Risk Hedging Supply Chain Strategy: L7
Summary
TLDRIn 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
🛠️ 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.
🔄 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.
📊 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.
Mindmap
Keywords
💡Risk Hedging
💡Supply Chain Strategy
💡Supply Disruptions
💡Efficient Supply Chain
💡Responsive Supply Chain
💡Uncertainty Matrix
💡Safety Stock
💡Buffer Stock
💡Transshipping
💡Cooperatition
💡Aggregation
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]
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