SUPPLY CHAIN RISK ASSESSMENT

A QUANTITATIVE APPROACH
Arne Ziegenbein, Jan Baumgart
Center for Enterprise Sciences (BWI), Swiss Federal Institute of Technology (ETH) Zurich
Kreuzplatz 5,CH-8032 Zurich, Switzerland, aziegenbein@ethz.ch
Abstract: Since several industrial companies face disruptions in their supply chains that cause high
financial losses as a consequence, practitioners and researchers start to look at the risk in the supply
chain. It is of importance for the risk management being informed about the magnitude of risk the
company or rather the supply chain is subject to. Systematic approaches to quantitatively assess
supply chain risks are still missing in practice and science. Therefore, this article introduces a
quantitative approach for measuring the probability of occurrence and the financial impact of
disruptions in the supply chain. First experiences of the application of the approach are illustrated in
an industrial case study.
Keywords: Supply chain risk management, Supply chain vulnerability, Business continuity

Introduction

Industrial organizations are subject to vulnerabilities of their supply chain. Especially

those companies with huge chains have to cope with uncertainties in their inbound and
outbound logistics. Several recent business trends have increased risk and uncertainty in
supply chains: Globalization and a lower vertical range of manufacture have led to a
reduction of the supplier base (e.g. single sourcing) with the consequence that a failure of a
supplier is increasingly critical for the business success. To lower costs, supply chain
managers attempt to reduce inventory and lead-time (Norrman, and Jansson, 2004;
Norrman, 2003), so that there is less redundancy in the supply chain for buffering
unexpected events. Moreover, the uncertainty caused by natural hazards, e.g. typhoons,
flooding, and terrorism results in financial loss in global supply chains.
The following case study illustrates how disruptions in the supply chain can
negatively impact the business. In March 2000 a fire broke out at a Phillips plant in
Albuquerque, New Mexico. Although the blaze was cancelled within 10 minutes, the
consequences were tremendous. Scandinavian cell-phone giants Nokia and its competitor
Ericsson sourced computer chips from the factory in New Mexico. After the incidence
Phillips was not able to deliver the desirable chips for months. This disruption impacted the
supply chains of the two customers at a time of a cell-phone boom. Whereas Nokia was
able to reschedule its inbound supply chain with negligible financial consequences,
Ericsson suffered a loss of about $400 million in potential revenue (Latour, 2001).
Remarkably, Nokia not only fulfilled its demand but also seized a portion of Ericssons
market.
The depicted case study indicates the need for companies being aware of disturbances
concerning their inbound supply chain, namely supply chain risk. Specifically, in order to
derive risk mitigation strategies, managers require information about the magnitude of risk
the supply chain is subject to. This information is gathered within the assessment process.

Therefore, this article is focused on supply chain risk and the assessment process. Due to
the fact that only few approaches exist, a quantitative method to assess the probability of
occurrence and the business impact of supply chain risks is presented.
The proceeding will be as follows that is based on the research methodology
proposed by Ulrich, and Hill (1976): In chapter 2 supply chain risks are distinguished in
sources and consequences. Moreover, requirements of a method for assessing supply chain
risk are derived from literature and interviews with supply chain managers. Chapter 3,
considered as a literature review, covers available quantitative methods for assessing supply
chain risks firms are subject to. It will be dealt with assessing the probability of occurrence
of an undesirable event and as well with estimating the potential impact on earnings.
Besides presenting the methods, advantages and drawbacks will be discussed. In chapter 4,
the new method is presented and first experience of the application and validation in an
industrial environment are described. The results are summarized and suggestions for
further research options are outlined in chapter 5.

Supply chain risk

As we indicated above, supply chain risk is risk related to the inbound logistics of a
company. Therefore, we define supply chain risk as the expected change in an outcome
variable that has been caused by an adverse effect on the inbound supply chain. To get a
broader understanding of supply chain risk it is reasonable to decompose the examinations
to sources and consequences of risk (Jttner, et al., 2003). Whereas sources of risk are
related to uncertain internal, external or environmental variables (see chapter 2.1); changes
in outcome variables are regarded as consequences (see chapter 2.2).
2.1

Risk sources

Since the risk sources in supply chains are very different, it is appropriate to classify
the risks. The research topic of supply chain risk management is very new, so that there are
only a few approaches structuring supply chain risk sources (e.g. Pfohl, 2003; Christopher,
2003; Kajter, 2003; Jttner, et al., 2003; Johnson, 2001). The classification shown in
table 1 conforms to the top level processes of the SCOR (Supply Chain Operations
Reference) model that is very common to describe supply chains from a process view
(Supply Chain Council, 2003; Ziegenbein, and Nienhaus, 2004).
SCOR-Categories

Source of supply chain risk

Description

Plan

- Financial health of suppliers

- Information systems
- Production management

Source
Make

- Supply disruption
- Machine breakdown
- Quality problems
- Time delays
- Damage / loss of goods
- Disasters
- Legal liabilities

- Cash flows, Profitability, Liquidity

- Transfer of timely and accurate data
- Suppliers ability for accurate materials and
capacity planning
- Disturbance in the suppliers inbound supply chain
- One or more machines out of order
- The ability of suppliers to fulfill requirements
- Transport, ramp
- During transport
- Any occurrence that causes great harm or calamity
- Legally enforceable restrictions or commitments
relating to the use of the material, product or service

Deliver
Environment

Table 1: Examples for sources of supply chain risk

Table 1 shows examples for the risk sources in the supply chain of one company in
the supply chain. This article deals with risk sources in the inbound logistics, classified as
source risk, of a focal company. In turn, this source risk of the focal company can be
caused by suppliers risk categories plan, source, make, deliver and environment. For
example, a source risk of the focal company can be a consequence of the machine
breakdown (make) or a misapplied planning method (plan) at a supplier.
2.2

Risk consequences

Having categorized different sources of supply chain risk, impacts on corporate

performance measures as a consequence of an undesirable event are depicted. The main
consequence of supply chain risks is the delay or disruption of the goods flow, i.e. the focal
company doesnt receive the right amount of components in the right quality at the right
location and the right time. Further, the disruption is carried forward to the next stage of the
supply chain up to the end customer: The focal company cannot punctually deliver the end
products its customers, so that the supply chain experiences a loss of orders and customers.
Moreover, the company suffers of idle capacities if some components necessary for
production are not available. Due to the fact that the company is often committed within
supply contracts to receive other components for the end product, additional inventory and
possibly obsolete material is built up. Besides these consequences, there are potentially
other negative impacts of supply chain risks, e.g. damages and repair.
All these negative consequences impact the financial result of the focal company and
the whole supply chain. For quantifying the financial consequences measures from the
external or internal accounting can be applied. The EBIT (earnings before interest and tax)
is more appropriate than the net income because the EBIT is independent of the capital
structure of the firm. Therefore a comparison of companies with a different financing mix
can be conducted. A further accounting measure is the group of residual income introduced
by consultancy firms to assess the economic success of companies. The most famous is the
concept of EVA (i.e. economic value added) defined as the difference between actual and
required rate of return (Coenenberg, 2003). Another eligible measure for assessing the
impact of an undesirable event is the concept of business interruption value (BIV) (Clark,
1990). The business interruption value comprises lost gross margins, extra costs such as
costs for excess inventory and idle capacity. Further, lost customer goodwill must be taken
into consideration (Norrman and Jansson, 2004). The business interruption value is easy to
understand for decision-makers and contains not only accrued costs but also opportunity
costs for unused capacity or nonemployed staff. According to accounting rules, opportunity
costs must not be considered in financial statements. Therefore the BIV cannot be
interpreted as the impact on earnings and is incompatible with the accounting measures
presented above. Since a company has different stakeholders with different information
requirements BIV, EBIT and EVA may coexist. In the following, however, we focus the
examinations on business interruption value.
2.3

Requirements for assessing supply chain risks

Based on the structured approach to supply chain risks (see chapter 2.1 and 2.2), the
relevant literature and workshops with supply chain managers, requirements on a method to
assess supply chain risk are evaluated. The most important criteria are summarized in
table 2:

Criterion

Description

1. Impact.

The procedure should be eligible to assess the impact on profitability (e.g.

EBIT, EVA, or BIV) if a detrimental incidence occurs (Zsidisin et al., 2003;
Norrman and Jansson, 2004).
The procedure should be an appropriate estimate of the probability of
occurrence of an undesirable event (Zsidisin et al., 2003; Norrman and Jansson,
2004).
The results should be intersubjective and therefore independent of user. The
outcome should be unique.
The model should be easy to understand for practitioners. Besides, it should be
feasible to introduce in industrial organizations.
The model is a modified description of reality and it should therefore contribute
to a reduction of complexity (Cranfield School of Management, 2003).
The assessment procedure should project results of future supply chain
disruptions. Based on the outcomes, managers should be able to understand
vulnerability and to make decisions.

2. Probability.

3. Objectivity.
4. Straightforwardness.
5. Complexity.
6. Decision-Support.

Table 2: Requirements on quantitative methods for supply chain risk assessment

Literature review

As stated above, this chapter deals with available quantitative methods for supply
chain risk assessment. The results are to be found in the tables 3, 4 and 5:
Reference

Description

Advantages / drawbacks

Norrman and
Jansson, 2004

The authors describe qualitatively the main

aspects of Ericssons supply chain risk
management approach. Sources of risk are
classified on supplier base and measured by the
business recovery time in case of a disruption.
Besides, the probability of occurrence is
calculated using fault tree analysis. The figures
are aggregated on corporate level to the business
interruption value that is deemed to be the
economic damage for the focal company after an
undesirable event.
Zsidisin et al. present empirical results of a
survey of previous supply disruptions. As a result,
they present a course of action for the reduction
of supply chain risk. The applied measure is the
impact on EBIT.

Adv.: An overview of the items to

be considered as economic damage
after a supply disruption is provided
Drb.: The outlines are qualitative
and therefore less eligible for
decision-making. Further literature
(e.g. production planning,
accounting) must be considered to
derive a quantitative model.

The model for supply chain risk estimation is

derived from engineering probabilistic risk
analysis (PRA). For different scenarios of
disruptions, the impact on supply chain
performance measures can be simulated.

Adv.: The model provided is

quantitative.

Zsidisin et al.,
2004

Deleris et al.,
2004

Cranfield
School of
Management,
2003

The authors present a procedure for identifying

and valuing risks in supply chains as selfassessment workbook. The risk exposure is
concretized by the total costs of risk (TRC), the
result of combining ordinal scaled numbers for
each source of risk.

Adv.: An overview of the items to

be considered as economic damage
after a supply disruption is provide
Drb.: The outlines are qualitative.

Drb.: The approach requires

probability distributions and
potential impacts on performance
measures as input parameters.
Adv.: The method is easily to
implement in practice.
Drb.: The ordinal scale provides just
a very rough estimate of the
importance of a risk source.

Table 3: Risk assessment methods from supply chain management literature

Reference

Description

Advantages / drawbacks

Any TQM
literature

Failure modes and effects analysis (FMEA) is

commonly used in TQM and provides an
approach for identifying potential causes of
system failures. Having sought out potential
events that may cause system failure, prevention
strategies are considered and evaluated on a
before-and-after risk exposure base. The
established risk measure is the risk priority
number (RPN) which contains the chance that a
fault occurs (O), the chance of failure of detecting
the fault (D), and the severity (S). If O, D, and S
are measures for the chance of failure, the chance
of non-detection, and the severity, respectively,
the risk priority number is then calculated by
multiplying the three numbers with each other.
Due to the fact that O, D, and S are scaled from 1
to 10 in dependence of the degree of risk, the
RPN is a number between 1 and 1000.
Based on the drawback of the FMEA the scenario
based FMEA has been developed. In this model a
scenario is an unrequested cause-and-effect chain
of events. For each scenario the probability and
the impact on earnings have to be assessed. The
suggested measure of risk is the expected value of
total costs over all scenarios. The probability of a
scenario can be subdivided into the probability of
a cause and the probability of consequences
conditional on the cause (i.e. probability of nondetection). The costs are a measure of the
financial consequences.
Fault tree analysis (FTA) is commonly used for
the assessment of technical risks. The approach
starts with examining potential causes for the
failure of the considered system (i.e. top event).
In a further step the fault tree is constructed and
the probability of occurrence of the top event can
be evaluated based on the likelihoods of the
causes (i.e. basic events).

Adv.: FMEA is a structured method

for assessing the risk of a potential
failure of a system. Considering that
the inbound logistics of a firm or
rather the whole supply chain is a
system, the related risk exposure
can be calculated.
Drb.: However, the RPN provides
as any ordinal-scaled figures only a
ranking of risk sources. Therefore,
the measure is less eligible for
decision-support.

Kmenta, and
Kosuke, 2000

Modarres,
1993

Adv.: The scenario-based FMEA

reduces the depicted drawbacks of
traditional FMEA significantly by
applying likelihoods (probability)
and costs (impact) for measuring
risk.
Drb.: The probabilities have to be
assessed using historical data.
However, for certain events like a
severe supply disruption, there is
probably no data available.
Adv.: The purpose assessing the
probability of an undesirable event
is accomplished by putting the
overall failure down to causes
related to basic events. The
procedure is objective and reduces
complexity because only relevant
causes that might trigger the top
event are considered. FTA is
intuitive and easy to conduct for
concise systems and only basic
statistics are needed.
Drb.: None.

Table 4: Risk assessment methods from quality management

The literature review shows that there is a lack of quantitative approaches for assessing
supply chain risks that fulfil the requirements presented in chapter 2.3. However, we
suggest transferring the method of fault tree analysis used in quality management to the
specific problems of supply disruptions (chapter 4.1). Further, the concept of business
interruption value and the business interruption insurance approach provide a base for
further examinations in chapter 4.2.

Reference

Description

Advantages / drawbacks

Hax, 1965

The author describes qualitatively how insurance

companies assess impact and likelihood of
business interruption caused by either market
slowdowns or by company-related causes like
supply disruptions. The impact is calculated on
full-cost base and comprises lost gross margins,
costs of idle capacity as a percentage of fixed
costs, extraordinary costs such as costs for excess
inventory or materials obsolescense. Besides, lost
customer goodwill must be considered.
For assessing the probability Hax distinguishes
between the probability that any damage emerges
and the probability of dispersion. Whereas the
probability that any damage emerges is related to
the frequency of historic events, the latter refers
to the scale of the impact in case of damage.

Adv.: Hax provides a framework for

assessing the impact of undesirable
events by describing which aspects
have to be considered.
Drb.: A detailed formula for
concrete calculations can only be
derived using further literature (e.g.
accounting and production
planning). Besides, the suggested
classification for the likelihood is
reasonable but it is not illustrated
how to proceed.

Table 5: Risk assessment methods from insurance literature

Quantitative assessment of supply chain risk

Before introducing the method for assessing the probability of occurrence and impact
of a supply disruption, the model of the supply chain that is the basis of the method is
roughly presented (see figure 1).

Information Flow

Information Flow

Dependent demand oij,t

Supplier j

Item i = 1 m

Independent demand D t

Focal
Company

End
Customers

(j = 1 n)
Delivery dij,t

Goods flow

Delivery Qt,act

Goods flow

Figure 1: Model of the supply chain

Considering the focal company that is part of a supply chain among j=1n suppliers.
The company sources i=1m items which are assembled to finished goods. These goods
are sold to end customers whereas the independent demand is considered to be
deterministic and accounts for Dt in each period t. The dependent demand oij,t (i.e. the
companys demand for items) can be decomposed from the independent demand Dt via bill
of materials (BOM). Thereby it is assumed that the company orders the dependent demand
oij,t lot-for-lot at the latest possible date. Supplier j actually delivers dij,t of item i at
time t.

According to the introduced notation, i,t, the relative delivery of item i at time t, can
be defined as the quotient of oi,t, the dependent demand for item i at time t, and di,t, the
actual delived amount of item i at time t:
n

oi ,t = oij ,t

di ,t = dij ,t

j =1

j =1

i ,t =

d i ,t
oi ,t

Assuming a discrete time-bar with equal intervals is given by t = t0, t1, t2, t3, , the
relative delivery quotients i,t allow to model a disruption in the inbound supply (see
figure 2): During the normal-phase (t0t<tk) the items are delivered as ordered (i.e. i,t=1
for all items i). The disruption-phase (tkt<tL-R) is characterized by an unsufficient delivery
(i.e. i,t<1 for at least one i). Within the subsequent recovery-phase (tL-Rt<tL), the level of
supply increases but is still lower than required. Afterwards (tLt), the desired items are
unrestrictive available (i.e. i,t=1 for all i).

i, t

Time
t0

t1

t2

tk-1 tk

tL-R

tL tL+1 tL+2

Figure 2: Supply disruption of item i

For these supply disruptions, a certain probability of occurrence as well as business

impact on the supply chain can be estimated. In the next section 4.1 the assessment of the
probability of occurrence will be briefly discussed whereas the assessment of the business
impact of supply disruption will described in more detail in section 4.2.
4.1

Probability

As mentioned in the literature review, fault tree analysis is used to assess the
probability of failure of a system based on the probability of failure of subsystems. In the
context of supply disruptions, the top event is a lack of a critical component (see figure 2).
For detecting causes that might trigger the supply disruption, the four top level processes
(i.e. plan, source, make, and deliver) of the first tier supplier and environmental aspects
have to be analyzed in more detail (see table 1). In order to analyze the suppliers source
risk, the second tier suppliers are included as well but rather on a lower level of detail. To
give the reader an impression how a FTA is executed, an example for a fault tree is
illustrated in figure 3:

Top event:
Supply disruption of item i

1
min

Time

plan

i, t

source

make

deliver

extern

pM = 1 - (1-pM12)*(1-pM3)
pM12= pM1*pM2

pM3

FTA Symbols
OR

pM1
Machine 1
fails

pM2
Machine 2
fails

Machine 3
fails

AND
Intermediate
event
Basic
event

Figure 3: Assessing the probability of occurrence using FTA

The supply disruption of item i can be caused in one OR more of the supply chain
risk categories (see table 1). In the make process, a breakdown of machine 3 OR a fault of
machine 1 AND machine 2 could result in the described disruption of the goods flow. The
failures of the machines are basic events so that these events can be assigned to a certain
probability of occurrence. Using simple mathematical rules the probability of occurrence of
the top event can be calculated based on these probabilities (see figure 3). For more
information about the basics of the FTA, the interested reader should refer to Andrews
(1998). Carrying out a FTA the probability of occurrence of supply chain risks is evaluated
on a solid and transparent basis.
4.2

Business impact

The second step is to assess the business impact of the supply disruption of item i (see
figure 2). The presented approach uses the concept of the business interruption value (BIV)
whereas the three most important parts, lost gross margins, costs for excess inventory of
delivered items and opportunity costs of idle capacity, are considered. For simplicity, lost
goodwill is disregarded.

Lost gross margins are the cumulative excess of sales (i.e. product of price and
quantity) over variable costs. Considering that p is the price per end product sold and cvar
are the accordant variable costs per end product. Hence, p - cvar is the gross margin per end
product that must be multiplied with the lost quantity in order to get the cumulative lost
gross margin. Due to the unavailability of a component in a supply disruption, the focal
company is not able to deliver all demanded end products to its customers. Moreover, the

lost quantity of sales is dependent of the customer behavior after a supply disruption. It is
questionable how the missed out customers behave in the period after a supply disruption.
If the product is common, the customers probably migrate to a competitor with the
consequence that the difference of market demand and actual quantity Dt - Qt,act are
definitely lost sales (see figure 1). If, conversely, the product is short (e.g. the focal
company is monopolist) it is likely that the customers will wait till the next period. To
quantify the business interruption value, it is assumed that 01 are patient and purchase
the product in the subsequent period. Hence, 01-1 of the clients will migrate to
competitors. The consequence of this assumption is that multiple backordered additional
demand decreases exponentially (figure 2):
2 . Dtk

Additional demand
from backorders in tk
Additional demand
from backorders in tk+1

. Dtk
lost

Dt

. Dtk+1

lost

tk

lost

tk+1

tk+2

Figure 2: Customer migration after a supply disruption

In the example of figure 2, the focal company is unable to deliver any end product in
the periods tk and tk+1 to the customers due to a supply disruption. Hence, the required
amount Dt is backordered, but only of the customers in tk are disposed to buy the product
in tk+1. The overall demand in tk+1 is the base-case demand added by the part of the
backorders of the previous period that still can be sold. Due to the fact that the company
remains unable to offer products in tk+1, of the base-case demand is backordered to tk+2
plus 2 of backorders from tk. Consequently, .Bt-1 is the additional demand each period
whereas Bt-1 are the backorders of the precedent period. Backorders itself are the difference
between the required quantity Qt,req and actual quantity Qt,act: Bt = Qt,req - Qt,act. The required
quantity is defined as the sum of demand and additional demand: Qt,req = Dt + .Bt-1. Let Kt
be the available capacity. Considering further that St is the overall maximum producible
quantity of end products according to the availability of any item, the actual quantity is the
lower of this restriction and the capacity constraint: Qt,act = min{Kt;St}. St itself depends on
the degree of delivery (i.e. relative delivery i,t) which is in case of a supply disruption less
than 100 per cent and the on-hand inventory of item i defined as Ii,t-1. Considering that
di,t = i,t.oi,t is the actual delivered quantity. Considering further that the end product
requires ki of item i denominated in the BOM, the inventory in terms of quantity accounts
for the residual of in- and outflow of the warehouse, namely Ii,t = Ii,t-1 + i,t.oi,t - ki.Qt,act.
o
Whereas i ,t i ,t is the producible amount of end products according to the actual delivery
ki

of item i,

I i ,t 1

could be produced using the on-hand inventory. Therefore, the sum of both
ki
is the maximum producible quantity of end products according to the availability of item i:
o
I
S i ,t = i ,t i ,t + i ,t 1 . Si,t might be, however, much bigger than the required quantity Qt,req,
ki
ki
so that the proposed quantity PQi,t according to the availability of item i is equal to
PQi ,t = min {Si ,t ; Qt , req } . Considering all items, the quantity producible according to the

availability of any item is St = min PQi ,t

i = 1...m . Using the presented scheme, lost

gross margins after a supply disruption can be calculated.

Costs for excess inventory of delivered components are calculated by multiplying the
value of excess inventory with the inventory interest rate r that accounts usually for about
20-30% (Schoensleben, 2004). Let vi be the value of item i. To get the value of excess
inventory of each item, the value of the item must be multiplied by the excess quantity
caused by the lack of another item. Whereas actual delivery increases the stock of inventory
of item i, the items withdrawn for production decrease inventory. The inventory disposable
at the end of each period is the stock of the previous session added by the delivered items
less the removed amount. Costs emerge if and only if the inventory disposable exceeds the
safety stock SSi,t. The value of inventory must then be multiplied by the inventory interest
rate r and adjusted for the accordant fraction of a year (i.e. t/T) in order to get the value of
excess inventory (Sipper and Bulfin, 1997).
Costs of idle capacity (i.e. idle time costs) are the part of the fixed costs that is not
utilized by the realized production level. Let Ct,fix be the fixed costs per period. The actual
utilization ut,act ratio is defined as the quotient of actual output and actual capacity. The
planned utilization ratio ut,plan is defined analog using the respective planned figures. The
costs for idle capacity are the fraction of the fixed costs that have not been utilized by the
current level of output (Coenenberg, 2003).
Concretely, the formula for the business interruption value is:
( p c var ) (1 ) Bt
t

m
t
r max{I i ,t 1 + i ,t oi ,t k i Qt ,act SS i ,t ;0} vi
T
t i =1

u
+ Ct , fix 1 t , act
u

t
t , plan

= Business interruption value

4.3

Case Study

In the following, the approach for assessing supply chain risks is tested on data
provided by a leading global provider of chip assembly equipment, processing techniques

and system solutions for the semiconductor industry. Concretely, the supply chain of a
standard machine, known as wire bonder, is analyzed. Since this supply chain is globally
distributed and the environment in the semiconductor industry is very dynamical, the
supply chain experienced several unexpected events in the past.
The bill of materials (BOM) indicates that each wire bonder consists of 40 first level
items (i.e. i = 40). One of the most critical items makes up around 7 per cent of the over-all
material costs of one machine. Moreover, there is only one supplier for this hightechnology item and the development of an alternative supplier would last several months,
so that it is important to analyse the risks concerning the absence of this item. To consider
different sources of supply chain risks, three scenarios for the disruption of the goods flow
are build up: A minor scenario that could be caused by a forecast error; a medium scenario
that could be the result of a quality problem; a severe scenario could be caused by a fire or
damages of flooding.
For simplicity, the remaining 39 items are considered as one module rest. The
realizable price for a wire bonder is 1.6 times the over-all material costs (no real factor due
to confidential reasons). The periodic capacity is deemed to be less critical and is
considered to be sufficient to match the maximum independent demand without backorders
in each period of the considered time horizon whereas one period is two weeks. Since the
value added by the company is relative low, the fixed costs per unit are around 5 per cent of
the over-all material costs. The safety stock for all modules is 15 per cent of the average
demand per period. Due to the high technology of the products, the semiconductor
equipment manufacturer is subject to materials obsolescence. The problem becomes even
worse after a supply disruption of only few items because the excess inventory of delivered
items is obsolete after a couple of periods. This phenomenon has not been considered
within the model in the previous section. To solve the problem, it is suggested introducing
an obsolescence factor of three per cent which means that on-hand inventory is adjusted for
three per cent downwards each period. The costs for additional obsolete material are
additional obsolete quantity times value per unit. The costs for excess inventory are excess
quantity times value per unit times inventory interest rate adjusted for the fraction of the
year. The inventory interest rate is assumed as 20 per cent per year. The market for the
considered product is deemed to be highly competitive and the marketing manager knows
from experience that 50 per cent of the customers reject a lately delivered product (i.e.
=0.5).
Due to the fact that forecasts are not available actual sold quantities are applied as independent demand. The results using this data provide insight into what consequences
would have occurred in case of a supply disruption within the analyzed period of one fiscal
year divided into 20 subperiods. The results of simulation of the three different scenarios
are depicted in table 4. It can be easily seen that a severe and medium size supply
disruption can significant impact the business success of the company. Based on these
results, the supply chain manager saw the need to tackle the risk of a failure of this supplier.

Potential cause

Minor scenario

Medium scenario

Severe scenario

Forecast error

Medium quality

Fire and damages of

problem

flooding

Periodic coefficients of relative

delivery of the supply disruption
of the critical component
5=6=0.8, 7=0.9

5=6=7=0.4,

5==9=0, 10=0.5,

8=0.6, 9=0.8
BIV / expected gross margin

0.96%

11=0.7, 12=0.9
9.55%

35.16%

Table 6: Business interruption value for different scenarios

Conclusion

In recent years, several incidences showed that the global supply chains are exposed
to unexpected events and the accordant consequences. To derive mitigation strategies
managers require information about the magnitude of risk their company is subject to.
Defining risk as the product of probability of occurrence of an undesirable event and the
financial consequences, both parameters must be taken into account for assessing supply
chain risk. Based on the concepts of fault tree analysis and business interruption value, a
quantitative method for measuring the likelihood and the financial impact of a supply
disruption is presented. A first application of the method on real data shows the practical
benefit.
There are several opportunities for future research activities. Technically, the model
for quantifying the business interrutption value can be extended by an inventory for
finished goods. Further, different ordering policies for items and their consequences for the
BIV can be determined. Strategically, it will be of significant interest to both the academic
and industrial practitioners of global supply chain risk management to verify the
quantitative methods by recalculating the probabilities and consequences of previous
events.

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Biography

ARNE ZIEGENBEIN studied electrical engineering (Dipl.-Ing.) at RWTH Aachen

and at Imperial College in London. In parallel, I studied business administration (Dipl.Kfm) at RWTH Aachen and University of Hagen. Since 2002, he is research assistant to
Professor Paul Schoensleben (Logistics, Operations, and Supply Chain Management) at the
Swiss Federal Institute of Technology (ETH) Zurich. ARNE ZIEGENBEIN focusses his
research activities on uncertainty and risks in supply chain management whereas he works
in close cooperation with several industry companies.
JAN BAUMGART studied industrial engineering at the University of Hannover, at
the California State Polytechnic University, and at the Swiss Federal Institute of
Technology. He gained practical experience through internships in logistics and operations
in industry and consultancy.