Michael Levin of Integrity Interactive is right … risk assessment doesn’t have to be complicated. Many companies put off risk assessment, management, and mitigation because they think it is too time intensive, hard, expensive, etc. … when in reality it usually isn’t. The vast majority of what you buy doesn’t have to be single sourced from a single factory or be made of a single raw material only found in one place in the world. As a result, it’s usually not too hard to define risks (we’re single sourcing oranges from the coast of Florida or RAM chips from a factory on the Shanxi Border in China) or come up with mitigations (buy Oranges from Florida and California and RAM from the Shanxi border factory as well as a factory in Korea).
Furthermore, the six-point approach to risk minimization he outlines in when the CPO gets a request for quote is a great way to kick-start a risk management program:
- Ensure the initial supplier selection process is comprehensive, repeatable, and documented.
This must include inquiries into ethical standards and history.
- Establish ethical standards and expectations for suppliers.
Include labour, environmental and anti-corruption standards. SI’s series on the John Lewis Partnership Responsible Sourcing Supplier Workbook has a lot of good standards you can start with.
- Publish and actively communicate those standards to suppliers on a persistent basis.
Not simply at the initiation of the supplier relationship. Regular newsletters and reminders when they log into your system as well as educational pieces about how to be more socially responsible. (You don’t just want to nag them, you want to inform and better them.)
- Perform routine audits of suppliers.
This is to ensure they continue to meet your ethical standards. Make sure that your contract states that you can do at least one surprise audit annually. (While you shouldn’t do it unless you expect your supplier is not being ethical or socially responsible, as it’s a big drain on you and your supplier, if you get wind of shenanigans, you want to be able to check them out.)
- Perform risk assessments of your supply chain.
Identify suppliers as high risk, low risk, minimal risk and no risk. (Yes, you do have no risk suppliers. For example, if your office suppliers vendor goes out of business, you just go down the street to the next one.)
- Establish in advance a remedial action plan in the event trouble is discovered.
Make sure it’s one you can act on quickly. Otherwise, your brand and reputation will be on the line. After all, by institutionalizing an approach, a company at the centre of an ethics scandal in its supply chain will fare much better with the public and potentially avoid the media storm that is inevitable. It’s a matter of enduring six weeks of pain rather than six months or more of media pain.
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… and its effects that can be very detrimental to your inventory levels, associated costs, and overall supply chain revenue, don’t do any of the following:
- Second Guess the System and Overcorrect
This typically happens when a buyer orders early, thinks he needs more “just in case” inventory, or believes that the system has under-estimated inventory requirements. When this happens at each stage of the supply chain, the original order requirements end up increasing significantly. For example, if a buyer at a retail store adds 10%, then a buyer at the local warehouse adds 10%, then a buyer at the central warehouse adds 10%, and then the distributor adds 10%, the supplier will get an order for 146.4% of the original order volume and the supply chain will become saturated with excess inventory.
- Last-Minute Unplanned Promotions
This goes for both buyers and sellers. Buyers, don’t allow marketing or sales to do last-minute unplanned promotions that were not taken into consideration during the forecasts. Without re-running all the forecasts, you can’t know how much more inventory you’ll need, and you’ll over-order “to be safe”. Furthermore, this surprise over-order will cause bullwhip second-guesses up the chain. Suppliers, don’t offer last-minute enticements to get a buyer to buy more. The net effect will be that your buyers will have too much stock, and then drastically cut their orders next time around. These unexpected cuts across the board will result in distributors overcorrecting downward, and then there won’t be enough inventory in the system and sales, and revenue, will be lost by all.
- Tweak the Order
If you have a good, modern, forecasting and inventory management system that can make use of all of your historical data, multiple forecasting algorithms, and run multiple what if scenarios that can take into account multiple assumptions, then, as long as the forecast and inventory plan was generated by a seasoned pro, on average, it’s going to be much better than anything your gut tells you. Tweaking just leads to uncontrolled overcorrections throughout the supply chain.
- Increase the Batch Size
Just because you can get an additional volume discount on order volume or shipping doesn’t mean that you can arbitrarily increase the batch size without consequences. Total cost of ownership, which will have been minimized by your inventory management or strategic sourcing decision optimization system, can involve dozens of variables. For example, there’s the inventory storage cost which could exceed the volume discount, especially if your warehousing cost is high. If you’re currently at FTL, it might put you over to FTL and LTL, and the LTL costs could be much higher. And, of course, the over-order will be followed by an under-order, which could lead to two devastating over-corrections by your distributor who was unprepared for the large swings up and down in order sizes.
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