Over time, this shift will have an impact on supporting enabling technology. Traditionally, master planning systems (MPS) horizons have been shorter than those associated with S&OP processes, which drove, to a certain extent, decoupling of the plans. As the need for cash and operational management has increased, and as leading companies strive to conduct more accurate scenario planning, an integrated and frequently updated business and operating plan is required.
Supply Risk Management
The disruptions to a company’s operations and cash position due to supplier shutdowns or key customer bankruptcies can be disastrous. These risks introduce enhanced levels of uncertainty throughout the value chain. And when suppliers or third-party providers experience financial difficulties affecting operational performance and causing slowdowns, it is difficult to understand portfolio and channel margins to appropriately manage capacity requirements while focusing on cash positive production. Furthermore, customer instability can result in the need to reorder allocation priorities and credit terms (i.e., the traditional “best” customer might no longer be the “best”).
When looking at the entire value chain, any substantial delay of parts or components availability can lead to plant closures or even bankruptcy. Consequently, it is critical for companies to monitor and work closely with their suppliers to develop contingency and risk mitigation plans to offset any potential major disruption of critical procured parts or components, as well as inbound material.
These contingency plans should contain at least three major areas of focus. The first area is better identification of critical suppliers or vendors. Companies need to revisit who their critical suppliers and vendors are in light of changing customer buying trends. For example, tooling that may have been critical may no longer be required, or the shift in commodity prices and excess capacity has provided the opportunity to use other material or suppliers that previously would not have been an option.
The second area is better understanding the challenges and major issues facing key suppliers and vendors. Providing production plans and anticipated demand schedules is no longer enough; companies need to understand the viability of critical suppliers and the impact they can have on their operations should failure occur.
In working with suppliers and carriers, managers should evaluate their performance from several perspectives:
- Operational performance, focusing on quality, on-time delivery, capacity issues and flexibility;
- Economic performance, focusing on financial statements and cash position.
This performance assessment should result in an overall rating of suppliers/carriers and the risks the company bears by working with each of these organizations.
The last area of focus is increasing an organization’s awareness of current market and industry forces. This is critical because it enables a company to have better visibility to the pressures and stresses not only within its own organization but also within its suppliers and vendors. Elements like competitiveness, market characteristics, trends, emerging technologies and availability of substitutes provide insight into the positioning of current suppliers/carriers compared to other players in the market.
The mitigation plan, in combination with the risk profile of the company, should enable a quick and comprehensive response should a major supplier, vendor or carrier fail. The result of this exercise could be the consolidation of suppliers, leveraging suppliers across the enterprise, or seeking new companies that can step in when and if needed.
Another element of supply risk management, on a more tactical level, is improving internal cross-functional coordination, as well as external collaboration with the supplier/carrier, by redefining and enhancing certain processes and structures. This includes: