Cover Story: Rethinking Risk

Supply chain executives are discovering new ways to apply technology and innovative processes to the challenge of managing uncertainty


Venu Nagali has a piece of advice for supply chain executives looking to undertake a risk management initiative. "Most people think having a great piece of software solves the problem," says Nagali, who has been heading a supply chain risk management initiative at technology solutions provider HP, "but the biggest lessons for us have been that, first, you have to change people's mindset about risk, and second, you have to put in place a rigorous business process to make this [type of initiative] work."

Those lessons have clearly paid off for HP, as Nagali estimates that the company has saved more than $100 million dollars in incremental value over the five-year lifespan of the project. But beyond the savings, Nagali says the initiative is helping HP to achieve the even greater goal of mastering the uncertainty inherent in its global supply chain.

Increasing Focus on Risk

Supply chain risk management has garnered increasing attention of late, and for good reason. First, as companies have outsourced greater portions of their supply chain, they are left with direct control over smaller and smaller segments of the total supply chain, heightening exposure to factors outside their control. Second, as supply chains have expanded globally, enterprises have become subject to political, social and even geological events occurring throughout a much broader area than in the past. Meanwhile, compliance mandates such as Sarbanes-Oxley make it imperative for companies to understand the impact of external events on their bottom lines.

Third, as manufacturers have assiduously sought to simultaneously take as much inventory out of the network as possible while increasing the speed with which products (especially new products) move to market, margins for error have become slimmer, amplifying the potential impact of unanticipated events. And, finally, as the technology analyst firm Industry Directions points out in a white paper entitled "Inventory Liability: Managing Risk in the Electronics Supply Chain," traditional advanced planning systems have not been set up to deal with the unexpected. "Production planning is designed to optimize resources within stated constraints to support the operating plan, but a plan is only as good as the known constraints — and it is virtually impossible to identify the real constraints when the plan is built."

Supply chain executives are keenly aware of the panoply of risks threatening the integrity of their supply and demand chains. A recent survey of manufacturers by ARC Advisory Group showed that their list of concerns includes shortages of key materials or components (cited as a concern by 45.8 percent of respondents); catastrophic loss of factory and business disruption at a key supplier (37.5 percent for both); and poor forecasts of sales and profitability of new products, dependence on overseas suppliers and delayed introduction of a new production line or process (25.0 percent for all three).

And yet ARC found that companies have made greater progress in assessing supply chain risks than in getting a handle on them. "Companies lack a strategic approach to risk management," write Steve Banker, Sid Snitkin and Adrian Gonzalez in "Supply Chain Risk Management," a report on ARC's survey. "They neither assess all of their risks in a consistent, uniform way, nor do they apply common approaches to risk evaluation and management." That may well be the case, but this article examines efforts underway at three different companies that are confronting various aspects of risk in their supply chain, beginning with technology company HP, which has been a pioneer in turning supply chain risk management into a cross-functional business process addressing a broad swath of its spend.

Getting Proactive at HP

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