Yazaki has only been using the new supplier risk management process for a few months, so the company is still gauging its return on investment in the initiative. Karakos says that the majority of the ROI on this type of project will come through cost avoidance — avoiding the premium freight, testing and validation costs, overtime, poor quality and other costs of the supply chain disruption that could result. "If you can forecast one or two crises per year and take the necessary actions in advance, it pays back your investment," Karakos says.
Making Risk Management Fashionable at Luxottica
Risk runs deep in the fashion world, where every season the industry's producers must make educated guesses about what will be "in" and ensure that they have enough product on the shelf to meet that demand, but not so much that they get stuck with containers full of obsolete goods.
Unsurprisingly, the fickle winds of fashion affect any number of product categories outside apparel, even, it turns out, eyeglasses. Just ask, Alin Udrea, senior manager for production planning at Agordo, Italy-based Luxottica Group Spa, which produces prescription frames and sunglasses. Udrea, who is responsible for all planning, production and procurement of materials for both the wholesale and retail sides of Luxottica's business, says that the average life span of one of Luxottica's products (numbering more than 2,500 models and more than 30,000 stock-keeping units) is about 18 months, while the lead time for the products is typically two to three months. "If you compare the short lifecycles with the long lead times, the major risks that we have are either obsoletes on finished goods and backorders," he explains.
With its business growing globally, Luxottica has taken several steps to deal with these risks. First, the company has been consolidating its planning and forecasting process for the wholesale and retail sides of its business, including for the LensCrafters and Sunglass Hut chains that Luxottica acquired in the U.S. market. The company also has initiated collaborative forecasting with 20 of its major suppliers of finished goods. On the production side, the company has been working to implement lean manufacturing practices to reduce its lead times and thin out its inventory liability, while on the distribution side, Luxottica has consolidated its operations in Europe down from separate warehouses in each of the countries in which it operates to a single distribution center in Italy.
In addition, Luxottica is deploying an inventory optimization application from a solution provider called ToolsGroup to help determine the right inventory mix. The company will use ToolsGroup's DPM solution to analyze and optimize stock levels for all finished products in a distribution network comprising five sites, one central warehouse and 26 distribution centers. Specifically, Luxottica's goals for the solution include gaining the ability to position inventory to promptly satisfy customer needs, allowing production to quickly adjust to market changes, reducing inventories and global logistics costs, and improving forecast accuracy.
In the first six months of using DPM forecasting algorithm, Luxottica was able to reduce its stock levels by 10 percent while maintaining the same service levels, and subsequently the company was able to reduce manual intervention in the planning process by 50 percent, while then progressively increasing service levels. Implementing the DPM solution also allowed the company to roll up its forecasting for the retail and wholesale sides of its business into an integrated process.
And yet the uncertainty inherent in Luxottica's business is only rising as its products become increasingly fashion-oriented, and Udrea says that the company will have to continue to work to find ways to ameliorate that uncertainly. "The risks in our industry are becoming higher and higher every year," he says, adding, "We were able to reduce our forecast error by 5 percent this year, and that is very interesting progress, but we will continue to push the system to get more positive results like this."
The Risk of Being Reactive
As the examples in this article demonstrate, companies appear to be approaching various aspects of their total supply chain risk. And yet we again return to the ARC Advisory Group's assertion, cited above, that enterprises have failed to date to take a comprehensive, enterprise-wide — let alone a supply chain-wide — approach to address the risks inherent in any supply network nowadays.