Category Archives: Supply Chain

A Very Simple Definition of Risk

Not only is risk everywhere on the map, so are the types of risk and associated definitions thereof. Risk: a concept that denotes the precise probability of specific eventualities (Wikipedia). Financial Risk: probability of loss in the methods used in financing a firm (Business Dictionary). Supply Chain Risk: the damage — assessed by probability of occurence — that is caused by an event within the company, within its supply chain, or its environment affecting the business processes of more than one company in the supply chain negatively (Kersten).

Fortunately, there’s a very simply actionable definition of risk that everyone can understand:

If you’re counting on it, it’s a risk.

This covers every type of risk you can think of.

    • Production Risks
      Machine Breakdowns: check.
      You’re counting on the machine to work.
      Supply Shortages: check.
      You’re counting on parts and raw materials to be available when you need them.
      Talent: check.
      You’re counting on having the operators you need, with the right skill sets and experience, when you need them.
    • Communication Risks
      Network Outages: check.
      When you pick up the phone, you expect a dial-tone. When you send an e-mail, you expect it to leave your server.
      Broken Channels: check.
      When you issue an order, you expect it to be relayed.
    • Business Model Risks
      Disruptive Technology: check.
      You expect that your product will continue to be in demand and viable in the marketplace.
      Disruptive Business Model: check.
      You expect that your pricing model is valid, and that you’ll be able to sell your products at a profit against competitors in the same ballpark.
    • Environmental Risks
      Natural Disasters: check.
      You expect that an earthquake won’t level your plant tomorrow.

Resource Shortages: check.
You expect the water and electricity to keep flowing.

  • Political Risks
    Trade Barriers: check.
    You expect that you can keep importing from your suppliers and keep exporting to your customers.
    Civil Unrest: check.
    You expect that your plants won’t be blockaded and that they won’t be attacked by a terrorist organization.
  • Economic Risks
    Currency Fluctuations: check.
    You expect the currency exchange rate will stay within your predicted window.
    Commodity Market Instability: check.
    You expect prices won’t yo-yo out of control over your contract period or that your current strategy will be able to deal with yo-yo pricing.
  • Internal Compliance Risks
    Maverick Spending: check.
    You expect your employees will buy off contracts using approved methodologies and that expected savings will be realized.
    Contract Adherence: check.
    You expect your employees will live up to supplier, customer, and partner commitments and SLAs.
  • External Compliance Risks
    Trade Documentation: check.
    You expect that your partners will produce all of the necessary import and export documentation, and deliver it on time, to all of the appropriate customs and government agencies.
    Regulatory Requirements: check.
    You expect that your production facilities are complying with the RoHS, WEEE, and REACH directives.
  • etc.

This is also why it’s actionable. To identify risk using this definition, all you have to do is review every business activity and outline what you’re depending on AND assuming, and you have your list of risks. Then, you can prioritize the risks and begin working on the definition of your risk management plan.

Now That You Have Your Demand Planning Strategy in Place, Use It!

In our last post, we reviewed Infor’s top ten demand planning strategies. In this post we’re going to illustrate why you need to put your demand planning strategy into action immediately using a recent case study from Global Logistics & Supply Chain Strategies as our example.

In Free The Enterprise! Bust the Silos in the Supply Chain, Robert Bowman tells us how, not too long ago, Linksys (the router division of Cisco Systems Inc.) had a record of only 20% accuracy and could only manage supply and demand for its top 200 SKUs. However, after taking appropriate actions, it was able to reduce inventory by 35%, backlog by 60%, and obsolete inventory by 40% in only twelve months. It also increased supplier fill rate from 65% to 95% while reducing expedited shipments more than tenfold from 40% down to 3%. And forecast accuracy at the SKU level increased 350% to a much more acceptable 70%.

How did Linksys do this? The Vice President of Operations tore down the silos between the demand forecasting and product management teams and created a formal S&OP organization that served as a data clearinghouse and a foundation for a company-wide demand forecast. No longer was forecasting a monthly spreadsheet exercise conducted in isolation by the demand forecasting team. In the new structure, a cross-fuctional forecasting team was formed that solicited input from finance, sales, marketing, purchasing, and supplier management before constructing a forecast. This is a much better situation than the one where no one trusted the forecast and sales would inflate its numbers to insure product availability.

In addition, the VP instituted an aggregated view of forecast, inventory, and production data for each SKU that he called “gameboards” supported by a an underlying software platform. No purchase was permitted unless it was based on factual information from the gameboard.

However, the effort ultimately succeeded because the internal walls were torn down and all organizational groups learned to work together in harmony and trust the forecast that was produced as a group. This is not always an easy effort. As the author astutely notes, “companies might find it easier to tear down functional walls separating them from external partners, such as suppliers, than those between internal departments“. In addition, “independent partners understand the need to work closely together, while individuals with a common employer tend to gravitate toward their immediate areas of responsibility“. And this tendency to stick to silos will continue unless you align incentives. If sales is incented to push product even if inventory is high and factories are incented to increase production even if the demand is not there, everyone ultimately loses. Everyone needs to be incented against the same goal and off of the same metrics, which must capture TCO reductions and ROI improvements. And the organization needs to move to a collaborative demand-driven mentality focussed on compliance with the agreed upon operational procedures.

Cut Cost with the Supply Chain

A recent article in CPO Agenda on how “supply chains hold the key to cost cutting” covers a recent “Opportunities in Adversity” survey by Ernst & Young across 337 senior supply chain executives. According to the survey, the majority of supply chain executives (83%) reported that their supply chains provided opportunities to lower costs, with a whopping 57% indicating that major cost savings opportunities rest in the supply chain.

This should not be a surprise considering recent findings by Aberdeen, Accenture, Hackett, and many others. The only surprise is that companies still see the need to do these studies. How many studies should it take to convince you that untold savings opportunities lie in your supply chain? That every procurement event is a savings opportunity? That every dollar saved by procurement matches five, ten, and sometimes twenty dollars of revenue brought in by sales? That best-in-class operations see a 6:1 ROI for every dollar spent on their procurement operations? I’d think three would be enough (and by now there are well over thirty). So, what are you waiting for? Hire a consultant (they’re cheap!) and get cracking!

Six Ways Companies Mismanage (Supply Chain) Risk

A recent Harvard Business Review article by Rene M. Stulz dives into “six ways companies mismanage risk” (membership required) that are just as applicable to supply chain operations as they are to financial operations. As the article points out, these missteps are just as likely to occur in good economic times as they are in the rough economic times we are currently experiencing, but rough times will magnify the impact of the mistakes considerably.

The six mistakes highlighted in the article are:

  • reyling on historical data
    Historical data is a starting point, not a destination. For example, look at how well real estate investment managers who assessed risk on the basics of statistics over the past three decades did in 2007. Closer to home, consider how well you would have done in your fuel hedges in early 2008 (before the price of oil dropped over 60%) or with your logistics hedges in late 2007 (before global shipping volumes were cut in half).
  • focussing on narrow measures
    Focussing only on-time deliveries misses the point. It’s about the perfect order — the right product of the right quality shipped using the right method with the right carrier at the right price delivered to the right customer at the right time. If you ship the wrong product, or the quality is insufficient, or you have to expedite it and it costs three times as much, you’re losing money and your metric will never capture the losses.
  • overlooking knowable risks
    Meticulous review and careful thought allows one to identify almost every possible risk, including risks in the instruments used to measure the risk. For example, if you are using an index to hedge against cost increases, and that index lags reality by three months, you could be cut off-guard by rapid cost increases or decreases due to unexpected supply or demand disruptions (caused by natural disasters, for example).
  • overlooking concealed risks
    Risk takers in your organization may deliberately hide risks that they feel are unlikely, and jeopardize an entire sourcing plan or production line. For example, if you’re in food, and your supply manager decides to source all of your tomato crop from coastal Florida because of volume-based cost savings, you’re at risk of an immediate supply disruption every time a hurricane sweeps up the cost.
  • failing to communicate
    If you can’t clearly explain the risks in your plan, systems, and organization, chances are they’ll be ignored, or at least severely underestimated. For example, if you’re assuming uninterrupted supply from a single-source supplier, and that risk goes overlooked, that could be a real problem in this economy.
  • not managing in real time
    Unless you’ve been hiding under a rock in a cave, you’ve probably noticed the volatility of the global markets lately, including supply volatility (as suppliers go out of business) and demand volatility (as customers reduce their spending).

All these mistakes will cost your dearly in the current economic climate, so its worthwhile reviewing your risk management strategy to make sure you haven’t made any of them. For more information on risk management, and best practices, see the risk management posts here on Sourcing Innovation.

On The Road to IBM’s Smarter Supply Chain of the Future

Today, IBM releases the results of its Global Chief Supply Chain Officer Study, “The Smarter Supply Chain of the Future”. This report summarizes the findings of an in-depth study that questioned 400 Senior Supply Chain professionals in 29 industries across 25 countries to determine the key challenges facing supply chain executives today.

The study, which identified the top five supply chain challenges, defined the three characteristics of the smarter supply chain as well as a roadmap for the CSCO of the future that centers around the challenges and core characteristics of the smarter supply chain.

The Top Five Challenges, which should be of little surprise to regular readers of the sourcing blogs, were:

  • Visibility
    collaboration, real-time data visibility, and decision support are all key concerns
  • Customer Intimacy
    customer behavior comprehension, service cost models, optimized forecasts, and collaboration are all key concerns
  • Cost Containment
    cost structures, inventory costs, fluctuating markets, and service costs are all key concerns
  • Risk
    predictive capabilities, risk adjusted inventories, compliance strategies, and product traceability are all key concerns
  • Globalization
    demand, supply, and distribution planning are key concerns

According to IBM, the three characteristics of a smarter supply chain are:

  • Intelligence,
  • Interconnectivity, and
  • Instrumentation.

So how do these three I’s come together to define the smarter supply chain of the future? Download the report and find out!