Posts Tagged ‘Supply chain risk management’

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Is it just me or does it seem like the topic of supply chain risk management is everywhere these days?  It seems like no matter where you turn the notion of supply chain risk is being talked about.  Some evidence:

• Jason Busch at Spend Matters has a post entitled “Managing change: a supply risk imperative” that cites Noha Tohamy of AMR Research who says “global companies are struggling to understand and mitigate risks across their extended supply chains in arguably some of the worst economic conditions of modern times.” Jason adds, “but not only are times tough — they’re volatile as well.”
• At the SupplyChainNetwork, Jeff Ashcroft has a post entitled “Analysis shows downturn decimating global suppliers.”  The post references insights from Panjiva, an objective information source on global suppliers that were based on analysis of the apparel industry in the second half of 2008.  It reveals staggering statistics, including: The number of suppliers actively serving the U.S. market dropped over 70% in just three months; from 22,099 suppliers in July to 6,262 suppliers in October.  The post also states that according to Aberdeen Research’s July 2008 survey and report on Supply Chain Risk Management, 58% of companies surveyed “suffered financial loss because of supply chain disruptions.”
• Jeff has another post entitled “Detroit 3 bankruptcy would ‘implode’ supply chain“ at the SupplyChainNetwork that talks about the potential cascade of failures amongst suppliers should the Big Three automotive companies declare bankruptcy.  There’s another post at SupplyChainer entitled “When supply chain makes two enemies good friends” talking about the shared suppliers between the Big Three and the Asian manufacturers, making a situation where they too are worried about the potential impact of bankrupties.
• At Supply Excellence, Tim Minahan has a post entitled “Risk: the next big (bad) thing.“  Tim writes “And suppliers are equally concerned about their customers. The CPO at one of the U.S.’s leading regional financial institutions told me last week, “Risk is a big issue in our sector. Period. Our supply base is now doing as much diligence on us as we are on them.”  He goes on to propose some risk mitigation approaches.
• IndustryWeek has a new article entitled “Supply chain risks threaten shareholder value.”  The article opens with “Supply chain integrity is a risk management issue that affects not only business operations but also long-term shareholder value, according to a new report from PricewaterhouseCoopers LLP. The report found that the average stock return of companies suffering from disruptions was almost 19 percentage points lower over a two-year period relative to the benchmark group.”
• And, I’ve commented on this numerous times (see here, here and here to name but a few).

So, there’s no shortage of evidence as to the magnitude of the issue.  The last thing you want to do at this point is to freeze and not do anything.  Market leaders are taking proactive action in light of the current environment.  They are establishing supply chain risk management strategies that include:

• Risk assessment–understanding where you have risk exposure by ensuring you have supply chain visibility and early warning systems in place.
• Risk mitigation–ensuring they have the right tools to simulate potential risks to mitigate negative impacts associated with any potential risks.
• Risk response–arming their staff with tools for risk tradeoff and response to those risks that do materialize, ensuring people can detail and collaboratively reiew various action alternatives and implement the right course corrections.

The current environment requires you to be on your toes.  Proactively developing a solid supply chain risk management strategy will ensure that you can spot potential risks, avoid many of them and manage those that do materialize.

New research published today from AMR Research finds that China poses the most supply chain risks to global companies.

According to AMR, the top three most successful strategies that companies execute in mitigating supply chain risk are performance-based contracts with suppliers or service providers, closer collaborative relations with trading partners, and dual/multi-sourcing strategies and using redundant suppliers.

We’ve certainly seen all of these strategies utilized by the global customers we work with.  In fact, many utilize all of these strategies.  But, what we’ve found is the cornerstone of any successful strategy is the closer collaborative relationship with your trading partners.  The reality is that you can put all the other measures in place, but without a strong relationship, you’re going to be more exposed (again, this isn’t suggesting that all you need is a strong relationship with your partner, just that you are much more exposed without it).  I wrote about this recently in the post “What’s your relationship with your suppliers?”

A strong relationship is built on a win-win.  When supply chain partners are tied to the same goals and objectives and working collaboratively to achieve them, there’s a greater vested interest in the shared outcome.  Thus, as things go astray, and they will, there’s a shared interest in quickly identifying the risk, understanding its impact and collaborating on the appropriate response.

Global supply chains provide significant benefits, but they also bring substantially more supply chain risk management challenges.  Building solid relationships with your key supply chain partners should be the cornerstone of any supply chain risk management strategy.

In this video, we sat down with MIT’s demand management research director, Larry Lapide, and discussed his views on sales and operations planning (S&OP). Larry comments that he’s always been a big fan of planning, but acknowledges that a plan can only take you so far. There’s a lot of uncertainty in demand and supply that will lead to some degree of plan inaccuracy or risk that must be managed. Larry also comments on the importance of taking risks to win in the market and how that must be supported by supply chain risk management strategies as a part of the S&OP process.

If you are unable to view the video above, please try this link: Larry Lapide, MIT - Supply chain risk management within the S&OP process.

Kerry Zuber and I were talking the other night and he mentioned how funny Jim Carrey was in Ace Ventura - Pet Detective.  Everyone in supply chain will appreciate this clip as Jim Carrey takes a humorous look at supply chain risk management.  And you didn’t think supply chain management could be funny!

What is your funniest supply chain story?  Post a comment with your favorites.

If you can’t see the above video, try this link.

I found this article today and thought it deserved comment (we’ve commented on this before here - “Not-so-perfect order performance management metric“).  In it, Justin identifies the idea that “Hero Culture” is no way to approach supply chain risk management.  What’s a hero culture?  It’s relying on someone to save the company from disaster in the nick of time. 

• It’s the buyer sourcing a replacement vendor when your primary supplier is on strike in time to make the quarter revenue targets
• It’s the production engineer that figures out how to leverage another piece of equipment to get the product out the door when the primary equipment has broken down
• It’s the marketing guy that figures out how to increase sales on a failed product release

There’s a number of reasons why given today’s environment this approach won’t work;

• The supply chain is global today.  You can’t call the vendor across town to make parts for you, instead you’ll be dealing with some company in China
• Customers just won’t wait. People expect to get what they want when they want it.  If you don’t have the product, they’ll go to the competition
• Shareholder expectations and fiduciary responsibilities dictate that you continue to grow the value of the business while not taking risks

While having smart, innovative people in your organization is always important, we can’t rely on them to save us from supply chain risks.  Instead every organization needs to have a structured supply chain risk management program in place that;

• Identifies and quantifies supply chain risk
• Develops and simulates mitigation strategies
• Continuously re-evaluates risk as product, market position and supply base changes

I can’t take credit for the title.  I’m at the AMR Research “The Business of IT” conference in Boston where we heard from AMR analysts, the CIOs of Merck and IBM and from Karl Braitberg who heads demand management for Cisco.  Karl gets credit for the great quote.

During his discussion, Karl commented that what drives IT investment at Cisco is the need to battle complexity.  In a company that spends $5.2 billion on R&D, you have a very robust product pipeline that creates complexity.  Thus, IT investments are to battle complexity in both IT and the business “before it eats you.”

Cisco’s view is that the right IT investments enable the supply chain team to manage increasing complexity and complexity is a reality today.

Karl described their evaluation criteria and process for recent investments in demand planning, supply-demand balancing (where they selected Kinaxis RapidResponse) and analytical forecasting and data mining.

There were also good discussions about supply chain risk management by several AMR analysts.  One of the key things they pointed to was the fact that too many people look at supply chain risk within the context of their role only - their silo.  Supply chain risk, for example, is not isolated to having a negative impact on the supply chain.  It has a financial impact, can negatively impact customer satisfaction and market share, etc.  Companies need to look at risk more holistically and IT must be an enabler.  Technology is an enabler to compliance, monitoring and managing risk.  And, most risk is at the handoffs between groups and IT uniquely understands these business processes and the associated data.

Another good article at IndustryWeek talking about supply chain risk management best practices.  I posted a comment on the site and have included it here as well.

** My comment **

Good article.  It’s important to continually elevate awareness to supply chain risk management given the increasing volatility that most companies face today.  There are no signs of this letting up.

One statement really caught my attention.  The article states “The ultimate goal of an effective and comprehensive supply chain risk management strategy is to embed risk awareness into all the core elements of the organization, from the C-suite through supervisors and department heads across the various supply chain functions.”

This is really important.  There is no chance that you could develop a supply chain risk management strategy that covers every contingency.  You have to build a culture that focuses on identify and proactively manage risks as they materialize.

To do this you need to make sure that your staff are both educated and armed with the proper tools.  Increasingly, your staff are having to deal with a growing number of risks that pop up daily - risks related to demand volatility, supply disruptions, product changes, etc.  Some of these are small, some will be large, but collectively they risk undermining your ability to achieve your objectives.

Tools to arm your staff with the ability for risk tradeoff and response are necessary.  These tools must deliver supply chain visibility so everyone has a common view of facts upon which to act.  These tools also must support rapid and collaborative scenario creation and analysis to quickly understand the impact of the change and the available action alternatives that exist.  These tools must also be able to score each potential action alternative on it’s potential impact to your business objectives.

The reality is that change is a constant today and on the increase.  A solid supply chain risk management strategy following some of the guidelines in the article, supported by a well armed supply chain staff are keys to turning these risks into opportunity in today’s environment.

I read a pair of interesting blog posts from Bob Ferrari about the addition of supply chain risk to SCOR. (See The Inclusion of Supply Chain Risk in SCOR Framework - Part One and The Inclusion of Supply Chain Risk in SCOR Methodology - Part Two).

I was very excited to see that the SCOR model now includes supply chain risk management assessment, tracking and mitigation methodologies.  This is yet another indication that supply chain risk management is becoming even more mainstream.   If the recent financial meltdown has taught us anything it’s that every organization (from large enterprise down to the small business) needs to have a clear understanding of the risks facing them and an effective mitigation strategy to deal with the identified risk.

A second key point that I found very interesting is that the metrics could be clearly separated into two types;

Supply Chain Risk Assessment: These metrics help you assess your degree of readiness for a significant supply chain event.  They measure the degree to which you have assessed your supply chain (and maintained the assessment)  and whether you have mitigation strategies in place.�
Key metrics include:

• Supplier Mitigation Plans Implemented (%)
• Value at Risk
• Age of supplier or customer risk data (Months)

Supply Chain Agility:  These metrics help you assess your ability to respond to events that you may or may not have anticipated in your supply chain risk assessment.  Key metrics include:

• Internal Event Response (Days)
• External Event Response (Days)

Supply Chain Risk Assessment is what people normally associate with supply chain risk management.  However, many people don’t think enough about their ability to respond (Supply Chain Agility).  Being notified an event has occurred, being able to assess the impact and recommend solutions within hours is on its own a very effective method of mitigating risk. 

Imagine this scenario.  A third tier supplier goes out of business.  While they don’t contribute a significant amount to the overall value of your product, the product can’t be built without these parts.  Upon receipt of notification of the supplier’s demise, you identify the current set of parts on order with this customer, identify the parts where this supplier is the only source,  then identify the customer orders that those parts impact.  Within minutes, you can identify the financial impact of the supplier going out of business.  Now your procurement team can start working on sourcing these parts elsewhere.   With the right tools, this agility is possible.

Do you agree?   Do you have any firsthand experience with these types of events?  If so let me know by posting a comment.

It would surprise me if anyone reading this blog is not aware of the financial crisis precipitated by the sub-prime mortgage lending that has been taking place over the past decade.  With a little creativity, there is a lot we can learn by extrapolating from the crisis into multi-tier global supply chains.  After all, what we are really facing is the money “supply chain” freezing up.

But let us start in the “real” world.  Over the next few months, and possibly even longer, cash is king.  Squeezing every dollar out of the supply chain ought to be high on the agenda.  The ability of a company to convert purchases into cash is best measured by their Cash-to-Cash (C2C) cycle.  The Cash-to-Cash cycle is defined as [“Days of Sales Outstanding” + “Days of Inventory” – “Days of Purchases Outstanding”].  While the contractual terms agreed with customers and suppliers are strong drivers for the C2C, the primary driver is speed with which a company converts purchased materials into products that have been sold to their customers, in other words the supply chain. In many cases the majority of DSO is accounted for by channel inventory, not only the true Accounts Receivables.  As a consequence there is a great deal that companies can do  to run their supply chains more efficiently in order to reduce their C2C.

First, understand which of your products your customer’s customer are buying.  Knowing only your “sell in”  forecast rather than your “sell through” forecast tells you nothing about your inventory liability in the channel.  Any unsold inventory in the channel is a liability regardless of payment terms because it affects your customer’s ability to pay you.  Even worse, if the channel inventory is not moving, it is unlikely that your customers will order more.  Your customers have to sell the stock at a loss, further eroding their ability to order more and pay you on time.  Channel inventory is a liability regardless if it is accounted for as Inventory or  Accounts Receivables.  Gaining visibility into which of your products your customer is selling gives you much greater control over the distribution of finished goods to your customers, increases their ability to pay you on time, and reduces the excess and obsolete inventory in the channel.  The same is true on the supply side, especially in Buy/Sell relationships with Tier 2 and Tier 3 suppliers.  Visibility into these inventories enhances greatly the ability of companies to manage their DPO and raw material inventory liabilities.

Too often we see brand owners leveraging their “muscle” to force suppliers to accept onerous payments terms, often many multiples of  the payment terms they receive from their customers.  While this will undoubtedly reduce the C2C, often making it negative, this is financial management along the lines we have seen from Wall Street, and is likely to drive some suppliers into bankruptcy during this period of tight credit.  As we have learned from Wall Street, clever financial management cannot mask poor fundamentals forever.  Instead the brand owners should be focussing on promoting and embedding superior operations performance.

Let us see if we can extrapolate from the financial supply chain to a manufacturing supply chain in order to derive lessons from the current financial crisis.  In this context I look at mortgages as channel inventory, mortgage lenders as the brand owners financing the consumers (channel partners) to build the houses by borrowing money or selling financial instruments to the banks (suppliers).  Once the market is flooded with inventory that is decreasing in value, this affects the channel partner’s ability to pay for what they have already bought let alone ordering more.  Which in turns affects the ability of the brand owner to pay the suppliers.  Once cash is tight, companies cannot invest in new products or equipment, which further erodes their ability to capture more sales.  We don’t have to look much further than Walmart to understand that most manufacturers live in a world in which the value of their channel inventory is decreasing daily. The key to being able to respond rapidly to changes in the market is to have visibility into what is happening in the market and a collaborative environment in which customers and suppliers can evaluate alternatives to reach a compromise which is of mutual benefit.  Without this level of supply chain visibility and collaboration, supply chain risk management is at best a blunt instrument.

Undoubtedly financial institutions came up with many fancy financial instruments that contributed to the current financial crises.  This is equivalent to the brand owner forcing onerous payment terms on the suppliers.  It doesn’t address the fundamental issue of superior operations performance.  Furthermore, when coupled with a lack of adequate visibility and controls to understand when things are getting out of control, we have a recipe for disaster.

I recently read a blog post by Bob Ferrari at his Supply Matters blog.  The post, entitled A Key Takeaway in Supply Chain Risk Management , described some of the quality issues plaguing China (tainted milk scandal, contaminated pet food, contaminated heparin) and Mexico (Salmonella laced tomatoes).  I posted a comment at his site, but have also included it here.

** My comment **

Good comments.  To me, the key takeaway was that Supply Chain Risk Management is something that no company can afford to ignore.  Of course, I couldn’t agree more.  However, while Bob’s focus was on quality, I want to make sure that we also focus on the flow of materials within the supply chain.  Not having any product to ship due to a supply chain problem will also have a negative impact on your company.  Let’s take a look at some of the events over the last little while;

• This year, the Olympics were held in Beijing.  The Chinese government put extremely strict limits on factories and on transportation in and around Beijing running up to the 2008 Olympics in an attempt to reduce the air pollution in that region.  If that region was part of your supply chain, you would have been impacted
• Earlier this year, there was a significant Earthquake in China.   While less important than the loss of life and the pain and suffering brought about by that event, several factories were destroyed.  Along with those factories sections of several supply chains were also destroyed
• In March of this year, the LG Chem factory in Ochang, South Korea burned, causing laptop battery shortages for Dell and HP
• In February of this year, year, the Lite-On LCD factory in Dongguan, China burned, impacting Dell, HP and Lenovo amongst others
• There are many other examples, some of which may have impacted you.

In addition to these catastrophic events, strikes, business closures, extreme weather and global shortages (and excesses) can all impact your supply chain.

So how do you identify and manage the risks in your supply chain?�
It starts with visibility.  You need to be able to see what suppliers contribute to your end product (and how much).  You need to be able to identify which suppliers supply unique components – components you can’t get from any other supplier.

Then you need to have analytic tools.   You need to be able to model your entire supply chain.  You need to be able to report results in ways that are relevant to your business.

Next you need to be able to simulate supply chain events.  What would be the impact if this supplier cut production by 50%?  What if I couldn’t get any of these components?  What impact would this have on my corporate metrics.  What would be the impact of a 10% downside? What would that do to my inventory position What about a 15% upside?  Could my supply chain cope?

Finally you need to be able to simulate potential solutions.  How long would it take to bring on another supplier? What parts could be substituted if I couldn’t get this part? What alternate routes could be leveraged to transport these goods?

I’ll leave you with this thought.  The difference between those companies that are significantly impacted by supply chain events and those that can ride them out is the extent to which they have anticipated and planned for the possibility of these things happening.  Which will you be?