Supply Chain Risk Management Comes of Age

Stephen DeAngelis

February 8, 2012

Steve Hall, from Procurement Leaders, believes that the numerous supply chain disruptions that have occurred over the past few years have forced business leaders to take a new look at risk management. [“The year risk management grew up,” Procurement Blog, 20 September 2011] He notes that last year there was “a noticeable jump in the quality and quantity of discussions on risk management.” Hall was particularly encouraged to see manufacturers and suppliers collaborating on the subject of risk management. He writes:

“This kind of collaborative thinking has been something of a holy grail for many for years now. When it comes to risk, it’s exciting to see the combination of supplier collaboration, internal collaboration and demand management and long term risk management coming together with support from the business.”

Hall’s point is that risk management efforts don’t really amount to much unless they are pervasively found throughout an organization. If risk management isn’t being actively pursued on a continual basis, then risk isn’t really being managed. As a result, what some companies call risk management is actually crisis management. Hall concludes:

“[In 2011, there was] every reason for function heads to take an interest in how risk in the supply chain affects the overall health of the business. But more than that, procurement has gained the leverage and the experience to tackle risk management in a more sophisticated way.”

Tim Feemster, of Grubb & Ellis, told the staff at SupplyChainBrain that “natural disasters, such as the earthquake and tsunami in Japan, have brought home the reality that companies need to plan for supply chain disruptions lasting months rather than days or weeks.” [“Smart Approaches to Risk Management,” 9 September 2011] The article continues:

“While such incidents may be rare, extended global supply chains have much greater overall exposure today, he says. As a result, companies should rethink their use of single-source suppliers and their safety stock policies, Feemster says. The natural tendency after a disaster may be to eliminate all single sourcing, but in some cases a supplier may have a technology that can’t be replicated elsewhere, he says. If that is the case, a change in inventory strategy may be needed. ‘One week of safety stock will no longer be sufficient, but determining how much more is needed will involve executive-level discussions, particularly if the part is very expensive,’ Feemster says. ‘A company just has to look at the probability of another disruption and the risk mitigation potential and make those decisions as best it can.'”

In situations where single-sourcing can’t be avoided, manufacturers must collaborate with that supplier in the way Steve Hall discusses above. By getting suppliers involved with risk mitigation plans, new approaches to risk and inventory management may result. After all, the supplier has a lot at stake as well. Like Hall, Feemster believes that risk management is coming of age.

“Companies have learned a lot about this process over the past decade, Feemster says, noting that global risk management first came to the fore in 2002, when longshoremen went on strike at West Coast ports. ‘No containers were allowed in or out of the West Coast for 10 days and the supply chain was interrupted for an extended period beyond that,’ says Feemster. As a result, most companies today have a four-corner or five-corner strategy, under which they bring containers into the Pacific Northwest, Southern California, and perhaps the Gulf Coast and East Coast, he says. ‘That’s how they have mitigated their risk.'”

Maz Ghorban, Vice President, Corporate Development, MIR3, also believes that risk management is coming of age and he thinks that it’s about time. He writes:

“As recently as 20 years ago, supply chain management was seen as something that took place behind the scenes without dedicated staff and resources. For many, it was regarded as a necessity for only the largest brands or companies with international distribution. When there was a disruption to the supply chain, the fix was easy—a company would pull a couple of people from whatever they were doing and put them on the problem. Once the kinks were ironed out, those people could go back their regular jobs.” [“How Technology Can Ease Supply Chain Management and Mitigate Risk,” SupplyChainBrain, 29 August 2011]

Obviously Ghorban doesn’t believe that is the case today. Supply chains have become so complex and consumers so demanding that ad hoc teams can no longer measure up to the task. Although some companies have hired a chief risk officer, Ghorban believes the task should fall to the chief supply chain officer. He writes:

“That role is seen as a highly strategic one that is increasingly valuable from both a customer service and a business perspective. As the role has evolved it’s become a critical one, as managing a supply chain is complex, fraught with risk, subject to complex regulations, fines, competition, international shipping restrictions, and more. As the internet, email and other technologies have become ubiquitous, the expectations of consumers have grown correspondingly. Today’s companies are increasingly global and complex, with competition growing on every front and acquisitions that change business processes taking place with astonishing frequency. At the same time, roles and responsibilities within companies have expanded and become more specific. With new technologies skills have become more specific, and companies are much less likely to want to pull people from important jobs to focus their attention on supply chain problems. The supply chain itself has become increasingly complex, with a higher number of ingredients and components leading to a finished product, and with a broader and more widespread base of suppliers. It’s clear that monitoring the path of goods using tacks on a map no longer works.”

Because supply chains have become more complex, technology has inevitably assumed a leading role in supply chain management. Ghorban underscores the fact that technology can be both a blessing and a curse. Consumers now expect to be able to tap into supply chain visibility to track their orders. As Best Buy learned over the holidays, consumers can get very upset when order fulfillment promises are not met. He reports that such tracking was “initially intended for business-to-business interactions, … but even in those early days it was clear that the ability to notify everyone along the chain was important.” On the whole, however, Ghorban believes that visibility is an essential characteristic of any good supply chain. He continues:

“Tracking and accountability can be applied to virtually every link in the supply chain to provide a moment-by-moment snapshot of how goods are moving around the planet. This is the aim of a supply chain manager, to know where inventory is and to anticipate delays and hitches before they affect the final assembly line. And just as technology has provided the business landscape with many more capabilities; it has contributed to a new recognition of supply chain management as a profession and a discipline. Today, knowledgeable supply chain managers command respect and correspondingly high salaries. Modern supply chain managers understand that technology provides increased visibility and accountability; therefore, a stronger competitive edge and tight control of the supply chain is worth the investment.”

Although visibility, and technology that enhances it, are essential elements of a good supply chain, so is the collaboration that backstops it. He writes:

“Key to this kind of efficiency is the ability to notify everyone along the supply chain when things aren’t going exactly as planned. Notification technology has adapted along with SCM to provide an easy way to send one message to many at once, by a wide variety of devices. So employees at desks will get a call and an email, and someone out in a plant will get a text sent to their smartphone. When the information is shared in real-time, it allows teams to adapt and change to suit the situation, helping to keep manufacturing lines on time and on track.”

Trust is the fault line in this system. Admitting that something isn’t going as planned is never easy. Ghorban, however, believes that companies are beginning to realize that early notification of problems is becoming recognized as the best way to handle problems and avoid even more devastating and costly consequences. Done right, however, visibility and collaboration requires implementing appropriate technology. Ghorban laments the fact that “many companies are still entrenched in outdated, monolithic systems, using phone, fax and email to communicate throughout their lengthy and complicated supply chains.” He continues:

“The fact that technology with notification has influenced the SCM scene is evident by the increasing trend towards just-in-time inventory management. JIT is a great way to free up cash and increase working capital by letting inventory run down. This can free up many millions of dollars, not just held in the goods themselves, but in storage, security and management of goods. It also reduces the risk of inventory becoming obsolete while in storage. JIT also comes with risks, many of which have been starkly illustrated by the earthquake and subsequent tsunami in Japan, which have left global manufacturers scrambling for alternative parts and materials that were impacted by the double disaster.”

As Ghorban notes, many companies have re-examined their reliance on JIT strategies as a result of the significant number of global supply chain disruptions that have occurred over the past few years. He believes, however, that “despite the risks, JIT manufacturing has become so entrenched that many companies simply can’t afford to stock and warehouse as much inventory as they used to.” As a result, visibility and collaboration are even more important. He continues:

“This tight management is only possible when SCM technology is tightly integrated with notification capabilities. Manufacturing is complicated, and supply chain interruptions can cause inventory levels to plummet precipitously. To maintain a steady flow of ingredients, components and finished goods there must clear communication all along the chain. That requires a solution that is more efficient and sophisticated than sending a mass email or pulling staff to make panicked phone calls.”

The more automated the technology the better. If a production line has monitoring that automatically sends out notifications if it goes down for a specified period of time, manufacturers are much more likely to trust information coming from that supplier. This kind of notification requires secure information sharing and great deal of trust between stakeholders. However, if monitoring systems can be securely linked, then a tremendous amount of analysis can be conducted automatically to determine whether potential problems are significant enough to alert decision makers. This kind of “management by exception” helps ensure that human capital is being effectively used.

 

Ghorban points out that being notified about a problem and being in a position to do something about it are two different things. “When it comes to business continuity,” he writes, “it’s important to plan for the worst.” Technology can also play a response role as well as a notification role. He continues:

“The survivors over the long term are those who have considered the what-ifs and have put solid plans in place for dealing with interruption. Wise companies will initiate the use of SCM technology and a notification solution. Any company that doesn’t use technology as part of SCM is at a distinct disadvantage, no matter how good their business continuity plans. According to supply chain experts, there are four major areas where SCM technology with notification will help. Those areas are global trade, supply relationship management, reverse logistics, and supply chain execution.”

Ghorban goes on to look at each of these areas in a little more detail. He begins with global trade:

“• Global trade – Global trade is fraught with constantly changing regulations. A well-respected company recently received an exceedingly heavy fine for inadvertently side-stepping regulations and shipping night-vision goggles that eventually landed in the hands of terrorists. Automated notification, as part of SCM technology, could have kept everyone along the chain appraised of the latest updates and helped to avoid such a situation.”

My company offers a Compliance Management System that alerts manufacturers of potential problems if an order doesn’t appear to meet retailer compliance standards. Such a system could be adapted to meet alert companies to potential regulation violations like the one described above. Ghorban next discusses SRM.

“• Supply relationship management – In 2007, Mattel had to recall over 10 million toys because lead paint was detected. To stop the spread of tainted toys, the company had to work backwards along the chain to find out where the lead came from, and also forward to where the final goods were all shipped to effect a recall. With notification as part of an SCM toolkit, much of this communication could be automated, thus speeding the process and providing a reliable audit trail.”

Creating reliable audit trails is going to become an increasingly important characteristic for most supply chains. Fortunately, technologies are now available to make this happen. Ghorban next discusses reverse logistics.

“• Reverse logistics – Reverse logistics is the process of managing the return of goods, recycling of batteries and other components, disposal of products coming off lease, and the auctioning of those items, etc. When there is a sudden influx of new goods, manufacturers have to offload outdated goods quickly. Notification can help alert a variety of recyclers and other parties at once, allowing them to respond with times they are available to remove redistributed goods.”

This is a great use of technology and the business case for implementing it seems obvious. Finally, Ghorban discusses overall supply chain execution.

“• Supply chain execution – One large discount retailer uses notification to make the delivery cycle more efficient. When a delivery arrives, staff has already been notified to be on standby to receive it immediately. If staff is not available, it’s easy to alert truck to deliver to an alternate store and to reroute staff, saving both time and money.”

There are a number of technologies available, including some offered by my company, that make supply chains more efficient and inventories more productive. As supply chain risk management strategies mature, companies will find that technology plays an increasingly important role in ensuring that those strategies are implemented correctly. Technology will also ensure that human capital is used more effectively in responding to emerging challenges.