Supply Chain Risks and Management

Dr Vijay Sangam, 13:05, 28 Jul 2010

Today’s business success to a large extent is driven by supply chain efficiency. The role of the Supply Chain has never been as critical as it is today.  Supply Chain Managers world wide are facing the daunting task of satisfying customers as well as stakeholders. Supply Chain speed and flexibility have become two key factors that deliver the competitive differentiation and increased profitability.  Apart from keeping customers or stores properly stocked and deliver the perfect order every time in a globalized business environment, supply chain managers are expected to continuously monitor supply chains in order to identify risks that would hurt the profitability of the organization and develop suitable strategies to counter them.

What are Supply Chain Risks?

In one definition, “risks” are simply future issues that can be avoided or mitigated, rather than present problems that must be immediately addressed – Cornelius Keating

Supply Chain risk mitigation is also about proactively working to avoid future risks. We have internal risks and external risks within supply chain. Let us examine some of the internal risks:

  • Skewed demand forecasts;
  • Excess inventory Carrying;
  • Procurement Fraud;
  • Poor component Quality;
  • Frequent production line stoppages;
  • Poor Product Quality;
  • Loss of Productivity;
  • Crisscross movement of goods;
  • Increasing supply chain costs;
  • Inefficient product lead time;
  • Diminishing product margins;
  • Wrong product mix;
  • Poor Supply Chain Visibility;
  • Appalling customer Service;
  • Rigid & Sluggish supply chain performance.

The above are some of the internal risks which are known to all of us and there is no need to spend time explaining each risk.  Some of them could be risks and some of them could be called as present problems/challenges.

Supply Chains do face some external risks and they include:

  • Globalization;
  • Terrorism;
  • Failing economies;
  • Uncertain Political environment;
  • Rising Legal and Regulatory Risks;
  • Cheap Fakes.

I may have to explain why Globalization is a risk.  Globalization means increasing competition and severity of competition varies from region to region thus making supply chains complex.  Complex supply chains deliver multifaceted risks.  Further, global sourcing is becoming more popular thus putting extraordinary stress on supply chain lead times coupled with global terrorism.

Fortunately, the very trend (globalization) that increased risk also becomes a solution to manage the risk.  For example, increasing cost of labour could lead to outsourcing the activity to low cost countries thus avoiding cost risks.  However organization is not shielded from outsourcing risks.

The attack on the morning of September 11, 2001 has changed the way business is done world wide.  An element of uncertainty has crept into the supply chain which has resulted in additional costs, increasing buffer inventories, delayed production schedules and long lead time to market.  The uncertain demand and global competition is making planning process complicated and terrorism has added one more dimension to the demand forecasting.

“For example Ford had to idle several of its assembly lines intermittently as truck loaded with components loaded with components were delayed at the Canadian and Mexican borders.  Toyota came within hours of halting production at its Sequoia SUV plant in Indiana, since a supplier waiting for steering sensors shipped by air from Germany, but air traffic was shut down.  Ford and Toyota and other manufacturers were vulnerable to transportation disruptions because they operate a JIT inventory discipline, keeping material on hand for only a few days and sometimes only a few hours of operation.” – (Source: “Supply Chain Management under the Threat of International Terrorism” by Yossi Sheffi)

The health of Economy plays a vital role in making supply chains more efficient. Inflationary Pricing threatening to destabilize some Supply Chains and according to Marsh’s Supply Chain Risk Management Practice, three macro-economic trends are creating troubling domino effects in companies’ supply chains and they are:

  1. Beware of country actions and labour unrest;
  2. Beware of fuel prices triggering work slowdowns and logistics delays;
  3. Beware of bankruptcies and delays in your supplier base.

Failing economies making supply chains world wide vulnerable.  We are not talking about one economy here; the world is concerned about unpredictable chain of economic failures.  Mexico in 1994, Southeast Asia in 1997, Argentina in 2002, recent Greece economic failure could lead to wave of defaults across Europe thus leading towards global economic disaster. Another disadvantage of globalization is chain of reactions.

Fake products are destroying business all over the world, heavily contributing to black economy which complicates how we operate our supply chains.   According to International Chamber of Commerce (June 2010), worldwide €700 billion were lost in sales annually due to Counterfeiting and Piracy and a recent study by Frontier Economics revealed that counterfeiting and piracy cost G20 governments more than €100 billion a year in lost in tax revenues and place 2.5 million legitimate jobs at risk.  Loss of sales due to fake product supply, demand forecasting is challenging and thus resulting in supply chain inefficiencies.

Further, ever changing regulatory requirements putting additional stress on supply chain.  Technology companies are increasingly face environmental mandate that required eco-friendly products thus increase in costs in R&D and product recycling. FMCG business is required to re-label their food and beverages packaging in order to report traces of common allergens.  Global warming is influencing automotive standards.  All regulatory requirements may cost supply chain, in order to negate the disadvantage of additional costs, supply chain manager are expected to identify new areas to improve supply chain efficiency and reduce costs.

Apart from internal and external risks, in my opinion there are two more risks which are our self creation.  They are:

  1. Product Proliferation;
  2. And scrambled merchandizing.

Product Proliferation

Product proliferation is the bye-product of product differentiation.  In order to gain competitive advantage in the market place, organizations are introducing product differentiation resulting in product proliferation thus competing with one another in the same market.  In simple, two products belonging to the same organization compete due to product proliferation.  This trend is prevalent in Technology, Retail and FMCG industry.  The risk involved in managing product proliferation is not recognizing demand decline stage and efficiently determining the EOL (end of life) for the product.  Ideally, any new product introduction (NPI) should determine EOL for an alternative product thus product balancing can be maximized.

“Product proliferation can erode margins by 18 to 25 percent and is the root cause of all complexity within an organization.” – EMCIEN.  Further, product proliferation could deliver following supply chain inefficiencies:

  1. Additional R&D time and costs;
  2. Ineffective Product Life Cycle Management;
  3. Customers preferring new product and ignoring old models;
  4. Increasing variations creating planning challenges;
  5. Product mix related challenges;
  6. Decreasing margins due to increasing costs and obsolete inventory carrying costs.

Scrambled Merchandizing

The market segmentation no more exists due to scrambled merchandizing.  Every one is selling any product.  You find consumer electronics products in grocery store and stationary in a FMCG store and surprisingly butcher selling electronics and magazines/drinks and food products.  The latest trend is grocery store selling petroleum products.  On top of it, hyper stores were launched, which is a combination of super market and department store, selling groceries and general merchandize.  Increasing SKUs making it complicated to control the inventory and planning efficiently.  Thus today’s supply chains are complex compared to 19th and 20th century supply chains.

In order to avoid catastrophic business disruptions, organizations today are focusing on implementing enterprise wide supply chain risk management programs.  The emphasis is on prevention and control.  By creasing a visible and integrated supply chain, half of the job is done.  Visibility and integration delivers planning efficiencies and cost savings.  By proactively probing into inefficiencies using tools such as variance analysis, activity based costing will allow us to identify the problem early and that allows us to work on solution before it becomes unmanageable. Proactive behaviour and risk preventing programs also delivers low insurance costs. Insuring adequately is part of risk management program.  Supply Chain risk prevention program should be individually customized based on several dynamics.  The mantra to success is proactive thinking and establishing a visible and integrated supply chain.  Further, establishing enterprise wide supply chain risk management programs and educating all supply chain personnel about the importance of prevention is critical.  Organization could develop several strategies, but ultimate it is the people who should understand the importance and implement the same.

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