Daily Archives: July 25, 2006

Supply Risk Management IV: WisdomNet’s Point of View

As mentioned in Jason Busch’s recent post Another Perspective on Supply Chain Risk on SpendMatters , WisdomNet recently published a whitepaper that serves as a good introduction to Supply Chain Risk, and a good companion to my introductory posts on Supply Chain Risk (An Introduction, Risks and the Need for Resilience, and Managing Risk) that ran this weekend on e-Sourcing Forum. Although I agree that there are not any breakthrough findings or thoughts in the work, I also found it to be quite a worthwhile read — a perfect supply risk management 101 type of study, if you will. As such, I’m going to highlight the key points made by the author as a comparison and contrast to the key points that I made this weekend (in an effort to encourage you to read more).

According to the white paper, five key factors have an impact on supply chain resilience:

  1. Supply Chain Design
  2. Business Process Management (BPM)
  3. Demand and Supply Visibility throughout the Supply Chain
  4. Supplier Relationship Management (SRM)
  5. Culture

Supply chain design is the primary driver of resilience, and the level of risk in a supply chain is affected by process structure, level of vertical integration (that results from make or buy decisions), the location of supply, the concentration of capacity, and inventory decisions. Process structure is dictated by the choice of make to stock, configure to order, make to order, and design to order. The extent to which suppliers that cannot be easily replaced perform critical steps in the vertically integrated supply chain increases the level of risk. Sourcing outside of the local market in which the goods are to be sold adds considerable transportation and delivery risk. Concentrating supply to a single region, country, or city adds considerable risk and risk (which includes obsolescence, quality, shelf-life, and loss) increases with the number of inventories in the chain.

Resilience can be added to the supply chain design by:

  • using common components and configure to order processes whenever feasible,
  • avoiding sole source arrangements,
  • reserving capacity, implementing maintenance and spares strategies when single sourcing must be used, and allowing for process redundancy,
  • distributing supply among multiple cities, countries, and regions
  • centralizing safety stocks regionally,
  • holding inventory in unprocessed states for flexibility,
  • consistently and regularly measuring and improving forecast accuracy,
  • rationalizing product lines,
  • building rapid re-supply provisions into supplier contracts,
  • collaborating with customers for “early warning” of potential needs,
  • using performance-based contracts with Service Level Agreements, and
  • sourcing locally within your target market to facilitate site visits, minimize cultural differences, and increase manageability.

A focus on business process management can enhance capability through the supply chain. Participants whose processes are controlled and reliable are less likely to induce supply chain disruptions internally than those whose processes are not under control. Operations where statistical process controls and improvement programs, such as Six Sigma, are in place tend to have more predictable processes and introduce less variability when compared to those operations without such controls.

Resilience is the result of business process management that includes

  • using fact-base process improvement and control techniques like Six Sigma,
  • working with partners to build the same process disciplines into their operations (as your supply chain is only as strong as your weakest link),
  • focusing improvements on reducing economic order quantities to increase flexibility, and
  • building the ability for flex capacity.

Enhancing visibility through the supply chain improves your ability to deploy appropriate levels of resources where needed and reduces the risk of internally generated disruptions. Also, the more open the participants are about providing early warnings about (potential) disruptions, the more likely the chain can either avoid them altogether, or at least reduce their effect and duration.

Resilience results from increased visibility when you

  • implement collaborative forecasting, planning, and replenishment,
  • use partner agreements to provide inventory visibility,
  • implement systems that integrate data feeds in (near) real-time, and
  • (contractually) require suppliers to provide immediate and specific notification of (potential) disruptions as soon as any event of significance occurs.

Competency in Supplier Relationship Management is the key to building and maintaining a strong supply chain team. SRM skills enable an organization to reduce supply chain interruption risk by strategically spreading business among multiple suppliers and multiple locations. SRM techniques include good performance measurement processes, collaboration and supplier development, and solid category management programs wherever sole sourcing is required.

With regards to performance measurement, it is important to establish clear expectations, provide timely feedback when performance falls short, and manage consequences. Reward suppliers that succeed and penalize suppliers that fail. Performance is increased when joint efforts with strategic suppliers are undertaken to optimize cost, inventory, processes and flexibility. Manage key categories with a sound understanding of the underlying commodity markets and devise substitution options when you foresee an impending shortage or crisis.

Resilience results from Supplier Relationship Management when you

  • establish supplier performance measurement processes and apply them consistently,
  • invest selectively in strategic supplier development,
  • manage categories for strategic and single-sourced components,
  • use supplier segmentation to guide relationship management, and
  • move toward performance-based contracts that build risk sharing into contract pricing.

Culture is used to refer to the level of trust, delegated decision-making structure, and rapid information movement. In order to build resilience:

  • participants need to share information about demand, inventory positions, capacities, and vulnerabilities,
  • lower levels of the organization need to be empowered to sound alerts regarding problems or potential problems (as the sooner a problem is found, the cheaper it is to fix, and the smaller the duration of the associated disruption), and
  • processes should be in place to enable timely information flow.

In addition to the steps that have been outlined above to improve resilience, there are actions that can, and should, be taken by an organization to prepare for a disruption. These are:

  • Identify potential risks, possible ramifications, and associated likelihoods.
  • Explore risk-reducing measures and decide on actions to mitigate risk, investing more in plans and processes to mitigate high likelihood and high impact risk scenarios.
  • Prepare business continuity plans that address both emergency response and plans for business resumption.
  • Practice drill the continuity plans against different scenarios to uncover and address potential weaknesses before a crisis happens.
  • Work with critical suppliers to make sure they are prepared and have business continuity plans in place.
  • Update plans regularly and as conditions change.
  • Respond to disruptive events as they occur.

In addition, the business continuity plans should include:

  • event impact analysis,
  • organizational roles and responsibilities for crisis management,
  • crisis communication plans,
  • well defined procedures for the evacuation of personnel,
  • consideration for means to provide food, water, shelter, clean air, security, and basic medical, and
  • secure back up of key business data and systems required to run the business and service your customers.

Events that cause supply chain disruptions are inevitable. The impact of these events, however, can be minimized by proactively taking steps to build a resilient supply chain and by preparing for disruption. For an in depth discussion, I refer you to WisdomNet’s white paper Managing Supply Chain Risk: Building in Resilience and Preparing for Disruption (registration required).