Supply Risk Management III: Managing Risk

Friday we defined supply chain risk, discussed the reasons why supply chain risk is increasing, and indicated how prevalent it is in today’s enterprises. Yesterday we discussed the different types of supply chain risk that an organization needs to prepare for, the need for resiliency in its daily operations, and the classic strategies used to prepare for risk. Today we will discuss modern strategies for supply chain risk management and supply network planning.

The good news is that it is possible to design supply chains that are robust enough to profitably continue operations in the face of expected deviations and unexpected disruptions and quickly recover from disasters. The foundation is a strong, stable supply network forged from good supply base management, strong supplier links, and continuous improvement and a corporate culture that embraces change and flexibility.

In fact, the factor that has been found to most clearly distinguish companies that bounce back quickly from a disruption from those that do not is a corporate culture geared towards flexibility. A flexible culture is one where communication is pervasive and continuous. Low-level employees have the power to make decisions and the end goal is continuous improvement. (See the recent article in CPO Agenda entitled Supply Risk Management.)

True resilience comes from attacking supply chain risk from all the angles and having operational, tactical, and strategic plans to deal with it. Operationally, companies need to be able to quickly fill in gaps that result from disruption and reschedule activities so that business processes remain synchronized and deliveries are made within customer delivery windows. Tactically, plans need to have redundancies in terms of human resources, machine resources, logistics and supply organizations to allow for this flexibility. Strategically, companies need reliable partners with intrinsic capabilities in deviation and disruption handling, and the skills and ability to adapt to changing market conditions.

Four strategies for building resilience into your supply chain and mitigating risks are production versatility, concurrent processes, decision postponement, and risk-mitigating sourcing strategies aligned with your supply base management strategies.

Production versatility is the ability to move production between plants, use interchangeable and generic parts (Build to Order), and apply employees to different tasks. The ability to move production between plants minimizes risk of complete supply disruption with respect to a part or product, the use of a small number of commodity parts simplifies operations and concentrates procurement outlays and creates the flexibility to move the business among suppliers, and flexible cross-trained employees will be able to step in and get you back on track when something goes wrong.

Concurrent processes with respect to product development, ramp-up, and production/distribution allow you to reduce time to market, decrease the time required to recover from supply disruptions, and improve overall operating efficiency.

Designing products and processes for maximum postponement of as many operations and decisions as possible in the supply chain, thereby enabling build to order operations, allows for the diversion of parts and semi-finished material from surplus areas and products to satisfy shortages.

Risk-mitigating sourcing strategies aligned with supply base management initiatives minimize the possibilities of preventable disruption, maximize your response time, and allow you to define contingency plans for immediate execution upon a supply chain disruption. There should be a contingency plan for each priority disruption that includes both a detailed description of the procedure to follow and a definition of roles and responsibilities in the event of the disruption.

Designing a robust supply chain and a resilient supply base is a straight-forward five-step process that starts with defining risks and ends with the definition of mitigation and monitoring activities. Specifically:

  1. Assess Risk Probabilities and Risk Impacts
  2. Select the top n high-probability high-impact risks
  3. Identify Risk Mitigation Strategies
  4. Implement the strategies
  5. Monitor the supply chain

Risks can be classified according to how likely they are to occur and how devastating the consequences can be. Contingency plans must exist for every risk that is both likely and known to have a significant impact. Remaining risks should be prioritized and contingency plans outlined for the top 10 or 20, depending on how many make sense from a cost-benefit analysis. All potential risks from an organizational, network, industry, and environmental perspective should be considered.

Once a risk is identified, risk mitigation strategies should be identified and the best ones implemented. This will include a modification of internal processes or defining a contingency plan, depending on the type of risk and its severity. For example, demand fluctuations would probably be dealt with by implementing order visibility systems that monitor consumption and spending levels and analyzing trends for unexpected changes whereas a disaster that took out suppliers and distributors within a region would require a contingency plan that specified the ramp up mechanisms for alternate suppliers and distribution centers in an unaffected region.

The supply chain will need to be monitored on a regular basis to detect deviations and disruptions quickly to insure that contingency plans, when required, are initialized and executed as efficiently as possible. Effective management and monitoring is a core business discipline that defines and enforces standard performance and risk measures and assessments, collaborates with suppliers to detect and mitigate risks, and leverages sourcing technologies and information services to improve risk planning, monitoring and response. It consists of appropriate supply chain and sourcing strategies that balance cost, performance, and risk and strong supply base management focused on continual improvement.

Proper supply base management is the process of determining not only what the right number of suppliers are but who the right suppliers are. It’s the right balance between supply base reduction to reduce administrative overhead and cost and supply base expansion to mitigate single source or dual source risks. It requires a good understanding of supplier capabilities and supply market dynamics. It includes continual supplier development which is not just a reactive process that identifies and fixes problems but a proactive process where you work with suppliers to drive continual performance improvements to make sure your supply base stays best in class. This is generally accomplished by performance incentives, direct involvement, which may take the form of training and education or collaborative projects, and regular supplier monitoring and assessment.

Effective supplier assessments are multi-dimensional and examine overall quality, performance, and service levels. They are linked to strategic goals and are objective and fact based. They are on-going and include supplier feedback and two-way communication. At regular intervals, you monitor the actual and relative performance of each of your suppliers with respect to goals and targets and establish a dialogue. You also establish consequences for failure / lack of improvement and stick to them. They are a fundamental tool of Supplier Performance Management, our topic for next weekend. Whereas the strategies above are your mechanisms for reducing risks, supplier performance management is your mechanism for keeping risks down. To be continued.

For more information on supply risk management, see the Supply Risk Management: Mitigate Risks and Reap Rewards wiki-paper over on the e-Sourcing Wiki.

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