Archive for the ‘Risk management’ Category

There was an interesting article here in the Wall Street Journal (paid registration required) the other day talking about the challenges that Nintendo is having balancing supply and demand for it’s popular Wii game console.  The article points out that “… Nintendo’s problem illustrates how tough it is for companies to try to predict demand for a product…”  The article goes on to describe the delicate balance companies face in choosing to ramp up supply in the face of uncertain demand.  Doing so risks being stuck with excess and obsolete inventory whereas not doing so creates stock out situations and the potential for customers to go with a competitive offering.

 The essence of the article speaks to the unabating market forces that are creating huge challenges for brand owners and manufacturers alike.  The combination of increasingly volatile demand, shortening product lifecycles and the globalization of fulfillment networks and supply chains are creating a significant performance management challenge for companies as they struggle to proactively manage their response to constant change.  The negative consequences of not doing this well are poor customer management and satisfaction, excessive inventory and overall operations performance issues.

 As the article points out, Nintendo is constantly working to improve its demand planning capabilities, but even under the best of circumstances they will never be able to completely predict their business.  This is the case for many companies today.  Given this reality, it’s important to complement demand planning and supply chain planning efforts with Response Management strategies that empower people to respond to the unexpected - to rapidly make the right tradeoffs and course corrections needed to deal with the uncertainty that unfolds every day.

Found this very interesting article based on research done as a joint effort between CAPS Research, A.T. Kearney and the Institute of Supply Management. The research poses the question “what will a typical supply management organization look like in 10 years?” and concludes that “it’s hard to say for sure, but it likely will be complex, high-tech, supplier network-driven, and spread out across the globe.”

This particularly caught my attention. The report identified four areas future supply managers will be expected to tackle:

1. Delivering more innovation from suppliers
2. Contributing more broadly to revenue generation
3. Anticipating and managing supply risk to ensure business continuity
4. Expanding the breadth and impact of cost management efforts

These are themes I’ve talked about frequently here. The trends are clear; increasing demand volatility, shortening product lifecycles and the increasing globalization of supply chains is creating an environment where collaborative response to unexpected events is required to compete and win.

A couple of weeks ago we held our annual user conference. This event brought together market leading brand owners and contract manufacturers to discuss the challenges they face every day. One of the most dominant themes at the event was the issue of managing change across multi-enterprise supply chains.

The move to outsourcing has led to “virtual enterprises” consisting of a variety of third-party specialists. Everyone is feeling the effects of increasing demand volatility and shortening product lifecycles. When you put this all in the mix together, it’s harder than ever to coordinate an effective response to change and ensure the required outcome - something the brand owner remains accountable for.

We took the opportunity to survey the attendees at this year’s event and here is a summary of our findings.

Rank in order of importance your top 3 business challenges (higher equals more important)
Managing customer demand: 2.45
Ensuring reliable supply: 2.06
Attaining supply chain cost savings: 1.88
Improving service to the customer: 1.79
Improving manufacturing efficiency: 1.50
Improving ECO and product launch: 1.88
Driving market opportunity and top line growth: 1.83
Compliance: 1.00
Other: 1.00

Importance of improving supply chain collaboration within your organization
Business critical: 64.44%
Important: 33.33%
Neutral: 2.22%
Not important: 0.00%

According to IDC: manufacturers that cannot effectively share data are less flexible, responsive and productive
Strongly agree: 62.22%
Agree: 33.33%
Neutral: 0.00%
Disagree: 0.00%
Strongly disagree: 0.00%

According to Aberdeen: business processes are transforming from inward facing to outward facing
Strongly agree: 28.89%
Agree: 53.33%
Neutral: 13.33%
Disagree: 0.00%
Strongly disagree: 0.00%

According to AMR Research: the greatest risks to the supply chain are day to day operational risks
Strongly agree: 17.78%
Agree: 55.56%
Neutral: 15.56%
Disagree: 6.67%
Strongly disagree: 0.00%

According to Technology Forecasters (TFI): responsiveness is key to success for OEM and EMS organizations
Strongly agree: 60.00%
Agree: 35.56%
Neutral: 0.00%
Disagree: 0.00%
Strongly disagree: 0.00%

There’s a good article here over on SupplyChainDigest entitled “Do you get supply chain “surprises?”" It’s written by Tom Wallace (to learn more about Tom, see his website here), a noted expert on Sales and Operations Planning (S&OP).

The article talks about the various challenges that companies face in dealing with supply chain surprises. Tom goes on to explain how you can use the S&OP process to deal with these surprises.

What’s not detailed in the article are some of the tools required to deal with surprises within this process. Participants in this process need to be armed with consistent and up-to-date visibility into demand and supply and have tools for rapid scenario analysis to enable sense and respond. When surprises happen, you’re really trying to figure out a way to “re-balance” supply and demand to enable a profitable demand response (Tom’s example is of a large customer sending in a signifcant, yet unexpected, order). If supply and demand can’t be re-balanced, then a compromise is required to determine the best course of action, one that balances all of the metrics the company is driving to, such as customer satisfaction, revenue, margin, inventory, etc.

Supply chain surprises are increasingly becoming the norm. Through the proper processes and by empowering key decision makers with the necessary visibility and tools to sense and respond to such changes, companies can gain a competitive advantage vs. those companies that are slow to react.

There’s a post over at Supplychainer talking about how you can attack supply chain risk. I posted a comment there but wanted to include it here for completeness.

** My comment **

I think the suggestions in the post are quite valid. However, I would argue that more is needed. The reality is that there’s no way to predict all the unexpected events that are going to pop up daily in a globally distributed supply chain that is faced with increasingly volatile demand and shortening product lifecycles.

To be proactive in dealing with these “make or break” situations, companies need to empower people with the visibility and tools (including collaborative scenario modeling capabilities) to act quickly and in accordance with corporate metrics. Why empower people? Because dealing with these high complexity, high risk decisions requires human judgment. By definition these unexpected events were not in the plan that everyone is trying to execute to. So, human judgment is going to be required to figure out the right tradeoffs and compromises to make.

Great post over at Solectron’s blog talking about putting supply chain risk management into perspective. When supply chain risk comes up, it’s usually the headline grabbing examples that get all the attention. Things like hurricanes, strikes, terrorist attack, etc. are always mentioned. There’s no doubt that these risks are potentially devastating, but I would define these as low frequency.

What about the high frequency risks? What about those unexpected customer demands that always pop up? While a natural disaster is automatically assumed to be devastating to the business, these higher frequency risks can be too. What happens when you’re company can’t effectively respond to that customer request, and they go to a competitor? The aggregate effect of hundreds of these events mis-managed over time can be equally devastating to the business.

I liked the Solectron post because it focuses the attention back to the more likely events and their true impact - lost sales.

In an effort to proactively manage risk, many companies have developed supply-continuity initiatives and plans. However, in doing so, few have factored in demand risk while doing so. The opposite is also true. One very common approach to supply risk mitigation is to establish (or increase) inventory and/or capacity buffers. Doing so comes at a significant cost in tied up capital and creates another risk - that of excess and obsolescence.

Failing to factor demand into these plans further complicates the problem. As everyone knows, demand is not static. Developing a supply-continuity plan that assumes demand is static (the de-facto reality when demand is ignored) is asking for trouble. The reality is that demand is constantly changing.

Today’s systems typically don’t help alleviate this problem. Most planning systems were designed around optimizing a specific area - demand or supply, for example. What’s missing are tools to support an integrated view of current demand and supply simultaneously. And, when it comes to simulating various scenarios, you need the ability to simultaneously simulate variations in both demand and supply to understand the inter-relationships between them and what impact changing multiple variables at once would have.

In the face of constant change, companies need to empower people with the right information and tools to respond quickly and accurately. One key aspect of that is leveraging scenario analysis or simulation tools, but to be effective, these tools need to be able to actually simultaneously accommodate the realities of ever-present changes in all key variables.

According to research by Aberdeen, in today’s consumer industries, 50% of companies they have surveyed have indicated it takes more than a month to sense changes in demand. This has resulted in an excess of downstream supply chain inventory closest to the consumer. Unfortunately, this inventory is the most expensive as well.

With such a lag in understanding true demand, companies are really in a bind to respond quickly and effectively to change. Inevitably, these companies are going to be faced with disconnects between demand and supply that require a profitable demand response in order to ensure both customer satisfaction and the achievement of operational performance metrics.

Companies need to focus on improving demand sensing and empowering their front-line decision makers with the tools they need to see the impact of changes and to solve problems that inherently come from unexpected changes not originally accounted for in the demand and supply plans. The ability to quickly respond to these unexpected events is proven to drive improvements in both top and bottom-line results.

Tim Minahan has a really well done post over at Supply Excellence talking about managing supply chain risk.

Tim quotes Mark Hillman of AMR Research who says “The greatest risks are the day to day operational risks that can detract from shareholder value and performance. You need to focus on high probability risks that you can control, such as supplier failure or market risks, and take steps to mitigate these.”

When most people talk about supply chain risk management, they tend to focus on the larger natural disasters and such. These are obviously critical because of the magnitude of impact they can have. However, as Mark points out, there are tons of risk vs. opportunity decisions that have to be made everyday in most organizations. Quickly identifying and responding to these risks is critical to operations performance and requires visibility and tools in the hands of those that can act.