Author: Erick Teas, Business Consultant, Kinaxis

The white paper “Essential characteristics of a supply chain risk management strategy” provides a clear definition of why supply chain risk management is needed, what risk management is and the requirement for a tool to enable 21st century risk management. There are a couple of points I think are worth highlighting.

Many conceptualize supply chain risk management as covering only “big” risks, or risks that have “big” consequences.  Most people think of floods, strikes, geopolitical issues and other major events.  While there is no doubt that this is true, the increasing complexity of today’s supply chains and the volatility of demand mean that there are also literally hundreds of risks popping up every day that taken in sum, can have a material impact on a business and can in many cases mean the difference between profit and loss.  Managing day-to-day supply chain risk should be part of the risk management discussion.

In this context, risk identification and mitigation are strategies that need to be reviewed on a regular basis. These are not activities that are best addressed in an ad hoc manner through projects.  With the business world changing constantly, yesterday’s solution may not fix today’s problems. The white paper clearly demonstrates the need to have a supply chain risk management strategy.  In the business world however, “should” have and “do” have are not the same for a number of reasons:

1. The company culture can be a problem. By using the same process, everybody being trained to the same standard, using the same tool, issues not on a pre-defined radar will be missed. A buzz word often used is group thought.
2. Instead of adopting a risk management strategy, a company uses short and focused risk management projects.
3. Addressing current issues is confused with risk management.
4. A company is not aware of what their exposures are, or does not have the tools to see their exposures.
5. Without the right tools, the cost of doing the analysis required is prohibitive.

Let me give you an example.  There is an aerospace & defense company that was suffering from all of the above challenges. The initial symptom was growing inventory and excessive overtime being worked to meet deliveries. The fact that these symptoms were present, and there were no instant remedies, showed that they were operating reactively without a supply chain risk management strategy (issue #3).

After their first analysis, they decided that they needed to change their lead-times and lot sizes. Without the use of any tool to test the solution, and no tools to determine root cause (issues #1, #3, #4), their answer was a blind text book response which did nothing to improve their situation.  Being determined to resolve their issue, they established a ‘project team’. The team determined how much inventory they should have if they executed exactly to plan, and compared that to what they did have. The analysis was performed at the part number level.  They were surprised (although they should not have been) to learn that they were not in fact executing to the plan (issue #4).  They developed analysis models that determined the root causes of the issues. The one root cause was that a good portion of the inventory was idle due to another part being short, which was expected.

Another issue was a large number of ‘one-time anomalies’. The large number of anomalies is an example of issue #1. The company had developed a habit of accepting the excuse of “this is a one-time occurrence”.  There is always the risk of new and never before conceived problems, but a never ending list of new issues shows a lack of risk management.  The company understood this and established a risk identification and mitigation process to find and correct the issues, and put measurements in place to alert of repeat occurrences. An example of one of the measurements was inventory or on-order beyond entitlement tolerances (entitlement is how much WIP on-hand and on-order a company should have if they were working to the company stated goals. The tolerance is the allowable plus or minus deviation from the entitlement value). Initially, the tools were being used to identify root causes and develop permanent solutions to inventory issues when they first occurred. This is a required activity but they were still working reactively, only earlier in the processes.

The idle inventory awaiting short parts was addressed as well. The analysis showed that a small percentage of the components caused the same issue repeatedly. For both their lean manufacturing lines and traditional line they determined optimal buffer stock quantities and put programs in place to keep the buffer quantities correct.

The drawback to both items above was issue # 2 – treating supply chain risk management as an ad hoc project, not as a strategy. The results above where profound, but were brought about by the project team’s activity.  After the team disbanded, continuous improvement stopped. An assumption was made that the business environment would never change, thus the tools would never have to be updated!

Eight months after the disbandment of the project team, new management decided to reduce inventory by removing the buffer inventory. Two months after that inventory and shortages were both up. The continuous improvement from the root cause tools only functioned to known causes and new issues were no longer being incorporated. Within a few months new ‘one time’ issues started to show up again.  Because risk management was treated as a project and not a strategy, the effort had to be redone again.

Like many companies, the organization first looked at this effort as a project, but then they realized the need for continuous commitment to the cause. They employed the tools again and started to build a strategy (a best in class move).

After the tools were in place again the same processes were presented to another division. The tools highlighted and prioritized many supply chain issues they were having. When first presented to management, the response was ‘we already know of these issues’.  It was then pointed out that it took three people two days to identify and understand the issues. When asked what the investment was for them in the same, they said 20 people and six plus months. This is an example of issue #5.  Without the right tools, the cost of doing the analysis required can be prohibitive.

Kinaxis RapidResponse was the primary tool used for these efforts by the way. This was done several years ago with a much older version. Today with the added features of demand management, response management, composite logic, etc, the applications in supply chain risk management are far more robust.

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Tags: Inventory, Supply chain risk management
Posted in Supply chain risk management
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