Thursday 24th Aug 2017 - Logistics & Supply Chain

Measuring up risk

Ever increasing competition in the manufacturing industry is leading to mounting pressure to reduce supply chain costs. Companies are responding by pursuing trends such as outsourcing, off-shoring and lean manufacturing in order to retain market position or perhaps gain competitive advantage. Unfortunately, such cost-cutting measures are sometimes adopted at the expense of managing risk within the supply chain. As the world becomes a more unstable place, with the threat of mega disaster an increasing reality, industry needs to seriously consider the risk mitigation measures available to them and ensure that they accurately reflect the level of risk exposure.

Current popular industry trends bear a direct correlation to the rise in the level of risk in the supply chain. As off-shoring and globalisation of manufacturing operations continue to grow, supply chains are geographically more diverse and therefore exposed to various types of man-made and natural disasters. Similarly, for lean manufacturers, who focus on low inventory levels, one disaster can bring business to a halt. As a result, 82 per cent of companies are concerned about supply chain resiliency, according to a Global Supply Chain Benchmark Report by the Aberdeen Group. However, despite the concern, only 11 per cent are actively managing this risk.

The increase in the level of risks faced by the enterprise demands that supply chain executives systematically address extreme risks such as hurricanes, epidemics, earthquakes or port closing, as well as operational risks, such as forecast errors, sourcing problems, transportation breakdowns and recall issues. Unfortunately, there is very little that can be done after a disaster has occurred. Companies therefore need to devote more attention to planning their supply chain so it can better respond to mega disaster as well as operational problems. Developing flexibility, investing in redundancy and structuring the organisation so it can sense a supply chain problem and respond effectively are key measures if risk is to be successfully mitigated.

There are four main methods that companies should consider to effectively manage risk in the supply chain, in particular the risks associated with mega disasters:

Sense and Respond: Speed in sensing and responding can help companies overcome unexpected supply problems. The ability to process the information quickly and devise a plan to replace a supplier or deal with a production problem can be a survival issue. The inability to respond to changes in the supply chain can force a company to exit a specific market.

Adaptability and Flexibility: This is, no doubt, the most difficult risk management method to implement effectively. It requires all supply chain elements to share the same culture, work towards the same objectives and benefit from financial gains. Indeed, it creates a community of supply chain partners that morph and re-organise to better react to sudden crisis.

Redundancy: A key challenge in risk management is to design the supply chain so that it can effectively respond to unforeseen events, without significantly increasing costs. This can be done through careful analysis of supply chain cost trade-offs so that the appropriate level of redundancy is built into the supply chain.

Global Optimisation: Traditionally, companies used to focus on one piece of the puzzle at a time. Each facility tried to optimise its own decisions with very little regard for the impact of its decisions on other parties in the supply chain. The result is a supply chain with high inventory levels, low inventory turns, low service and high expediting costs. Recently, supply chain executives have however started to focus on optimising decisions across the entire supply chain. The ability to model the end-to-end supply chain provides a platform to identify important drivers of cost and service problems and thereby focus on those needed to improve supply chain efficiency.

Ultimately, whether a company uses one or all four of these methods depends on the type of supply chain and the risks it is exposed to. However, companies must increasingly develop these capabilities if they are going to be successful in an environment which presents constant change and risk to the supply chain. Continuously modeling and revaluating the supply chain network capabilities to respond to changes and disruptions will be the mark of success in today”s competitive market.

David Simchi-Levi is a professor at MIT and is co-founder of LogicTools, a division of ILOG

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