Archive for the ‘Risk management’ Category

I found this really good article here at Chief Executive talking about some of the real challenges in today’s supply chains.  The last paragraph caught my attention:

“The main problem in supply chains is that many more things can go wrong because there are many more participants, and it takes more time to get something to market,” he asserts. “Furthermore, you have to forecast the need of the consumer weeks or months ahead of the buying period, and by the time you make the stuff, ship, store, ship again, store again, get it to the store shelf, the consumer wants something else.” 

This is right on the mark.  Many more things ARE going wrong today - it’s the nature of the beast.  The problem is that most organizations are still built around a model that assumes most things won’t go wrong, that things will largely run as planned.  For years companies have built their supply chains around the familiar paradigm that stressed excellence in supply chain planning and supply chain execution.  They’ve built processes, systems, trained staff, etc. with an expectation that the assumptions going into the plan would largely play out as you executed the plan.

But as the article accurately notes, that just isn’t the case anymore.  Most organizations, though, haven’t adjusted to this new reality.  Here’s a simple test - if you find that you have an increasing number of unplanned events (these could be demand volatility, supply disruptions, shortening product lifecycles) and increasingly your people are relying on spreadsheets to try to cope with them, there’s a good chance that you’re at significant risk and missing out on opportunities every day. 

The influx in spreadsheet use is because people need to be trying to find the unplanned events (about 95% of unplanned events just happen, with no notice) and manage them.  And there are no systems in place to do this - so they are left to be in constant triage mode.  The costs to the organization are significant, from missed revenue opportunities to substantial operating costs as the inability to respond to unplanned events increasingly becomes the norm.

Shocks to the supply chain are increasingly the norm.  As companies have increased the amount of outsourcing they’ve done, their role shifts from the “planner and executor” to the coordinator of response to these unplanned events.  This requires new thinking and new tools to support this reality.

Here are new insights on the rising threat of supply chain risks as found in a new study by Marsh, Inc (you can get a copy of the report here - free registration required). There are some interesting findings in the report:

• Nearly three-quarters of companies (73 percent) believe their supply chain risk has risen since 2005; nearly the same number (71 percent) believe the financial impact of disruptions to their supply chain has also grown.
• No risk managers in the Marsh study considered their companies to be ‘highly effective’ at supply chain risk management. Only 35 percent considered their companies to be ‘moderately effective’ at managing supply chain risk. Meanwhile, nearly two-thirds (65 percent) characterized their supply chain risk programs as having ‘low’ or ‘unknown’ effectiveness, or said they lacked any formal supply chain risk program.

Supply chain risks come in all shapes and sizes.  Most people think of floods, hurricanes, geopolitical issues and other “major” events when they think of supply chain risks.  But the increasing complexity of today’s supply chains mean that there are literally hundreds of risks popping up every day that you better be equipped to deal with in a timely and profitable way, or you risk losing your competitiveness in the market.  The inability to deal with these issues can mean the difference between profit and loss in many cases.

Consistent with the research findings, we find that most companies don’t have effective processes and tools in place to proactively manage day-to-day risks.  Most companies have spent years putting in place systems, processes and staff to run the business like clockwork, but find themselves caught off-guard as the business increasingly does not run like clockwork.  The warning signs are declining operations performance and poor customer satisfaction that can lead to market share erosion.

Ask yourself what role volatility is playing in your company’s inability to consistently beat the competition and hit your objectives.  Chances are you’ll find that it’s playing a major role in all aspects of the business.  Then evaluate how your company responds to change today and see if you’ve effectively armed your front-line decision makers that have to manage these situations with the tools they need.

Gartner recently released a new set of findings on supply chain management issues based on research they’ve done with end customers (you can purchase the research here).  Among the many good insights is this: about 93% expect the pace of change will increase through 2010 (the specific question was: “Between now and 2010 do you expect the pace of change in your supply chain market to decrease, stay the same or increase?”).  Based on this, Gartner concludes that “the pace of change will force enterprises to move away from their myopic emphasis on tactical issues, currently driven by economic conditions and an overly conservative business climate.”

If you’ve read anything on this blog you know that I’m in strong agreement about the pace of change.  I see this every day in the companies that we speak to.  I also tend to agree with their conclusions.  I sense that companies view the pace of change as a negative right now, something they need to find a way to deal with.  I think the truly visionary companies are seeing it as a huge opportunity.  The companies that figure out how to thrive in an environment of fast paced changes are the ones that are going to differentiate themselves with greater customer service and better operations performance.

Customer expectations are not likely to reverse course and decline.  They are only going to continue to expect more, faster, cheaper.  And, with more global competitors to choose from, there are more options for customers to find someone that can meet these needs.  A huge opportunity awaits those that can harness the pace of change for competitive advantage.

A post here at SupplyChainer asks what it takes to create a good promotion management system.  I commented at the site, but have posted below as well.

** my comment **

Agree with your thoughts.  You mention that you should have a plan B in case demand is higher than you speak.  I would take that one step further.  You need to ensure that your front-line decision makers are armed to deal with whatever comes up.  You might have, as you noted, an upside surprise in demand.  You could also see demand vary in geographies differently than you had planned.  There’s also the potential for supply disruptions that could impact your ability to meet the demand that the promotion generates.

The reality is that you just don’t know.  Unless you can predict with absolute certainty how your promotion will impact your business, you need to be able to respond to unexpected issues.  A lot of money goes into a promotion, and the last thing you want is to find that you can’t respond as needed to unexpected outcomes.

Empowering front-line decision makers with the ability to quickly sense issues, to fully analyze their impact and then to collaborate on a profitable response, you’ll go a long way toward ensuring a successful promotion.

I recently came across this article from Larry Lapide at MIT.  The basis of the article is discussing the need to balance demand and supply at all time intervals.

My experience has been that this is much easier for manufacturers to accomplish over the long-term than it is the short-term?  Why?  Volatility.  So many things are changing at once today that it makes it hard to maintain your balance (no pun intended).

The first challenge is supply chain visibility.  Most people struggle with this.  What is the actual state of demand - right now?  What is our current state of supply - at this moment?  Where do I have gaps and misalignments?

But visibility alone isn’t enough.  Once I’ve gotten a clear picture of things, I need to make sure everyone else has that same set of facts and that we’re armed with tools to develop a profitable response.  What happens if I change order priorities to meet the needs of a given, highly profitable customer?  What other options exist?  Which is the best option?

When things aren’t going according to plan, it becames a set of decisions that rely on human judgment.  In order to come up with the best action to take - the one that balances supply chain risk with rewards - these front-line decision makers need to have both visibility and tools to collaborate with their colleagues to come up with viable options, to analyze available options and to pick the one that appropriately balances all of the metrics critical to the company.  And all of this has to be done quickly, under intense pressures (especially as you near the end of the quarter).

AMR has produced its list of 2008 supply chain predictions, as reported here at SupplyChainDigest.  Included in the list are:

• Companies manage risk for business continuity and competitive advantage.  Response Management is all about supply chain risk management on a day-to-day basis.  I’ve written about this many times (see here, here and here) in the past.  The reality is that things are changing so fast today that companies need to be empowered to “manage at the moment” and to respond quickly and accurately to changing conditions as they happen.  If you can’t, someone else will and it’s going to impact both your top and bottom lines as they steal market share and/or your only response is one that is inefficient and costly.
• S&OP technologies – not just processes – take center stage.  This is very much a growth area that we’re seeing, but not in the way that you might expect.  S&OP is a planning process.  And, while companies are looking to improve their planning processes, the bigger challenge is at an operational level.  How exactly do you execute to the plan coming out of this process when everything (demand, supply and product) is changing at an increasing rate?  This is the challenge we see companies focused on.  This is very much an issue of empowering people with the tools for risk tradeoff and response so they can deal with the daily exceptions that are reality.
• What-if analysis and simulation-based tools see growing adoption.  Another area that I’ve written quite a bit about in the past (see here, here and here).  In an environment of constant change, people need to be able to understand the impact of a proposed change and to quickly create options for solving the unexpected problem.  They need to do this in an iterative and collaborative fashion - without impacting the real operations of the company before determining the best action to take.  This is where what-if analysis and simulations come in.  They provide the tools necessary to address these situations.  To work, they need to be multi-user to support the collaboration that the response process requires and they need to be easy enough to use that broad user communities can contribute.  Why?  Because when it comes to dealing with unexpected events, you need to tap into the human capital within the company to make the right tradeoffs and decisions to respond appropriately.

It’s NFL playoff time, so this analogy that someone shared the other day is appropriate this time of year.  If you think about the role of an NFL quarterback today, it has a lot in common with the role of a front-line supply chain decision maker.

NFL coaches are notorious for their maticulous planning.  You hear a lot of stories of how many hours they spend watching game film, developing the game plan and then practicing it over and over again with the team.  The quarterback is the field general that leads the implementation of the offensive game plan.

Yet, despite all of their planning, teams need to be able to respond to change.  Plans never actually unfold exactly as envisioned - whether it be injury, weather conditions, what the other team throws at them or a myriad of other unexpected changes that need to be accounted for.  Great quarterbacks like Tom Brady and Peyton Manning are exceptional at coming to the line and being able to manage at the moment.  They come to that situation with not only a plan, but the tools to do risk tradeoff and response to the unexpected changes they are going to encounter.  It is their ability to audible that frequently determines their success.

There’s a lot in common here with today’s supply chain professional.  It’s rarely the case that the gameplan unfolds exactly as developed and practiced.  It’s the supply chain professional that can audible, that can sense and respond to frequent and unexpected change that is going to win.  They need to be able to quickly determine what is going on and then make quick and accurate decisions that balance the risks and opportunities for their company.

Success today has very much become a function of your ability to respond to the unexpected.  Are you arming your supply chain quarterbacks with the tools that they need to audible at the line?

New research from Aberdeen (available here) points to the growing need for improved demand management in discrete industries.  The research identifies a variety of pressures that are forcing companies to focus on improving their demand management capabilities, including: rising customer service expectations, global supply chains resulting in increased lead-times, volatile market resulting in high uncertainty in demand, need to utilize expensive assets with maximum efficiency, pressure from stockholders to reduce inventory and competition from global brands.

The research also finds that Best-in-Class companies are 2.5-times more likely than all others to have a clear owner of the consensus forecast.  In discrete industries, the sales inventory and operations planning process is gaining foothold.  The owner of the consensus forecast thus then is the same as the S&OP process owner.  This is an important trend because in the past there has been very limited attention paid towards balancing supply, demand and inventory.  The challenge is exacerbated due to multiple channels of selling products.

For too long companies purchased applications that were focused on a single issue - demand planning applications that focused strictly on gaining an accurate picture of demand and supply chain planning applications that focused on the creation of a supply plan to meet the demand plan.  While planning plays a vital long-term role, as companies seek to become more demand-driven in light of the market forces that Aberdeen identifies, they face the reality that you can’t plan the customer.  The premium then shifts to being able to respond to change as it occurs.  To do so you need to empower people with the visibility and tools to quickly evaluate the impact of change and figure out what course corrections are required to balance supply, demand and inventory.  Doing so requires an integrated view of all three - a view based on real operational data and not some model of the real world that prevents you from taking action based on an understanding of what’s possible and what the impact of your actions would be.

Demand management is increasingly the focus for companies seeking to become more demand-driven, and the defition of demand management is all about demand sensing, demand shaping and the ability to profitably respond to demand changes.

Very interesting article here about the shareholder value impact of supply chain risk.  According to the article, “businesses must remain prepared to adapt to adverse events. Organizations that are better equipped will gain competitive business advantage while improving reputations, while ill-equipped organizations will lose market share and shareholder value.”  The article goes on to state that “Companies that are able to avoid disruptions will be regarded as a superior shareholder value in 2008 –shares of resilient companies should perform better.”

This is one of the first times that I’ve seen supply chain risk management be tied so directly to financial impact to the organization and, ultimately, shareholder value.  I think the article is right on the mark.  Unfortunately, supply chain management is too often viewed of as a tactical issue where cost reductions and savings is the main objective.  The article clearly points out the strategic impact of supply chain management and, specifically, the growing importance of being able to respond to change. 

The implications are clear, companies that can respond quickly and effectively to unexpected supply chain risk are in the best position to avoid customer erosion and win new business and are best positioned to avoid costly excess and obsolete inventory and other negative operations performance impacts associated with poor responsiveness.

Good article here at ITBusinessEdge by Ann All discussing the challenges Boeing has faced with its global supply chain for its new Dreamliner 787 jet.  As you’ve probably read, Boeing took a very aggressive outsourcing strategy for this project.  What they’ve come to realize, like so many others, is that doing so is a double-edged sword with lots of benefits and risks.

If everything goes according to plan, outsourcing doesn’t represent a lot of problems since a well laid out plan simply needs to be executed.  The reality is that things rarely go exactly according to plan.  This is where outsourcing can pose unique challenges since you’re now working with multiple third parties.  The problem I’ve seen a lot of companies take is that they continue to treat this situation as if they were still doing all the manufacturing.

When companies outsource, they continue to remain accountable for all of the outcomes despite the fact that they are no longer executing all aspects of the project.  Their role shifts to that of master coordinator and the emphasis needs to be on coordinating an effective response to change as it comes up.  A pre-requisite to doing so is visibility.  This isn’t to micro-manage the partners, but to ensure that exception based alerts are possible and to facilitate active resolution of problems.

Failure to properly coordinate response to change across the virtual enterprise can lead to poor operating performance, inventory control challenges and project delays.