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.