Supply Chain Risk Management

Supply Chain Risk Management

In today’s business world, supply chain risk management issues are the primary threat factor to an organization’s revenue.

Causes for Supply Chain Disruptions

  • Speed – Business operations are constantly innovating and growing at a rapid rate
  • Competition – Profit margins are narrower. It is not easy to distinguish oneself
  • Cost Effectiveness – Organizations are forced to adopt Lean methodologies, improve process efficiencies and control expenditure
  • Quicker Turnaround Times – Just in time (JIT) & Agile methodologies, Short-spanned product lifecycles
  • Broader Scope – Operations are conducted on a global scale
  • Reduction – Alternate vendor options, Vendor managed inventories, Resources
  • Constant Transformation – Evolving requirements, Collaborative Planning, Forecasting and Replenishment (CPFR), Technological changes
  • Load – Hectic schedules, High production volumes

Supply Chain Challenges

  • Impact on reputation owing to more than tolerable disruptions
  • Lead times between receiving an order and delivery are constantly increasing
  • Growing pressure from leadership and upper management teams
  • Rising demands of customers and stakeholders
  • Sourcing material from different locations around the globe
  • Adopting Lean and JIT methodologies
  • Disproportionate supply chain guarantee/cost ratio
  • Increasing pressure to reduce the number of active suppliers
  • Stricter regulatory norms and compliance standards
  • Logistical constraints with regards to transportation

Supply Chain Risks

  • Ever increasing transportation expenses
  • Fluctuating commodity costs
  • Consumer reluctance to purchase goods
  • Diminishing business expenditure
  • Impact on environment
  • Violation of intellectual property
  • Security concerns
  • Supplier’s inability to deliver
  • Below average product quality

Supply Chain Disruption Consequences

  • Heavy expenditure in restoring operations
  • Loss of revenue during the outage period
  • Reputational damage
  • Statutory and regulatory consequences for non-compliance
  • Shutting down operations, filing for bankruptcy
  • Client dissatisfaction, losing out customers to competitors
  • Losses in terms of revenue, profit and market share

Strategies for Mitigating Supply Chain Risks

  • Agreements with suppliers and service providers that can be assessed based on an evaluation criteria
  • Fortified IT infrastructure to enable granular visibility into supply chains
  • Greater level of collaboration with trading partners
  • Facilitating dynamic what-if analyses through optimization, simulation and other modeling techniques
  • Outsourcing logistics and manufacturing that can be controlled and monitored through detailed SLAs
  • Redundant supplier options

Supply Chain Components

  • Supporting Infrastructure – Strategizing the efficient transition of merchandize by leveraging relevant information and support systems
  • Plan, Purchase and Allocate – Designing procedures that are aligned with vendor operations and requirements
  • Merchandize Flow – Streamlining the transition of goods across the supply chain to meet demanding customer deadlines
  • Transportation – Maximizing cost efficiency through the shortest, fastest and safest distribution routes
  • Designing Distribution Channels – Connecting customers and vendors through a combination of resources, facilities, infrastructure, transportation and technology
  • Supply chain network validation – Identifying the right combination of resources, facilities, infrastructure, transportation and technology
  • Point of Purchase Inventories – Ensuring that the supply of merchandize maps to market demands in terms of cost, timing and customer satisfaction.

Strategies and Approaches for Mitigating the Impact of Supply Chain Risks

Increasing Profitability and Income

  • Segregating markets and categorizing customer profiles
  • Introducing new products, services and solutions
  • Selective selling and pricing

Consolidating the Use of Available Assets

  • Assessing capital assets
  • Focusing on an area of expertise for the facility
  • Gaining more infrastructural mileage
  • Buying and Selling

Optimizing Supply Chain Expenditure and Efficiency

  • Managing storage capacities
  • Streamlining shipping logistics
  • Eliminating errors, faults and bugs
  • Production line efficiency

External Factors Contributing to Supply Chain Risks

Demand

  • Missed business deals and lost opportunities
  • Fluctuating market trends and requirements
  • High customer concentration
  • Short life cycles
  • Competitors with game changing innovations
  • Excessive or insufficient buying

Environment and Business Ecosystem

  • Catastrophes and hazards
  • Communal violence, war and terrorist attacks
  • Taxes, quotas and customs duties
  • Updates to compliance requirements
  • Labor and union issues

Supply

  • Overreliance on primary suppliers
  • Operational outages
  • Consolidation in supply markets
  • Defective or substandard products
  • Potential Disruptions
  • Lead time and fluctuation issues while maintaining inventories

Internal Factors Contributing Supply Chain Risks

Procedures

  • Balancing production volumes and quality
  • Long setup timeframes and rigid, inflexible procedures
  • Equipment dependability
  • Capacity constraints and slowdowns
  • Contracting vendor services for mission critical operations
  • Product complexity

Response/Contingency

  • Awareness
    • Possibility of occurrence and intensity of damage
    • Repercussions on physical assets and information
    • Being aware of internal and external ecosystems
  • Prevention
    • Minimize the possibility and intensity of supply chain disruptions
    • Detect, analyze, treat and monitor risks
  • Remedies
    • Establish processes for handling the four phases of any supply chain disruption –
      • Process interruption
      • Respond
      • Recover and
      • Restore
    • Mitigate the impact on
      • Time,
      • Expenditure and
      • Reserves
    • Strategize the allocation of reserves
  • Knowledge
    • Track and document results to identify procedural faults and areas of improvement. Document changes that need to be made to the system and forecast future enhancements.
    • Make the necessary changes to the system and test improvements
    • Evaluate the relevance, effectiveness and efficiency of existing approaches and methodologies
    • Develop process driven strategies

Monitoring

  • Lack of network visibility
  • Irrelevant rules that hamper efforts to meet demand
  • Lack of collaboration while preparing future schedules
  • Multiple echelon inventory optimization causing bullwhip effects
  • Homegrown technologies

Increasing Value by Managing Supply Chain Risks

Profitability – Income and expenditure

Investment Capital – Working and Fixed Capital

  • Reduce the impact on sales, profit margins and market share through exceptional customer service.
  • Make selling price of goods more economical by increasing efficiencies in transportation, storage, material handling and distribution
  • Minimize working capital through efficient inventory management of raw materials and finished goods along with short cash to cash cycles
  • Minimize fixed capital assets by maintaining fewer physical assets – vehicles, storage facilities and material handling equipment

Risk Factors that can Affect Supply Chain Performance

Planning

  • Product recalls due to poor design
  • Downstream execution problems due to complicated design
  • Missed or lagging trends

 

Sourcing

  • Increased dependencies due to globalization
  • Issues in safety, quality and monitoring owing to supply of raw materials from emerging markets
  • Lack of alternate supplier options

 

Manufacturing

  • Risks due to realignment and consolidation of facilities such as
    • Maintaining revenue levels for each product
    • Employee strikes, staff unrest and low morale
    • Operational disruptions
  • Increase in vulnerabilities owing to outsourced activities

Delivery

  • More risks due to consolidated distribution and fulfillment. These risks include:
    • Product theft,
    • Insufficient workers,
    • Process interruptions
  • Lack of resiliency in local hauling channels increases vulnerabilities in the last few legs of product delivery

Sale

  • Reputational damage due to product recalls and substandard quality
  • Impact on customer service due to a combination of high turnover and lack of good training

Service

  • Impact on future purchases and brand reputation owing to issues in
    • After sales support
    • Product returns
    • Shortage of spare parts
  • Top & bottom line impacts due to lack of visibility across reverse logistics operations
  • Issues in product reliability owing to warranty failures

Supplier Risks

  • Lack of effective management
  • Constraints in exchanging information
  • Lack of backup supplier options
  • No control over supplier process policies
  • Insufficient production volumes
  • Lack of quality checks in operations
  • Financial instability
  • Misinterpretation of requirements
  • Supplier process disruption due to communal disharmony, political unrest and social upheaval
  • Suppliers exiting the market quickly, leaving organizations very little time to make alternate arrangements
  • Quality, staff and managerial issues
  • The use of products, processes or technologies that are new or don’t have any proven track record
  • Long physical distances that separate buyers and providers
  • Disruptions due to inconsistency and unreliable transportation
  • Fluctuations in currency conversions and cost of materials
  • Lack of preparation for dealing with environmental hazards and crisis situations

Managing Supplier Risks

  • Create Supplier Profiles
  • Conduct Risk Assessment Exercises
  • Audit Supplier Operations
  • Review Supplier Certifications
  • Outline policies for supplier non-compliance
  • Product Sampling & Evaluation
  • Reviewing and Reporting Performance

Root Cause Analysis for Supply Chain Raw Material Risks

Single Supplier with no backup option

  • Supplier’s network of providers
  • Supplier withdrawing from the market
    • Financial losses/bankruptcy
    • Market exit
  • Business continuity capability

Warehousing

  • Environmental hazards
  • Safety and security
  • Pest control, Contamination
  • Careful handling & Management

Compliance

  • Below par raw material quality
  • Missing specifications
  • Contamination
  • Lack of proper documentation

Sourcing

  • Systems
  • Processes

 

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