Chain Reactions: Quantify Risk and Improve Capacity Planning

Capacity planning is risky business for so many different industries. Supply chain risk management is one way to take some of the uncertainty out of your decision-making process


An SCRM approach enables companies to minimize under- or over-investment in inventory or capacity and improve profitability. Through it, the semiconductor testing equipment manufacturer was able to quantify low- and high-demand ranges and easily determine trade-offs and potential overlooked opportunities. It also determined the actual flexibility that would be required — down to the component level. As a result, the company reduced inventory costs by $1.3 million; it realized a $10.8 million improvement in its net cash position; and it reclaimed $0.4 million in gross margin otherwise forgone through lost sales.

Reducing Fixed Capacity Costs

A global automaker used SCRM techniques to help it plan capacity and tooling for new car options. Predicting consumer uptake is inexact at best, further complicated by consumer budget inelasticity. Deciding to purchase one option, such as an improved stability system, increased air-bag protection or a navigation system, usually decreases the customer's ability to purchase others. This can cannibalize current best-selling options and throw off revenue forecasts. Taking an SCRM approach, the automaker created a range forecast and evaluated supply quotes, measured a variety of capacity plans and measured suppliers' response times against it. As a result, the automaker achieved a 12 percent reduction in fixed-capacity costs in the supply base, which translated into $40 million in savings.

Reducing Total Sourcing Costs

With a range forecast, a European automaker created a portfolio of options for introduction of a new navigation system. The company used SCRM techniques to quantify the price reduction risk it would face if demand were only medium or low — 3.7 percent. At the same time, it could estimate what its shortage risk would be if demand exceeded expectations — 4.2 percent. By adjusting supplier contracts and taking the best and worst-case ranges into account, the company saved 18 percent in total sourcing costs — or 0.7 million Euros — on just this one decision, on one model of their line.

Complementary to Traditional Solutions

SCRM complements traditional supply chain, procurement change, collaboration, and supplier consolidation solutions by delivering actionable data that can be used by these solutions. However, SCRM provides an objective, repeatable way to approach capacity and launch decisions. It is not subject to defensive decisions based on turf, an individual's personal experience or best-efforts guessing. In addition, organizations that employ SCRM as an approach can scale it to virtually any supply chain or capacity problem as opposed to having individuals create ad-hoc, non-repeatable processes that are abandoned when the employee transitions to another role.

A Positive Chain Reaction

Organizations can apply science, in the form of financial engineering techniques, to supply chain and capacity decisions — without having to be financial experts themselves. Supply chain risk management techniques can provide results to companies that are seeking repeatable methods for reducing total sourcing costs and improving the quality of their capacity decisions.

About the Author: Heiko Pieper is director of Business Consulting at Vivecon Corp., a company that applies financial engineering techniques to design and manage supply chains.

  • Enhance Your Experience.

    When you register for SDCExec.com you stay connected to the pulse of the industry by signing up for topic-based e-newsletters and information. Registering also allows you to quickly comment on content and request more infomation.

Already have an account? Click here to Log in.

Enhance Your Experience.

When you register for SDCExec.com you stay connected to the pulse of the industry by signing up for topic-based e-newsletters and information. Registering also allows you to quickly comment on content and request more infomation.

OR

Complete the registration form.

Required
Required
Required
Required
Required
Required
Required
Required
Required
Required
Required