Monday, March 21, 2011

Proactive Management of Supply Chain Risks: Optional to Essential

Supply Chain Risks is an important part of the whole gamut of Enterprise Risks that an organization faces. Lately their importance has grown and hence a renewed focus on the topic is warranted.

The Need
Thoughts around proactively insulating your supply chain from risks have been around for a while. Only few companies have taken it forward with a dedicated program inside their organizations. However it might be time for other organizations to actively consider it, primarily because of three reasons:

• A company is finding itself managing a complex web of relationships across geographies and supply chain tiers. Hence a company is susceptible to disturbance though the problem may not be with its immediate partners but several tiers away in supply chain.

• The business world is far more competitive than before and a small mistake can lead to greater consequences like being shut out of a market.

• The increasing unpredictability in world, be it commodity prices, climate, regulations or other events. An enterprise can never know what would hit them and where.

There are numerous examples of how dear supply chain disruptions cost. A fire at sole supplier of an electronics company eventually resulted in its exit from the particular line of business as the competitor ate away into its market share while the company recovered. Researches have indicated that a supply chain disruption can cause 10% drop in price and takes two years to recover (Source: Kevin Hendricks, Vinod Singhal). Over 3 years, a supply chain disruption can result in 11% higher costs, 7% lower sales growth and 35% reduction in shareholders’ value (Source: Corporate Executive Board).

Recent global events have supply chain executives losing sleep. As world watched Egyptian crisis unfold, executives were worrying about movement of Goods along Suez canal. Japan's tragedy has affected semi-conductor industry worldwide due to fab shutdowns and halted product shipments. However, the ones who had Japan as major portion of their fab capacity are poised to lose more and fall behind the others. In automotive industry, Toyota and Nissan has closed down factories.

(Japan's earthquake, tsunami and nuclear crisis are tragic events and whole world shares the pain and sorrow. The brief reference of Japan's tragedy in the blog is in context of a different topic as such).

The Approach
The starting point for a proactive approach is to make a business case. Any program for active risk management would involve investment. Investment is required not only in form of direct cost like data collection, analysis, administration costs but also in form of indirect costs like high inventory levels, burden of managing more supply chain partners, foregone discounts etc. The benefits are far more intangible in terms of avoided losses. A business case should endeavor to use examples from past history to quantify the benefits and then work out return on investment.

Objectives of such a program will have direct bearing on the business case as it would influence both investment and benefits. Program objectives could be in form of: 
  • Recovery Time and Cost: Allowable limits on time and money which can be spend to mitigate supply chain disruption. 
  • Business Impact: The target cap on any losses on topline, bottom-line, shareholders worth, brand image, company image etc. when a risk goes live.

Objectives are key to define the boundaries of the program so that the company keeps a balance and does not go either overboard or under-invests.

Design of whole program is another factor which would influence the business case. One can opt to cover the following entire spectrum or components of it:

Inbound Supply Chain: Refers to commodities, components and/or products from contract manufacturers. It also includes logistic providers.

Prioritization: Prioritization of inbound parts is key first step and not all parts handled are equal in terms of importance. Shortfall in some parts can be more damaging than others. ABC classification, proprietary components, lead times can be some of the criteria for prioritization.

Risk Assessment: Next step would be risk assessment of each part and of supplier/logistic provider. Several agencies provide required data on suppliers to assess the risks. Specialized companies help with commodities risk management. Elaborate analytical models are capable of assimilating the risk data on several parameters like financial risk, nature risk, physical risk, political risk etc. Apart from parameters, risks also needed to be analyzed on following three dimensions:
  • Severity of the risk 
  • Probability of occurrence
  • Ease of prior detection
A single risk number is then calculated which is then used for risk prioritization, tracking and event management.

Risk Planning: If a risk is beyond a given threshold, mitigation steps can be taken till the risk drops below threshold. Also plans are devised if risk crossed threshold in future. Crisis teams are identified. Trigger points and escalation matrix are established.

Risk Tracking: This would require continuous information gathering and updating the analytical model to keep the risk number current. Personalized dashboards help executives to keep an eye on various developments, changes in risk levels, trends and sound alarm.

Risk Recovery: Unpredictable things will happen, risks will go live and execution will then matter the most. A well trained crisis team ensures timely and cost-effective execution of a risk mitigation/recovery plan.

Learning and Improve: With every passing event, knowledge would be generated which would improve the prowess of organization to handle risks. However, this is possible only if a system is in place to capture the knowledge generated and make it available at right time to right people.

In-house Supply Chain: This would cover in-house manufacturing and other operations. The steps would be similar to above. Business Continuity Planning will be a key risk planning measure.

Outbound Supply Chain: Distribution to warehouses, distribution centers, retailers/dealers, reverse supply chain form part of this.

Any successful program for managing supply chain risks needs to have a wide breadth to cover every possible source of disruption and depth of analysis to derive actionable intelligence and plan. A well-defined proactive approach to manage risks is the best insurance a business can have in these unpredictable times.

No comments:

Post a Comment