Risk management for your supply chain Mandurah WA

To quote an old adage, "Uncertainty is the only certainty in life." Today, you need not run a complex supply chain to realize what happens to even the best-laid plans, but, if you run a complex supply chain you have learned that doing nothing is not an option.

There are fundamentally two different kinds of risk and uncertainty. The first happens on a regular basis—for example, your truck shows up 20 minutes late or a machine run yields 0.5 percent less than usual. These kinds of uncertainties are typically smaller in magnitude, individually, but happen frequently and simultaneously.

The second are severely disruptive uncertainties that have a massive impact and often take days or months to recover from, and usually are headline news, such as "Hurricane Katrina-type" storms, terrorist attacks and sudden political upheavals.

While the latter may get more press coverage, the former is a daily headache for supply chain owners. And, as if managing these uncertainties were not challenging enough, a few recent trends in the supply chain have made the problem infinitely more complex.

First, all business has become global. Today, a supply chain starts with a customer in one end of the world and extends to manufacturing at the opposite end of the world. Outsourcing to locations of lower cost has increased the number of players in a supply chain, and makes their successful interdependence paramount to the smooth operation of the entire supply chain.

In addition to globalization, product proliferation has major ramifications on risk. You have more choices—different colors, options, brands and models—each bringing its own level of uncertainty.

And finally, the third driver of supply chain complexity, leading to greater exposure to risks, comes from the customer. Customer expectations for higher service levels have been on the rise in line with the rise of supply chain complexity. Fundamentally, all risks are easily manageable if the customer is willing to wait for an infinite (or at least a very large) amount of time for product availability.

Prepare And Respond

So you know that supply chains are complex, but how do you successfully manage around that? There are two golden maxims when it comes to dealing with risks: preparation and response.

First, you must be prepared. Preparation in the supply chain means building resilience in your supply chain design. Resilient supply chains absorb uncertainties by alternating the routing of items, risk-pooling strategies, postponing strategies and building in redundancies. This kind of preparation is fundamentally very strategic and need only be reviewed periodically (e.g. post mergers/ acquisitions; new supplier onboarding, etc.). Designing such a supply chain usually requires collaboration across departments; an understanding of costs, risks and other components is essential.

The conclusion most people come to is that restructuring physical network design is the only tool in preparing for risk. Actually, a more important way of preparing is to determine appropriate response buffers and where to keep them. Inventory is a supply chain's fundamental answer to hedging against uncertainty, which is why strategic inventory management is so important.

The fundamental question you will need to answer is what inventory should be held where? Inventory carrying costs, write-offs and markdowns can result from holding too much inventory, while holding too little might risk customer service satisfaction levels.

The second tool for managing risk in your supply chain is responsiveness. This means the supply chain and the system supporting it need to be able to detect deviations from plans—allowing you to then pull the various levers that were built in during the preparation phase. These levers could range from the automatic re-routing of trucks when a storm hits a region, to burning down safety stock as the weekly orders start violating the original grand plans. Equally important to remember is that the supply chain re-calibrates itself to be ready for the next risk.

Technology Is Available

One significant contribution in supply chain risk management is the appearance of solution providers, such as Optiant. These companies detected early on that ERP and APS systems are fundamentally handicapped when dealing with uncertainties and risks. These systems are decision support systems sustaining both optimization and scenario simulations. They take history into account to synthesize the kind of uncertainty profile various parts of the supply chain and products are subject to. This includes variabilities in demand, manufacturing, suppliers, currencies and what have you.

The beauty of these solutions is that they can easily co-exist with your present ERP and APS systems. They get raw data from ERP and APS, apply complex optimizations and set parameters that govern the ERP and APS execution and operational planning runs. One way of looking at it is that these solutions make the inputs to your ERP and APS systems very intelligent.

To state the obvious—"Risk is given; deal with it." However, you can make your ability to deal with risk your biggest competitive weapon—build a resilient supply chain by understanding risks, evaluating options and designing flexibility into it. And luckily, state-of-the-art technologies exist.

Rajib Roy is senior vice president, market operations, of Optiant, Boston.