Traditional management has always taught the golden rule of “Plan-Monitor-Act” as the fundamental way to run businesses, processes and projects. An inordinate amount of literature has been published on the planning part (a quick trip to the “Management” shelves in Barnes and Nobles will prove this), but little is written about reacting.
Only recently has there been an emergence of thinking in the supply chain area of how to be proactive in dealing with what happens when plans are bent out of shape. Your ability to absorb those disruptions defines your level of success in achieving targeted customer service levels, supply chain costs and, therefore, the derived advantages of competitiveness and market share.
So, you need to plan. The trick is to build resiliency into your plan so that it is equipped to handle the risks of the real world. Building resiliency includes systematic understanding of risks and preparing to buffer against them, or having quickly-triggered “Plan Bs.”
“Risk management” is perceived to be the ability to deal with severely disruptive uncertainties. No doubt, they pose a great challenge – ask any supply chain owner whose transportation lanes fell by the way of Hurricane Katrina. Disruptions such as natural disasters, political upheavals and terrorism usually occur with very little advanced notice and have a cataclysmic affect on supply chains. By their very nature these disruptions are also impossible to predict.
However, the less-talked about risk - which is a much bigger and far more continuous source of headaches for supply chain owners - is the uncertainty that is a feature of any supply chain activity. These uncertainties show up every day, in every process. You know that the truck with your goods will not show up at your factory at the exact forecasted time 100 percent of the time, because logistics providers, suppliers and manufacturers have variability.
While the massively disruptive risks may receive more press coverage, the day-to-day risk is the living nightmare for supply chain owners, leading to lost sales, upset customers and frozen funds without results.
Adding Complexity To Risk Management
As if this was not complex enough to manage, a few fundamental shifts in the nature of supply chains is making risk management a far more complex science.
The first driver of complexity is globalization. Recently, I ordered an “inscribed” portable MP3 device via the Internet, and it was fascinating to track the order. The item started somewhere from the hinterland of Shanghai, was sent to a particular place for the inscription, waited at the Shanghai port, came over to the U.S., cleared customs and then was delivered to my door step.
Previously, the risks that were encountered from such a transaction stemmed from a transportation risk management point of view, i.e. dealing with the truck being able to deliver the device to the consumer from the factory. Today, there are the added risks of routing the product through China and shipping the product across the Pacific, each phase bringing its own specific variability; and all of this, without accounting for the variabilities of the customs offices on either shore.
The second important driver of complexity is product proliferation. In the above example, if the situation was “you can buy any color device as long as it is white,” demand aggregation and risk pooling could have offset some of the headaches in the supply chain.
However, in reality, there are about a half a dozen models with half a dozen colors, all contributing to the complexity of managing variability in each product line.
And finally, nothing is made simpler by customer expectations. The reason I was tracking the device as it was being delivered in the first place was because I wanted it at my doorstep in the morning of the day it was promised. Customers expect products to be delivered, as promised, by the company and have very little flexibility in this area. Supply chains that do not meet 95-99 percent service levels are guaranteed to come with an “expires by” stamp on their foreheads.
Prepare And Respond
So you know that supply chains are complex, but how do you successfully manage around that? The answers are no different from most military ventures – preparation and response.
Prepare by building resiliency in your supply chains. Rigid supply chains will break down at the first whiff of reality veering from the grand plan. Building resiliency allows supply chains to absorb the effects of uncertainties by alternating the routing of items, risk-pooling strategies, postponing strategies and building in redundancy in chains.
And the good news is that newer technologies are making it easier to do this.
The typical conclusion most people come to is that restructuring physical network design is the only tool in preparing for risk. In reality, we have just thought about the “static” aspects of supply chain design. Now we get to the even more interesting “dynamic” part of preparing to determine appropriate response buffers and where to keep them.
A response buffer is a buffer of inventory that is held to respond to uncertainties. Inventory is a supply chain’s fundamental answer to hedging against uncertainty, which is why strategic inventory management is of paramount importance when creating a responsive and resilient supply chain. The complex mathematical problem is where to keep the response buffers and how much of it to keep.
An equally critical tool for managing risk in your supply chain is responsiveness. In the event of a risk-bearing problem, your supply chain will inevitably need to respond immediately. This means that the supply chain, as well as the system supporting it, needs to be able to detect deviations from plan, 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 plan. Remember, the supply chain re-calibrates itself to be ready for the next risk.
Technology Is Available
The most significant contribution in the area of supply chain risk management is the arrival of innovative solution providers on the scene. These companies detected early-on that ERP and APS systems – while they perform some vital functions of a supply chain – are fundamentally handicapped when it comes to dealing with uncertainties and risks. And the handicap comes from the deterministic approach (mostly linear programming) the vendors have taken while building their solution platforms.
Optiant, for example, has built the entire solution footprint around a platform designed with the “probability of an event happening” approach. Beginning as a research project at the Massachusetts Institute of Technology (MIT), this approach makes it very easy to perform the cost benefit analysis of different scenarios, as well as see what you gain and lose at each level of preparation.
You can make your ability to deal with risk a competitive weapon. Build a resilient supply chain by understanding your risks, evaluating your options, and then designing a flexible supply chain.
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