Mitigating Risk through Best Practices

By Andrew Kinder

As companies have become more successful at operating lean, mean and increasingly global supply chains, the risks of disruption from factors inside and outside of their control have grown exponentially. Sources of risk are everywhere, from natural disasters such as Katrina-style hurricanes, to geopolitical unrest, to unpredictable market forces that affect market prices, demand, supply and the ability to grow a profitable business. And yet, in an independent study of 100 top supply chain professionals, a third of the executives admitted that they do not have a risk management strategy in place for their supply chain.

This article investigates some of the sources of risk faced by supply chain professionals and examines key strategies and emerging technologies to help companies build "chaos-tolerant" supply chains. Broadly, sources of risk can be categorized into internal and external risks, with different strategies to mitigate each. Both are discussed, along with a five-point strategy plan for managing risk.

Internal Risks

Internal sources of risk are those you can influence and control — the physical resources and business processes that are within your organization. These include your physical assets of manufacturing, distribution, transportation, people, money and the efficiency with which you manage and orchestrate these to profitably service your customers. Sources of risk are many and varied and include some or all of the following:

  • Product quality from brought-in materials right through to finished products. Poor control here leads to lateness, customer dissatisfaction, unplanned remedial work and potentially legislative breaches.
  • Asset productivity — the ability to plan and coordinate your materials, production and people assets effectively to meet customer demand. Disruptions in these areas cascade and magnify throughout the supply chain, resulting in unprofitable and uncompetitive business models. The linkage between supply chain excellence and business performance is exemplified by AMR Research's finding that the top 25 supply chain performers "outperformed the market for the third year in a row."
  • Data integrity across multiple systems. This is a key source of risk. Often products may be missing key data elements that cause problems later on, such as components of their bill of materials, cost information, pricing and supplier codes. Because products today pass through more parties, geographies and systems on their way to the consumer's hands, the opportunity for data problems has never been greater.
  • Lack of visibility. Hundreds of products comprised of thousands of piece parts traveling to all points of the globe by any conceivable means of transport make transparency in the supply chain difficult to attain and a major source of risk. Supply chain professionals always feel particularly uneasy about what they don't know but wish they did.

Mostly, the internal risks are what best practice supply chain management business processes are designed to address. Enterprises that leverage these best practices, along with a range of available technologies such as demand and supply planning, warehouse, transportation and product lifecycle management, can go a long way toward understanding and mitigating their exposure to these kinds of risks.

External Risks

While many companies are practiced at managing their internal supply chain because they own the resources, the external sources of risk are outside of their control and too often dealt with reactively rather than proactively.

External risks to supply chain continuity include many of the following:

  • Market volatility. Despite the best efforts of your marketing department, customer demand for your products and services varies beyond your control. Determined by market pricing, availability, competition and consumer trends, demand for a product can disappear overnight, leaving obsolete inventory in the hands of manufacturers and retailers.
  • Macroeconomic factors, such as economic growth, interest rates, currency fluctuations, fuel prices and energy costs. Nobody would have dreamt of $100 per barrel oil two or three years ago; now $150 barrels are a possibility, and those prices affect product costs in all the economies of the West.
  • Government legislation. According to the same independent study referred to earlier, 82 percent of supply chain executives admitted to spending up to 52 days per year coming to grips with the latest legislative orders, with 58 percent being "concerned" or "very concerned" about operating in an increasingly regulated environment. They are right to be concerned. Failure to comply is expensive and puts customers, your brand and ultimately your company at risk.
  • Natural disasters. While most people think of major freak weather events such as hurricanes and earthquakes, this category also includes a large number of "everyday" occurrences that nevertheless can have a severe impact on supply chains, such as local droughts, floods and disease. These can severely affect crop availability, quality, market price and sourcing options for companies that rely on affected materials for their supply chains.

Solutions

In extreme cases, these internal and external risks can take companies down. To avoid being knocked off balance, companies try to alleviate these considerations through risk management strategies. If trouble comes and you're well prepared, not only do you inoculate your company against the risk, you open opportunities against competitors that had not perceived the risk. Here are five strategies that can help immunize your supply chain against these kinds of risks:

    1. Make every employee a risk manager. Enterprising companies in every industry are empowering their employees to proactively manage risk. Managers should be conscious of sources of risk and how to detect it, and they should integrate this knowledge into their daily practices. Overly bureaucratic and complex processes tend to submerge risk management. Managers need the flexibility to use techniques that make sense for them and their operation. Employees should also view unexpected events as opportunities as well as risks. For example, a larger-than-expected sales order demand will have an impact on planned stocks and production, but if coordinated with warehousing and logistics, this kind of event provides a great opportunity for increased revenues and enhanced customer satisfaction.
    2. Detect unplanned disruptions to your supply chain in real time. Most companies use key performance indicators (KPIs) at the corporate level as a way to identify supply chain disruption and take appropriate action. However, similar to trying to drive a car by looking in the rear view mirror, KPIs only provide insight into past performance. By the time the KPIs are reported, the data are usually a month old and no one can uncover the source of the original problem. Smart alerting technologies constantly seek out and monitor unplanned events anywhere in your supply chain (late deliveries, inconsistent or missing data, bigger than expected orders, stock right-offs). You are notified immediately if something goes off track. In supply chain terms, a "stitch in time" is critically important to avoid small issues that could grow into big, costly events.
    3. Provide a foundation for employees to collaborate and share knowledge to resolve risks. Combined human knowledge always provides greater insight than systems alone can provide. Individuals know about the big orders due next week, the likelihood of market price increases, competitor promotions and their impact, and the tanker that just went down with your shipments on board. Collaborative technologies reach out to your internal employees and external business partners, gathering information and improving transparency into and across your supply chain.
    4. Proactively measure performance and mitigate risk through continuous business process optimization. Risk management is a dynamic business process. Combining collaboration with alerting technologies allows companies to act immediately and improve the chances of detecting the source of the problem and eliminate the underlying source.
    5. Scenario planning. What changes would you make to your supply chain network if you had a crystal ball and knew the price of fuel in six months time? The level of "green" taxation that might be applied to your products? The crop yield of your key ingredient at the end of the season? The price of energy next year in all your plants around the globe? Knowing this, how many would revisit the very design of their supply chain network, source materials from different countries, perhaps even reverse the conventional wisdom of outsourcing to the Far East, saving on manufacturing costs but at much increased transportation expenses? Obviously, none of us has a crystal ball. But simulating your supply chain can evaluate your sensitivity to such eventualities and help you establish contingency plans. Forewarned is forearmed in supply chain strategic thinking.

Conclusion

In today's fast-paced global business environment, innovative companies must excel at mitigating risks; their employees must catch potential problems before those events become catastrophes. A tested and proven crystal ball would help, but until these are readily available, other strategies must prevail. Legislative requirements, market turmoil, competitive activity and freak weather events are all tricky to predict with accuracy, but they are not beyond the realm of proper planning.

To serve their customers, executives must be more vigilant than ever regarding threats to the financial well-being of their organizations. The requirement for greater visibility throughout the supply chain is paramount so that risks and opportunities can be anticipated. It's one thing to manage those factors that are relatively easy to see; it's quite another, but imperative, to manage those that come with an element of surprise. While the specific return on investment varies, mitigating risks means improved traceability and visibility, and results in lower costs, increased operational efficiency and customer satisfaction, tighter regulatory compliance and creation of a climate of continuous improvement. You cannot afford to remain among the 82 percent of companies that are just concerned about supply chain resiliency; you must act now.

About the Author: Andrew Kinder is director of product marketing for supply chain management at Infor. More information at www.infor.com.

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