I recently found this article in InfoWorld talking about supply chain risk management. It’s based on research from Aberdeen that talks about how most companies are lagging in supply chain risk management. According to Aberdeen “Of 138 companies surveyed, 58% suffered financial loss as a result of supply chain disruptions” Aberdeen goes on to say that less than 1/3 of companies polled are managing key supply chain risks.. The key question is why?
From my experience, there are two key reasons why companies are lagging in supply chain risk management;
- Lack of visibility / priority at the executive level. The focus up to this point has been on growing the global footprint of the company, taking advantage of lower labor costs offshore to improve profits. As we can see from the numerous articles in the press and analyst reports, companies now are starting to look at supply chain risk management. This is often being integrated into the Sales and Operations processes as Sales and Ops is typically the right level to be looking at this.
- Another key reason why adoption has been slow is because of a dearth of tools to facilitate the identification and management of supply chain risks. If I were to ask you to use your current systems to identify your top 5 suppliers in terms of what they contribute to revenue, could you? Maybe. If I were to ask you to quantify what the impact would be if one of those suppliers failed, could you tell me? Not easily. Why? Because the typical tools are just not able to cope with these types of questions. ERP systems don’t handle simulations well and the reporting capabilities are not flexible enough to allow you to determine actual impact at various levels of the company. Also, while companies are consolidating to a single ERP system, there is still are still many cases where companies deal with multiple disparate ERP systems. Because of this, many companies try to simulate supply chain events in Excel. Unfortunately, Excel doesn’t have the business logic of your ERP system, so any analysis will be a rough estimation at best.
So what is needed? Supply chain risk management needs to become a part of the sales and operations planning process. The top risks to the need to be identified and quantified and mitigation strategies need to be put in place. These need to be reviewed on a regular basis because as the business changes overtime, so do the risks. Don’t just focus on the risks to supply – also look to the risks due to changes in demand. According to Aberdeen, , “More than 1/3 of companies polled reported unexpected customer demands and shipment demands in the last year” It’s important to remember that supply chain risk includes unexpected changes in demand as well as supply. While a new large forecast increase is great, if it causes you to exceed the capacity of your supply chain it can become a liability.
The other key factor needed to move companies forward is a tool that inherently supports supply chain risk management.
- Visibility to supply, demand and inventory across all parts of the enterprise
- The ability to fully model your entire supply chain and emulate your business logic
- The ability to quickly and easily simulate major supply chain events. “What is the impact to revenue if this supplier can’t deliver parts for 2 months?”
- The ability to report results and impacts of these events. This includes the impact to the key business metrics and the ability to drill into the details where desired.
Where are you on the road to understanding the risk to your supply chain? What tools are you using to simulate events and understand potential impacts? Where do you discuss supply chain risk management issues? Post back and let us know!
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Tags: Sales & operations planning (S&OP), Supply chain, Supply chain risk management
Posted in Supply chain risk management
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I agree to the point that there is a need to involve Supply Chain Risk Management as a discussion component in S&OP analysis. However, infusing SCRM at operational level requires detailed SCRM Program within the organization across all supply chain functions. Ability to identify and measure the value of risk event is the key success area and Value at Risk (VaR) is an effective tool for doing so. I have posted my blog on Supply Chain Risk Management Program which may be of your interest. The same can be found here.
http://infosysblogs.com/supply-chain/2008/09/supply_chain_risk_management.html#more
We are on the same page. An SCRM discussion at the Sales and Operations level is necessary for two reasons;
1) To set the path for the rest of the company. Successful companies leverage the Sales and Operations process to align the company in a given direction. Discussion of SCRM at this level provides the necessary guidance to the rest of the organization.
2) There are risks of severe enough nature that they MUST be discussed at the executive level. As you point out in your blog, there are costs associated with managing risks and the decisions around these costs are best managed at the S&OP level.
That being said, I completely agree that SCRM must be addressed and evaluated at all levels of the organization. For example, when the procurement organization sources suppliers, risk factors should be considered such as; What geo-political environment does this supplier exist in? Are they in an area that experiences severe weather? Are they in an geologically unstable area? What is the company’s financial position? What is the companies safety/quality record? (you don’t want another pet food or tainted milk fiasco). When the engineering department design the next version of your product, they should look at the components they are planning to use. What items are unique to this product? What items can only be procured from a single source? Can the design be altered to reduce risk?
So to summarize; yes, supply chain risk must be evaluated at all levels of the organization, however, there must be a way to formalize this and to assess the higher level strategic risks. My thinking is that the Sales and Operations Planning meeting is the ideal place for this discussion to take place.
Thanks for raising this important point and thanks for the tip on your blog, I’ll add it to my subscription list.
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