregation to offset demand variability across locations. The paragraph emphasizes the importance of communication, collaboration, and coordination in implementing these strategies effectively.

10:02

📊 When to Apply Risk Hedging Strategies

The final paragraph summarizes the conditions under which a risk hedging supply chain strategy should be applied. According to Professor Lee's uncertainty matrix, risk hedging is suitable when there is low demand uncertainty but high supply uncertainty. It is recommended for functional products with stable and predictable demand, longer product life cycles, lower inventory carrying costs, and lower margins. These products typically have high volumes per SKU, with lower stockout and obsolescence costs. The paragraph concludes by reinforcing the intuitive nature of risk hedging, as demonstrated by common behaviors during weather forecasts, and the importance of understanding when to employ this strategy in supply chain management.

Keywords

💡Risk Hedging

Risk hedging in the context of the video refers to a supply chain strategy aimed at mitigating the risks associated with supply disruptions. It involves sharing and pooling resources to collectively minimize these risks. The concept is vital for supply chains that frequently encounter supply problems. In the video, risk hedging is exemplified by seeking multiple sources of supply to spread out the risk and minimize disruptions, which is particularly useful when dealing with unreliable suppliers.

💡Supply Chain Strategy

A supply chain strategy encompasses the methods and actions a company uses to manage the flow of goods and services from suppliers to customers. In the video, the focus is on risk hedging as a specific supply chain strategy to deal with unpredictable supply. The strategy is essential for managing supply disruptions and ensuring the continuity of supply to meet consumer demand.

💡Supply Disruptions

Supply disruptions are events that interrupt the normal flow of goods and services within a supply chain. These can be caused by various factors such as quality issues, employee turnover, or erratic lead times. In the video, supply disruptions are a central problem that risk hedging strategies aim to address, for instance, by using multiple suppliers to ensure that if one fails, others can still meet the demand.

💡Efficient Supply Chain

An efficient supply chain is one that minimizes waste and optimizes the flow of goods and services to maximize value creation. The video references Fisher's work on supply chain strategies, identifying the efficient supply chain strategy as one that addresses conditions of demand certainty. However, when supply is uncertain, this strategy may not be appropriate, leading to the need for risk hedging.

💡Responsive Supply Chain

A responsive supply chain is designed to be flexible and adaptable to changes in demand. It is one of the two basic supply chain strategies identified by Fisher, along with the efficient supply chain strategy. The video mentions that while these strategies work well under certain conditions, they assume stable supply characteristics, which may not always hold true.

💡Uncertainty Matrix

The uncertainty matrix, proposed by Professor Lee, is a tool for evaluating supply chain strategies by considering both demand and supply uncertainties. The video explains that traditional strategies often only address demand uncertainty, but the matrix highlights the importance of also considering supply uncertainty, which is a key factor in the risk hedging strategy.

💡Safety Stock

Safety stock refers to the additional inventory held by a company to cushion against potential supply or demand variability. In the video, increasing safety stock levels is suggested as part of a risk hedging strategy to create inventory buffers that can help a supply chain function during short supply disruptions, similar to stocking up on essentials before a storm.

💡Buffer Stock

Buffer stock is a term used in the video to describe inventory held specifically to account for supply uncertainty. It serves as a reserve that can be used to maintain supply chain operations during disruptions. The concept is likened to personal behavior during a storm, where extra supplies are kept on hand to ensure availability until the situation normalizes.

💡Transshipping

Transshipping is the process of transferring goods from one location to another within a supply chain to meet demand or address shortages. The video mentions transshipping as a part of the risk hedging strategy, where one store can provide extra inventory to another store facing a supply disruption, thus ensuring product availability.

💡Cooperatition

Cooperatition is a term coined in the video to describe a form of risk hedging where competitors cooperate to share resources and minimize supply chain disruptions. An example given is competing hospitals sharing a distribution facility and inventory pool to ensure a more reliable supply of critical items, which is a strategic move to hedge against individual supply failures.

💡Aggregation

Aggregation in the context of the video refers to the statistical concept of reducing demand variability by accumulating demand across different locations or products. This concept is used in cooperatition risk hedging strategies, where the combined demand of multiple supply chain members can offset fluctuations and ensure a more stable supply.

Highlights

Risk hedging is a supply chain strategy that aims to share and pull resources to minimize supply disruption risks.

The concept of risk hedging builds on Fisher's work, which identified two basic supply chain strategies: efficient supply chain and responsive supply chain.

Dr. Lee's uncertainty matrix proposes considering both demand and supply uncertainty for effective supply chain strategies.

Risk hedging is recommended when demand uncertainty is low but supply uncertainty is high.

Supply chain managers can mitigate supply disruptions by seeking out multiple sources of supply.

Adding additional sources of supply helps spread out the potential risk of supply disruptions.

Risk hedging discourages reliance on single sources of supply, especially from unreliable providers.

Safety stock levels can be increased to create inventory buffers that help during short supply disruptions.

Transshipping, or moving inventory between locations, can address individual store level supply disruptions.

Cooperation between competitors, known as 'coopetition', can help minimize supply disruptions through shared resources.

The statistical concept of aggregation suggests that demand variability is reduced by pooling demand across locations or products.

Risk hedging is particularly suitable for functional products with stable and predictable demand.

High supply uncertainty, such as evolving or unpredictable supply bases, is an ideal condition for applying risk hedging strategies.

Risk hedging strategies are best for managing cost and service trade-offs when supply conditions are unstable.

The strategy involves significant communication, collaboration, and coordination among supply chain members.

Individuals intuitively use risk hedging in their personal lives, such as stocking up before a snowstorm.

The lesson provides a comprehensive overview of risk hedging, its development, application, and optimal conditions for use.

Transcripts

[Music]

[Applause]

greetings everyone this is dr. Rodney

Thomas and today we're gonna talk about

the risk hedging supply chain strategy

so what is risk hedging isn't that some

kind of finance concept for trading

stocks or currencies well yes and no

finance hedges some types of trading

risks but in a supply chain context risk

hedging strategy is all about dealing

with supply disruptions

more specifically risk hedging is a

supply chain strategy that has the goal

to share and pull resources to

collectively share and minimize supply

disruption risks it takes a lot of

coordination collaboration and

cooperation to pull off but it is a

vital approach to supply chains that

frequently experience supply problems

now the concept of risk hedging builds

on Fisher's original work that

identified two basic supply chain

strategies that is the efficient supply

chain strategy as well as the responsive

supply chain strategy these strategic

approaches to supply chain management

address varying conditions of demand

certainty or uncertainty by identifying

appropriate actions for functional or

innovative product types and these

strategies work well under the right

conditions but they assume that supply

characteristics are stable although that

assumption hold true in many contexts

there are also times when supply is

erratic unpredictable or uncertain when

supply is uncertain efficient and

responsive supply chain strategies are

inappropriate when supply is uncertain

making assumptions based on supply

stability can lead to problems so

another professor named Holly proposed

an uncertainty matrix for supply chain

strategies and as a side note professor

Lee is as close to a celebrity supply

chain scholar as you will find he's at

Stanford he has some of the most

influential supply chain research in the

world and has regularly sought out for

his supply chain expertise dr. Lee's

uncertainty matrix highlights the idea

that supply chain strategies cannot be

thought of in terms of just addressing

demand uncertainty

that unit dimensional focus is flawed

and can lead to all kinds of cost or

service problems therefore as supply

chain managers we also need to

simultaneously consider supply

uncertainty this second dimension for

consideration makes a lot of sense

because supply chain management usually

comes down to integrating supply and

demand in the most efficient and

effective manner for now we're just

going to focus on a risk hedging

strategy that is recommended when demand

uncertainty is low but supply

uncertainty is high to illustrate the

concept of risk hedging let's think

about predictable supply flows and a

basic supply chain raw materials or sub

assemblies move from suppliers to

manufacturers the manufacturers then

convert these unfinished goods into

finished products these products are

moved to a distribution center where

they are then sent to multiple retail

locations for consumers to purchase this

basic supply chain works fine as long as

all sources of supply keep flowing

throughout the supply chain but what

happens when there's some type of supply

disruption or when a supplier cannot

deliver to a manufacturer perhaps the

supplier has ongoing quality problems

employee turnover or erratic lead times

that lead to sporadic deliveries

regardless of the root cause of the

supply chain disruption everything stops

flowing and retail shelves become empty

of products that consumers want or need

so what should a supply chain manager do

when a supplier continually causes

supply disruptions then a risk hedging

strategy is appropriate with this

strategy supply chain managers can seek

out multiple sources of supply to spread

out the risk and minimize supply

disruptions although one supplier may

have a delivery issue for a few days

it's much less likely that three

suppliers would all experience a problem

at the same time by adding additional

sources of supply managers spread out

the potential risk of supply disruptions

the more sources of supply that you have

the less risk you have some

problems can exist with a manufacturer

of finished goods there may be times

when production schedules get delayed

and cause supply disruptions throughout

the rest of the supply chain it might be

due to an equipment failure missing

materials accidents etc all kinds of

things can happen but the end result is

a supply disruption that disappoints

customers

what can a supply chain manager do well

much like with suppliers if a

manufacturer continues to cause supply

disruptions the manager should head to

their risk obtain additional

manufacturing sources to spread out the

risk of delayed production as the

supplier and manufacturer examples

demonstrate a risk caching strategy

would discourage single sources of

supply especially from unreliable

providers of goods or services although

having multiple sources of supply helps

hedge risks there may be some situations

where the supply base is evolving and

few options are available in these

situations expanding the number of

suppliers or manufacturers is not

feasible

what can a supply chain manager do to

prevent empty shelves further downstream

well a risk hedging strategy also

suggests that safety stock levels can be

increased in various locations to create

inventory buffers that help a supply

chain function during short supply

disruptions these inventory buffers or I

like to call them buffer stock can exist

anywhere in a supply chain and they are

simply held to account for supply

uncertainty think of it like stocking up

on milk and bread before a big snowstorm

hits you know you're gonna need these

items but you don't know how long it'll

take before you can go get them again

therefore you buy extra to get through

the storm well congratulations you just

implemented your own personal risk

hedging supply chain strategy here's

another scenario there are also times

when a supply disruption may come from a

firm's own internal distribution network

just like problems can arise with

suppliers or manufacturers things can

also go wrong in a distribution center

and create a supply disruption for

individual store locations what can a

supply chain manager do

risk hedging strategy is all about

sharing and pulling resources to

minimize supply disruptions

well store level inventories are part of

that same network of shared resources so

there are times when one storm a tranche

if some of its extra inventory to

another store that is in need of that

inventory due to a supply disruption

although transshipping increases costs

by moving the product again it can be an

effective way to address individual

store level supply disruptions another

form of risk hedging supply chain

strategy deals with a common pool of

inventory that is shared by multiple

supply chain members who are also

competitors I like to call this

coopertition risk hedging because it

requires cooperation between competitors

for example in some large cities

competing hospitals I'll use a shared

distribution facility and a common pool

of inventory to minimize the risk of

supply disruptions this approach takes

advantage of the statistical concept of

aggregation aggregation suggests that

demand variability is reduced by

accumulating demand across locations or

products aggregation also allows high

demand in one location to be offset by

low demand in another so what's this

have to do with the hospital example

well imagine if each Hospital had its

own distribution center with its own

inventory one hospital would likely have

too much of an item and another would

not have enough but because they did not

share the risk they could not offset

each other as a result one hospital

might run out of a needed item that

could cost somebody their life however

by cooperating competitors could share

resources drive down the risk of supply

chain failure another variant of

coopertition risk hedging strategy

implementation is to have individual

locations share inventory with each

other similar to our previous retail

example hospitals can also trans to each

other if the shared distribution center

runs out this type of resource sharing

requires tremendous amounts of

communication collaboration and

coordination but helps address supply

disruptions

so let's dive a little deeper into why

when you are a manager you might choose

to use a risk hedging supply chain

strategy risk hedging supply chain

strategy shares disruption risks and

minimizes supply disruption effects it

takes advantage of shared resources and

aggregation advantages to deal with

supply uncertainty it is the best

approach to managing cost and service

trade-offs when supply conditions are

not stable when should we use a risk

hedging supply chain strategy quite

simply the lis uncertainty matrix tells

us that risk hedging supply chain

strategy is appropriate when demand

uncertainty is low and supply

uncertainty is high so if we look back

at leas on certainty matrix and we want

to determine the best conditions for

risk hedging strategy we want a low

demand uncertainty and that's your

functional products risk hedging should

be used with functional products that

have more stable and predictable demand

you typically see this with longer

product life cycle products that have

lower inventory carrying costs and low

margins these also tend to be products

with high volumes per SKU that have

lower stock out and obsolescence costs

Lee's uncertainty matrix also shows us

that in addition to low demand

uncertainty we should use a risk hedging

strategy if we also have high supply

uncertainty risk hedging strategy is

typically used with evolving or

uncertain supply bases that are

vulnerable to breakdowns or have

inconsistent lead times likewise

sources a supply that seemed to have

quality problems reliability issues

extended processing times capacity

issues or difficulty with change in

flexibility tend to have inherent risks

that need to be hedged so let's

summarize in this lesson we talked about

a risk hedging supply chain strategy and

how the concept developed we looked at

examples of risk hedging why to use this

strategy and most importantly when to

use it

we even showed that all of you are

intuitive risk hedgers when snow storms

are in the forecast

[Music]