The Paradox of Supply Chain Risk

How you view supply chain risk — and how you manage it — depends on where you sit in the supply chain


One approach to dealing with this kind of demand-side risk is not to focus on trying to forecast demand better, since history is a poor guide to the future in these circumstances, but rather on putting in place the capabilities necessary to sense the changes in demand as they occur and to respond to those changes in a timely manner, says Trevor Miles. Miles is director of industry and application marketing at Kinaxis, which offers on-demand supply chain applications for supply chain visibility, demand management, supply management, sales and operations planning (S&OP) and supply chain risk management. "You need to be able to have an early warning that a metric is going in the wrong direction, but this kind of visibility is about more than just getting information, it's about being able to do something with that information," says Miles, who has written and spoken extensively on supply chain risk.

On the supply side, enterprises continue to look at the viability of their suppliers and must consider how to balance the benefits of supplier consolidation with the potential disruption from the failure of a key supplier, says Jon Bovit, chief marketing officer at CVM Solutions, which specializes in supplier management solutions covering centralized vendor management, supplier diversity, supplier risk management, and supplier performance management. "Companies need to realize today that having two or three alternate suppliers is almost a necessity in this environment," Bovit says. "Because even if you have a backup, that backup could be in worse shape than your primary supplier.

Supply management solutions providers have responded to the growing demand for supplier risk management solutions with offerings that range from best-of-breed to ERP-based applications. CVM, for example, offers a Risk Central technology module that it says focuses on "mitigating supplier risk through the proactive management of risk and compliance factors, relationships and processes." Aravo offers a "QuickStart" program for supplier risk management, aimed at getting an SRM program up and running in 60 days or less for $50,000. Ariba last year rolled out a new set of tools aimed at helping companies determine the financial health and stability of key suppliers, among other solutions targeted at risk. Emptoris provides risk management capabilities as part of its supplier performance management offering. SAP offers supplier risk management solutions as part of its BusinessObjects business intelligence offering.

Practitioner Perspective

On the logistics side, the risk levels can vary with the market, points out Rick Franklin, corporate director of operations for Komyo America, a provider of third-party logistics services and a unit of Honda Logistics. Franklin directs operations to support Honda America's aftermarket OEM parts distribution in three major hubs located in Ohio, Tennessee and California, as well as the operations of Komyo America's 3PL business outside of Honda in facilities in the U.S. and Mexico.

Franklin says that in 2008 it was costing up to $3,000 to bring a 40-foot container from Asia into Los Angeles and Long Beach, which are Komyo's main supply routes to the West Coast. Finding affordable capacity was the principle concern. But by mid-2009, he says, the company was getting a rate out of the East of about $850 and the risks had changed.

"At that point we knew that the steamship lines were having huge problems with parking fleets because they had way more capacity than they had containers to move, so we had to be wary about sticking with one supplier and be careful to have a variety of suppliers," Franklin says. "We were looking not only at who had the best rates, but who's got vessels sailing in a timely fashion, who's making the ports, and who's making the commitments on time."

Looking ahead, Franklin says that a service provider like Komyo America has to consider the risks associated with its own capacity to meet its customers' requirements. Komyo actually saw growth during the recession as it took on business that switched from smaller 3PLs that had gone under as a result of the downturn. That created pressure to be able to scale capacity while at the same time holding the line on costs.

The company approached this challenge by deploying a software-as-a-service, subscription-based warehouse management system from SmartTurn, which allows Komyo to manage its more than 2 million square feet of warehouse space effectively without requiring the $100,000 minimum investment Franklin figured would be necessary to put in a traditional server-based solution. The SaaS solution also has the ability to scale quickly, Franklin says, so that when the economy kicks into gear again, Komyo will be able to scale its own operations rapidly to meet increased demand.

Final Word

So the supply chain industry continues to lumber toward a common understanding of what supply chain risk management means, and what the appropriate tools are for managing those risks. What is clear, however, is that risk is likely to continue to dominate much of the conversation around supply chain strategy for the foreseeable future, particularly in light of the lessons being gleaned from the recession.

As AMR's Noha Tohamy wrote last year, "If you're a supply chain executive, you're thinking risk—or at least you should be. ... The reasons for the topic's eminence are well understood. The strategies to make sure risk is managed in your supply chain, however, are varied and burgeoning." ¦

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