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1. Risk Management​ SESSION – I | Risk Management​ UNIT - 2 Dr. Vishal Kashav  | Assistant Professor, SOB Scan to Know More About Me 

2. Sources of risk In supply chain businesses, risks come from different sources, which can affect operations, finances, and reputation. Understanding these risks helps companies prepare and respond effectively. Below are some key sources of risk, explained with industry examples: Supply Risks: These occur when raw materials, parts, or products are delayed or unavailable. This can be due to supplier failure, natural disasters, or geopolitical issues. Example: In 2021, the global semiconductor shortage affected car manufacturers like Ford and Toyota, leading to production delays and losses. Demand Risks: These arise when customer demand changes suddenly, leading to overstock or stockouts. This can happen due to economic downturns, changing trends, or inaccurate demand forecasting. Example: During the COVID-19 pandemic, demand for hand sanitizers surged, while demand for luxury goods dropped, causing supply chain disruptions. Operational Risks: These risks come from failures within the company’s operations, such as machinery breakdowns, labor strikes, or IT failures. Example: Amazon’s warehouse automation helps speed up deliveries, but if its robotic systems fail, order processing can be delayed. Presentation for UPES Faculty & Students 

3. Sources of risk Financial Risks: These relate to currency fluctuations, interest rate changes, and economic instability, which can impact a company’s profitability. Example: A European fashion brand selling in the U.S. may lose money if the euro strengthens against the dollar, making its products more expensive. Environmental and Natural Disaster Risks: Weather events like hurricanes, floods, or earthquakes can disrupt logistics and supply chains. Example: In 2011, floods in Thailand severely impacted the hard drive manufacturing industry, delaying global laptop and computer production. Political and Regulatory Risks: Changes in government policies, trade restrictions, or new laws can impact business operations. Example: The U.S.-China trade war led to tariffs on electronics, increasing costs for companies like Apple and affecting supply chains. Cybersecurity and Data Risks: Hacking, data breaches, or IT failures can disrupt supply chains and lead to financial or reputational damage. Example: In 2017, the NotPetya cyberattack disrupted global shipping company Maersk, halting operations and costing hundreds of millions in losses. Presentation for UPES Faculty & Students 

4. Global risk Global risks are large-scale risks that affect businesses, economies, and supply chains across multiple countries or even worldwide. These risks often arise due to geopolitical, environmental, economic, or technological changes. Examples of Global Risks in the Supply Chain: COVID-19 Pandemic (2020): The outbreak disrupted global supply chains, leading to factory shutdowns, labor shortages, and transportation delays. Companies like Apple and Toyota faced production slowdowns due to a lack of raw materials and components. Russia-Ukraine War (2022): This conflict led to disruptions in global oil, gas, and grain supplies, affecting industries worldwide. The price of crude oil surged, impacting logistics costs for companies like FedEx and DHL. Chip Shortage Crisis (2021-Present): The global semiconductor shortage affected industries like automobiles (Ford, General Motors) and electronics (Sony, Samsung), leading to production delays and increased costs. Presentation for UPES Faculty & Students 

5. Global risk Impact of Global Risks on Supply Chains: ✔ Higher production and transportation costs ✔ Delays in delivery and manufacturing ✔ Increased uncertainty in demand and supply Presentation for UPES Faculty & Students 

6. Elemental risk Elemental risks are smaller, localized risks that affect specific parts of a supply chain, a company, or a region. These risks arise from internal company operations, local economic conditions, or specific supply chain vulnerabilities. Examples of Elemental Risks in the Supply Chain: Warehouse Fire at Amazon (2021): A fire at an Amazon fulfillment center in the U.S. caused delays in customer orders and inventory losses. Port Congestion at Los Angeles (2021): Delays in unloading cargo led to supply chain bottlenecks, impacting businesses like Walmart and Target. Supplier Bankruptcy (UK-based Fashion Brand): A clothing brand relying on a single supplier faced inventory shortages when the supplier went bankrupt. Presentation for UPES Faculty & Students 

7. How Businesses Can Manage These Risks: For Global Risks: Diversify suppliers across different regions, invest in risk forecasting tools, and develop flexible supply chains. For Elemental Risks: Have backup suppliers, strengthen internal operations, and use technology for real-time monitoring. Presentation for UPES Faculty & Students 

8. Holistics Risk, Static Risk and Dynamic Risk The understanding of the distinctions between Holistic Risk, Static Risk, and Dynamic Risk is essential for developing effective strategies to mitigate potential disruptions. Holistic Risk (considered as a whole thing rather than a collection of parts) involves evaluating risks across the entire organization or supply chain, considering the interconnectedness of various components. This comprehensive approach enables businesses to identify and address vulnerabilities that may not be apparent when examining individual elements in isolation. By adopting a holistic perspective, organizations can enhance resilience, agility, sustainability, and cybersecurity, thereby better navigating complex and interconnected challenges. Example : A global manufacturing company faces risks not only from its suppliers but also from logistics disruptions, regulatory changes, and geopolitical instability. By adopting a holistic approach, the company evaluates how these interconnected factors impact the entire supply chain. For instance, a natural disaster in one region could disrupt production, leading to supply shortages, financial losses, and reputational damage across multiple markets. A holistic risk management approach enables the company to develop mitigation strategies that address multiple risks simultaneously, such as diversifying suppliers, investing in disaster recovery plans, and ensuring regulatory compliance across different jurisdictions. Presentation for UPES Faculty & Students 

9. Holistics Risk, Static Risk and Dynamic Risk Static Risk refers to risks that are relatively stable and predictable over time. These risks are often associated with established processes, systems, or environments that do not change frequently. While static risks may be easier to identify and manage due to their predictability, they can still pose significant threats if not properly addressed. For example, relying on a single supplier for critical components can be a static risk if the supplier's capacity or reliability is not regularly assessed. Example : A company that relies on a single supplier for a critical raw material faces a static risk. This risk is predictable, as the company’s supply chain is stable and has been functioning well for years. However, if the supplier experiences an unexpected disruption (e.g., a fire in the factory), the company may face delays or even a halt in production. Static risks are often associated with predictable and stable business environments, and they can be mitigated by diversifying suppliers, ensuring contract flexibility, and performing regular risk assessments on the supply chain’s vulnerability. Presentation for UPES Faculty & Students 

10. Holistics Risk, Static Risk and Dynamic Risk Dynamic Risk pertains to risks that evolve and change over time, often due to external factors such as market fluctuations, technological advancements, or geopolitical events. These risks are less predictable and require continuous monitoring and adaptation. The COVID-19 pandemic, for instance, introduced dynamic risks that disrupted global supply chains, highlighting the need for businesses to be agile and responsive to rapidly changing conditions. Example: The COVID-19 pandemic introduced dynamic risks for companies across the globe. The sudden, global health crisis created disruptions in demand, labor shortages, and transportation delays, all of which evolved over time. Dynamic risks are not static and evolve as external factors like market conditions, technology advancements, and unforeseen events (e.g., pandemics, political instability, or technological shifts) impact the supply chain. Businesses need to be agile and continuously monitor such risks to adapt their strategies accordingly. For example, a logistics company might pivot to digital solutions or adjust its transportation methods to mitigate the impacts of travel restrictions during a pandemic. Presentation for UPES Faculty & Students 

11. Inherent Risk and Contingent Risk Inherent Risk refers to the level of risk present in a process or activity before any controls or mitigation strategies are applied. It represents the natural exposure to risk due to the nature of the business or operational environment. For example, a hospital purchasing a new data analytics system must assess the inherent risk associated with the vendor's data security practices before implementing any specific controls. Example: In manufacturing, inherent risks include equipment failure, production delays, or safety hazards that naturally arise from the production process. For example, a car manufacturer may face inherent risks related to assembly line breakdowns or defects in raw materials. Presentation for UPES Faculty & Students 

12. Inherent Risk and Contingent Risk Contingent Risk , on the other hand, pertains to risks that may arise due to specific events or conditions, often external to the organization, and are typically associated with uncertainties that could impact the supply chain. These risks are not inherent but depend on particular circumstances or events, such as geopolitical tensions, natural disasters, or regulatory changes. For instance, geopolitical tensions in the Middle East can disrupt supply chains, affecting businesses that rely on that region for sourcing materials. Example: (1) These risks depend on external factors, such as supply chain disruptions caused by a natural disaster. For instance, a fire at a critical supplier’s factory or a delay in material shipments due to geopolitical issues would be considered contingent risks. (2) External events like changes in consumer behavior due to economic downturns or political instability can affect a retailer’s sales. For instance, the risk of a retail company facing a downturn in business due to an unexpected global recession would be a contingent risk. Presentation for UPES Faculty & Students 

13. Customer Risk and Fiscal/Regulatory Risk Customer risk pertains to the potential challenges and uncertainties arising from customer relationships and behaviors. These risks can manifest as demand fluctuations, credit defaults, or shifts in customer preferences, all of which can significantly impact an organization's revenue and operational stability. To mitigate customer risk, companies should implement robust demand forecasting, maintain diversified customer portfolios, and establish strong credit management practices. Additionally, fostering transparent communication and building resilient customer relationships can enhance trust and loyalty, thereby reducing the likelihood of adverse impacts. An example of customer risk is seen in the case of Apple, where the company heavily depends on a few large customers like major telecom companies and retailers. A shift in customer demand or a reduction in order volume could significantly impact Apple’s revenue stream. For example, the company faced challenges during the COVID-19 pandemic when global demand for smartphones decreased, and major retailers experienced store closures, affecting sales. Diversifying their customer base helped mitigate some of these risks by ensuring that the company was not overly reliant on a few clients. Presentation for UPES Faculty & Students 

14. Customer Risk and Fiscal/Regulatory Risk Fiscal and regulatory risk involves the potential for financial loss or operational disruption due to changes in laws, regulations, or fiscal policies. This includes compliance with environmental regulations, tax laws, trade restrictions, and industry-specific standards. Non-compliance can lead to legal penalties, financial fines, and reputational damage. To manage these risks, organizations should stay informed about relevant regulations, engage in proactive compliance monitoring, and develop contingency plans to adapt to regulatory changes. Implementing a comprehensive compliance program and conducting regular audits can also help in identifying and mitigating potential fiscal and regulatory risks. Volkswagen provides an example of fiscal and regulatory risk through the 2015 emissions scandal, often referred to as “ Dieselgate ”. The company was found to have violated environmental regulations by installing software in their cars to cheat emissions tests. As a result, Volkswagen faced significant financial penalties, legal actions, and regulatory scrutiny across several countries, including billions of dollars in fines. This case highlights the importance of complying with fiscal and regulatory standards to avoid substantial financial and reputational losses. Presentation for UPES Faculty & Students 

15. Purchasing Risk and Reputation/Damage Risk Purchasing risk refers to potential losses associated with the procurement of goods and services, encompassing issues such as supplier insolvency, delivery delays, and quality deficiencies. For example, in 2017, the automotive industry faced significant disruptions when a major supplier, Takata Corporation, filed for bankruptcy due to the costs of recalling defective airbags. This event led to production halts and financial losses for numerous automakers reliant on Takata's products. Reputation damage risk involves the potential harm to a company’s public image, which can result from various factors, including product failures, unethical practices, or environmental incidents. A notable instance is the 2015 Volkswagen emissions scandal, where the company was found to have installed software in vehicles to cheat emissions tests. This revelation led to a substantial decline in consumer trust, legal penalties, and a significant drop in sales, highlighting the profound impact of reputational damage on a company’s financial health. Presentation for UPES Faculty & Students 

16. Organizational Risk Risks arising from internal organizational structures, strategies, processes, and culture. Organizational risks stem from internal business functions and can affect the overall efficiency and success of operations. For example; Poor decision-making in long-term business planning, Quality control issues affecting product/service delivery, Budget overruns and cost mismanagement, Ethical concerns leading to reputational damage, Employee resistance to change. Presentation for UPES Faculty & Students 

17. Interpretation Risk Interpretation risk arises when decision-makers misinterpret or misanalyze data, reports, or market conditions, leading to incorrect conclusions. For example; Anchoring bias (relying too much on initial information), Ambiguous or unclear data presentation, Wrong assessment of demand fluctuations, Lack of expertise in statistical and analytical techniques. Presentation for UPES Faculty & Students 

18. Case Examples of Organizational and Interpretation Risks Case 1: Organizational Risk – Boeing 737 MAX Crisis Issue : Flawed strategic decisions and regulatory compliance failures led to two major crashes. Impact : Global grounding of aircraft, financial losses, and reputational damage. Lesson : Strong internal governance and compliance mechanisms are essential. Case 2: Interpretation Risk – Kodak’s Fall Issue : Misinterpretation of digital transformation trends; believed film-based photography would remain dominant. Impact : Loss of market leadership and bankruptcy. Lesson : Companies must correctly analyze market trends and avoid cognitive biases Presentation for UPES Faculty & Students 

19. Process Risk Process risk refers to the likelihood of failures, inefficiencies, or vulnerabilities within an organization’s internal operations, leading to financial losses, customer dissatisfaction, or regulatory non-compliance. What are the sources of process risks? Poor workflow design, bottlenecks, or redundant processes. Defective products due to process inconsistencies. Delays or failures in logistics and procurement. System crashes, automation errors, or cybersecurity breaches. Failing to adhere to industry regulations and legal standards. Mitigation Strategies: Implementing process standardization and automation. Using Lean and Six Sigma methodologies to optimize workflows. Enhancing real-time monitoring and predictive maintenance. Conducting regular risk assessments and audits. Establishing contingency plans for critical process failures. Presentation for UPES Faculty & Students 

20. Heuristic Risk Heuristic risk arises when decision-makers rely on cognitive shortcuts (heuristics) rather than data-driven analysis, leading to biased or flawed decisions. What are the sources of process risks? Investors overreacting to recent market trends without deeper analysis. Choosing a supplier based on past reputation rather than current performance data. Overestimating or underestimating demand based on past trends without considering market changes. Mitigation Strategies: Promoting data-driven decision-making over intuition. Encouraging cross-functional discussions and diverse viewpoints. Using AI and predictive analytics to reduce cognitive biases. Implementing decision review processes to avoid overreliance on heuristics. Presentation for UPES Faculty & Students 

21. Decommissioning Risk Decommissioning risk refers to the challenges and potential failures associated with the discontinuation of infrastructure, products, systems, or technologies. What are the sources of process risks? Risks associated with retiring legacy IT systems without proper transition plans. Consumer backlash and financial losses from withdrawing a product line. Improper disposal of decommissioned assets leading to legal penalties. Disruptions caused by the closure of supplier facilities or plant shutdowns. Employee layoffs or skill redundancies due to automation or restructuring Mitigation Strategies: Strategic transition planning for phased decommissioning. Ensuring regulatory compliance in asset disposal. Developing alternative solutions for affected stakeholders. Conducting risk impact assessments before decommissioning decisions. Implementing change management strategies for employees. Presentation for UPES Faculty & Students 

22. Institutional Risk Institutional risk arises from external governance bodies, regulatory agencies, financial institutions, or geopolitical factors that impact business operations. What are the sources of process risks? Government-imposed policies affecting operations (e.g., environmental laws, trade regulations). Geopolitical conflicts affecting supply chains (e.g., Brexit, US-China trade war). Interest rate fluctuations, currency instability, or economic downturns. Non-adherence to international trade laws or corporate governance standards. Mitigation Strategies: Engaging with policymakers and industry bodies to stay informed. Diversifying supply chains and markets to reduce geopolitical risks. Investing in regulatory compliance and legal counsel. Using financial hedging strategies to mitigate currency and interest rate risks. Scenario planning and stress testing to prepare for institutional shifts Presentation for UPES Faculty & Students