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RISK MANAGEMENT IN REVERSE SUPPLY CHAIN A Project Report Presented to The Faculty of the Department of General Engineering San Jose State University In Partial Fulfillment of the Requirements for the Degree
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RISK MANAGEMENT IN REVERSE SUPPLY CHAIN A Project Report Presented to The Faculty of the Department of General Engineering San Jose State University In Partial Fulfillment of the Requirements for the Degree Master of Science in Engineering By Sahil Salunke Milan Shah Sarbjot Kaur Grewal December 2009 i 2009 Sahil Salunke Milan Shah Sarbjot Kaur Grewal ALL RIGHTS RESERVED ii APPROVED FOR THE DEPARTMENT OF GENERAL ENGINEERING Dr. Wenbin Wei Technical Advisor, Department of Aviation and Technology College of Engineering, San Jose State University Dr. Tahoe Park Industrial Advisor, Department of Organization and Management College of Business, San Jose State University Dr. Leonard Wesley Associate Professor, Department of Computer Engineering, College of Engineering, San Jose State University iii ABSTRACT RISK MANAGEMENT IN REVERSE SUPPLY CHAIN By Sahil Salunke Milan Shah Sarbjot Kaur Grewal Reverse supply chain has gained recognition in recent years. Until now focus was mainly on forward supply chain, the only difference between the two is that the link between manufacturer, supplier, distributor and retailer is reversed. The focus of this project is to identify the risks involved in the reverse supply chain. Survey tool is used to collect data and information required for analysis. The methodologies that are used to identify key risks are the six sigma tools namely Define, Measure, Analyze, Improve and Control (DMAIC), Cause and Effect, and Risk Mapping. After the analysis the key risks are identified and the above mentioned six sigma tools are used to developed solutions to mitigate the major risks in reverse supply chain. The project can be applied to all types of industries. The advantage of implementation of our solution is that it will help improve performance and reduce time. This will benefit the company by having reduction in their cost due to uncertainties and also contribute to better customer satisfaction. iv ACKNOWLEDGEMENT We would like to express our respect and appreciation to Dr. Wenbin Wei (Department of Aviation and Technology) College of Engineering, San Jose State University for his continuous support, encouragement and direction. We would like to thank Dr. Tahoe Park. (Department of Organization and Management) College of Business, San Jose State University for his support in achieving our goal. We would like to thank Dr. Leonard Wesley, Associate Professor, Dept. of Computer Engineering, San Jose State University for his suggestions and guidance throughout the ENGR 298/295B course in FALL 2009 Semester. We would like to thank to our family members who continuously gave us an encouragement and support. Sahil Salunke Milan Shah Sarbjot Kaur Grewal v Table of Contents Sr. No Description Page No Introduction Overview Objective Problem Statement Hypothesis 3 Supply Chain Overview Forward Supply Chain Reverse Supply Chain 5 Risk Management Risk management in reverse supply chain Risk Identification Risk Mitigation Methodologies Proposed Methodologies Risk Assessment 16 Literature Review Introduction to Literature Review History of Supply Chain History of Reverse Supply Chain Present Methodologies Risk Management in Reverse Supply Chain 22 Economic Justification Executive Summery Problem Statement Solution and Value Proposition Market Size Competitors Customers Cost Variable Cost Fixed Cost Price Point SWOT Analysis Investment Capital Requirements 32 vi 5.11 Norden-Rayleigh Graph Personnel Business Revenue Model Strategic Alliances / Partners Profit and Loss Statement Exit Strategy 40 6 Survey Analysis 40 7 Project Schedule 69 8 Team and Committee Members 72 9 Conclusion References 74 Appendices Appendix I Appendix II 95 vii List of Figures Sr. No Description Page No 1 Supply Chain Network 4 2 Forward Supply Chain 5 3 Reverse supply Chain 5 4 Cause and Effect Diagram 12 5 DMAIC Layout 14 6 Financial benefits down the years after implementing solutions from SMS Consultants 26 7 Growth of SMS Consultancy up to Q Break-Even Analysis 33 9 Norden- Rayleigh Curve Cumulative Distribution P&L diagram depending on the forecasted number of customers served by SMS consultancy Pie digram to the response to question 1 of survey form Graphical representation of question 2 in surevey form Bar graph showing results to question 3 in survey form Graphical representation to results of question 4 of survey form Pie chart to the explain table Pie chart to show distribution of no of respondents to 48 viii department they work for 18 Algorithm to show methods after the product is returned 19 Risk Map Model I Risk Map Model II Pareto Chart Risk Management Model Gantt Chart 71 ix List of Tables Sr. No Description Page No 1 Types of risk and Description 9 2 List of Potential Customers 29 3 Variable Cost 30 4 Fixed cost 30 5 Strength, Weakness, Opportunities, and Threat 32 6 Norden-Rayleigh 34 7 Profit and Loss calculation table 39 8 List of number of respondents from different sectors 41 9 List of respondents from different industries List of Respondents to amount spend in dollars on RSC List of respondents to question 4 of survey form No of respondents to frequency of using risk management methods Results to question 5 in survey analysis Impact and occurrence scores for Strategic Risk Impact and occurrence scores for Financial Risk Impact and occurrence scores for Product Risk Impact and occurrence scores for Environmental Risk Impact and occurrence scores for Customer Risk Impact and occurrence scores for Inventory Risk Impact and occurrence scores for Data Management Risk Impact and occurrence scores for Time-Management Risk Impact and occurrence scores for Legal Risk Impact and Occurrence score for Managerial Risk Impact and occurrence scores for Culture Risk Impact and occurrence scores for Technology Risk 59 x 26 Impact and occurrence scores for Outsourcing Risk Risk scores and dependency of risks on each other with weighted 63 average method 28 List of all the sub risks those causes key risk List of top four risks Recommendation table for the problems Team and Committee members and their roles 72 xi 1. Introduction 1.1 Overview The total value of products returned by consumers in the U.S. is enormous - estimated at $100 billion annually (Blackburn et al. 2004). Companies have to handle the returns and decide what whether they want to refurbish, reuse or remanufacture the returned products. There is substantial amount of risk involved in the reverse supply chain that has to be managed by the company effectively. Risk Management in the reverse supply chain is somewhat uncharted and immature. Most of companies are spending time and money on improving their Forward Supply Chain Network and ignoring the Reverse Supply Chain Network. Companies cannot afford to ignore on the Reverse Network in today s competitive business world, when there is both internal and external pressure. Different firms have inimitable characteristics for Forward as well as Reverse Supply chain. Most of the firms have developed certain tools to enumerate and manage the risks involved in Forward Supply Chain method. Through this project our aim is to show that the tools used for risk management in forward supply chain can be used for reverse as well. To control the risks in reverse supply chain strong mechanism should be developed which will increase the efficiency by reducing risks in reverse supply chain. Reverse Logistic Trend Inc is the company which will provide us with the relative data for consumer electronic industries. This project will be attempted to figure out certain enumerating and managing tools exclusively for Reverse Supply Chain method. The tools will be executed at Reverse Logistics Trend Inc by plugging their data to exhibit the benefits of the Risk Management 1 tool to the organization. To attain this objective the project will follow six steps: Map Reverse Supply Chain network, Risk identification, Map Risk impact, Assess and Quantify Risks, Assess and Quantify Loss, Managing risk. Various methodologies will be provided which will help mitigate risks in the reverse supply chain that can be used universally by all industries. 1.2 Objective Our project work will concentrate on the risk involved in the reverse supply chain and how will be reducing those. We will try to mainly focus on the critical thinking areas during our research and while doing that we will be applying mathematical and theoretical models used in forward supply chain and reducing the cost. Reverse supply chain is an area that has a positive impact on the environment by reducing waste and increasing resources. One of the main reasons for choosing this project is that there is not much research done in this area. There is a lot of information and work on forward supply chain but not much on reverse. The main focus of this project will also be on the risks involved in reverse supply chain. To illustrate the risks let s take a look at an example of Nokia and Eriksson during the year 2000 when a fire destroyed an electronics plant in New Mexico. Both the companies were supplied with the electronic components by the same plant. Nokia fulfilled all its requirements upfront by getting the components from other market but on the other hand Eriksson did not react the same way and did nothing and were not prepared for any kind of uncertainty or risk and hence suffered a major loss of $390M. This is a very interesting example to illustrate the importance of risk management in supply chain and it encouraged and 2 increased our interest in this area. (Basu.G, et al. IBM Corporation 2008) 1.3 Problem statement Different firms have different supply chain and hence the risks involved in their network are different. Considering huge competence within the supply chain sector various firms are trying to focus on their reverse supply chain network, as 80% of problems are caused due to 20% of defect (Pareto s Principle). Cost is a major problem which this product based firms are facing at present. Companies in United State are trying to use various methods to minimize these risks by evaluating loop holes and hence increasing profitability, as it is being tough for industries to survive in today s competitive world. Through our research we have found few major risks that are affecting reverse supply chain network and they are: Distribution Risk- Logistics Process Risks Information Errors Input Risk Forecasting Output Risks Competition, Inventory Other Risks Taxes, Environment Analysis says that there is not much profit fringe due to strong competitive 3 environment; hence risk management within the reverse supply chain network is the only activity that can be performed 1.4 Hypothesis After going through previous research papers at Martin Luther King Library, going current articles on supply chain and most primary source survey we came down to a conclusion that. The current reverse supply chain system in general does not have risk management function. Risk management process applied in the forward supply chain system can be used in the reverse supply chain as well. 2. Supply Chain Overview Supply chain management in general is the process of flow of material as well as information right from the raw material stage till the final product is made available to customers. It is the method that encompasses of all activates associated with the flow and transportation of goods from the raw material stage through to the end use, as well as the associated information flow. (Source: Bozarth.C.C & Handfield.R.B (2006). Introduction to Operations and Supply Chain Management, (1 st Ed.)). 4 Figure 1 Supply Chain Network Weber State University, SASCM. (2009). student association of supply chain management. Retrieved from There are two types of supply chain networks Forward Supply Chain and Reverse Supply Chain. 2.1 Forward supply chain (FSC) Forward supply chain is a method that involves producer, distributor, retailer and finally the end customer. It involves collection of raw materials, manufacturing, assembly and distributing. Traditional / Forward Supply Chain Supplier Manufacturer Distributor/ Wholesales/ Retailer Customer/ End user 5 Figure 2 Forward Supply Chain (FSC) (Kulkarni.D, 2004) 2.2 Reverse Supply Chain (RSC) This process includes various activities involved to extract the used or new products from the consumers or customers for collection, sorting, checking, Reverse Supply Chain Supplier Manufacturer Distributor/ Wholesales/ Retailer Customer/ End User disassembly, Figure 3 Reverse supply Chain (RSC) (Kulkarni.D, 2004) remanufacturing, redistribution, dispose and recycling to make efficient use of the product. The steps of reverse supply chain are product acquisition, reverse logistics, inspection and disposition, remanufacturing, marketing and distribution. Steps in Reverse Supply Chain Acquire Product- products are obtained from users. Reverse Logistics- this step includes transportation of returned goods for further inspection and disposition. Inspection and Disposition- inspect the returned products and after assessment decisions are made as to the ones that can be reused and disposed. Remanufacturing/ Refurbishing- returned products are brought to their original specification/ configuration. 6 Marketing and Distribution- recovered products are marketed in the market. In the product acquisition phase products are acquired from customers through resellers. The returned products are further shipped for further assessment such as inspection and disposition. Returned products are inspected thoroughly to make decisions on whether the materials need to be disposed or reused. Returned products are then remanufactured / refurbished to their original configuration/ specification. These remanufactured products are marketed and distributed in the market. The products that are not used/ remanufactured are recycled. Reverse supply chain has a positive effect on the environment as the waste and unused products and materials are brought to use. It helps environment in becoming green and also helps companies make revenue (Blackburn et al.2004). 3. Risk Management Risk management is an organized/ structured approach of identifying, mitigating and assessing/ evaluating risks to reduced losses incurred due to lack of risk management (Tohamy 2008). It includes three steps namely risk identification, risk mitigation and risk evaluation and assessment (Stoneburner et a ). Risk management process involves following three steps Risk identification- It is the first step in risk management process which helps identify the possible threats with respect to the system. Risk mitigation- It is the second step in risk management process that helps prioritize, evaluate and implement the proposed control method to the system. Risk evaluation and assessment- It is the third step in risk management process 7 that analyze and evaluate whether the current control process is applicable to the system. 3.1 Risk management in reverse supply chain The global supply chain consists of a number of risks in various stages. In the reverse supply chain these risks / uncertainties are related to many factors such as acquiring products from customers, returned product quality, timing etc. Further risks can be categorized as internal risks and external risk (Goh et al. 2007). The internal risks in reverse supply chain include financial risks, strategic risk, transportation risk etc. The external are the ones where the system interacts with external environment such as customer risk, laws and regulation risk etc Risk Identification Before analyzing risks in reverse supply chain it is important to understand the risks faced by companies in this area/ domain. This part is risk identification where we aim on finding the risks that have an impact on the company. Risk identification is a very important step that leads on to further assessing of problem. Now to get this idea and understanding the tool used is survey. The reason for choosing a survey form as a tool to collect data is that it can be sent out to a larger group of companies from various industries Harris, Shon. (2006, April 06) Risk identification is a process that aims at finding risks that affect the project/ department and documenting those risks and their distinctiveness/ characteristics. The first step in this process is to develop a project management plan. This plan focuses on mission, scope, and work breakdown structure. A Gantt chart is also made which shows 8 the schedule and time constraints. Further the second step is to develop a risk management plan. This plan addresses the what, when, where, why, who and how of administration of risk management plan. (Elyse et.al,. (2007, February 07)). Individual role and responsibilities are described. Different categories of risks are mentioned. Schedule for risk management is developed and funds for risk management department are arranged. The scope of the plan is defined that address to the limitation and boundaries of assumption. Risks need to be obtained for further mitigation process. Factors such as environment and its effect are mentioned. Both internal and external factors are addressed that include resources, market conditions, structure of the organization and the cultural aspect and approach. a) A few techniques of gather information are Suggestions/ Brainstorming- here a group of members sit together and exchange their ideas on possible risks and their effect, suggest ideas on how to find solutions to the problem area. Survey- Conducting survey are finding the risks faced by different industries in this area and their impact on the company Personal interviewing- This is a powerful medium of gathering information where one can have one on one interview with people who work in this area. The main advantage is that doubts can be resolved at the very moment of improvement. 9 After all the information to the above mentioned are found, the third step in the process is documentation of details in a well explained and detailed manner. There is a strong need of clarity so that the idea is clear to all. The next step is identification of root cause where the causes of risks are identified and defined. SWOT analysis is done i.e. finding strengths, weaknesses, opportunities and threats are found that help understands these aspects. The main purpose of using tools and techniques in identifying risks is that it helps in better assessing and analyzing information. Some of risks are represented below Risk Strategic risk Operations risk Supply risk Customer risk Competitive risk Legal risk Financial risk Reputation risk Description Adverse effect of strategic implementation on the business. Effect of the firm s ability to produce /supply goods and services. Adversely affects inward flow of any type of resources to enable operations to take place; also termed as 'input risk' uncertainty of losing customers not capable to differentiation your products from competitors Legal laws and regulations that could occur on customer or supplier side Additional taxation Decreasing value of company leading to lack in confidence. Table 1 Types of risk and Description Banisalam, S. (2008). b) Survey Tool Survey is powerful tools that can help reach out to a larger group of people. In this project survey plays a major role in data collection which is further analyzed and results are obtained. The form was designed with the aim of collecting information on risks 10 faced in different industries in reverse supply chain area. While framing survey question close attention was given to details on reverse supply chain and possible risks. It took us around a month s time to come up with the final draft of the survey form. The survey form is designed in a way that it is easy to understand and can be filled with no difficulty Risk mitigation methodologies After identification of risk areas that have an impact on company, the next step is mitigation of thes
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