8/3/2019 HW08-Can Technology Handle Supply Chain Risk

1/3

Can Techno logy Hand leSupply Chain Risk?

Today's supply chain technology has a notable lack ofrisk management tools. Developers need to change this tocompete in a global market.

By NohaTohamy

NohaTohamy(ntohamy

amrresearch.com) is aresearch

director atAMR Research.

In ar e c e n t l y c o n d u c l -fd AMR s u r v e y , 100u s e r c o m p a n i e s l i s t e dc o m m o d i t y v o l a t i l -ity and p r i c e s as t h e i rn u m b e r one supply-c h a i n r is k . T h i s c o m e sa s nos u r p r i s e w h e n

t h e p r i c e of c o p p e r h a s t r i p l e d in f i v e y e a r s , thep r i c e o f Z i n e h a s d o u h l e d , a n d t h a t o f w h e a t a n ds o y b e a n s r o s e by 70 p e r c e n t in2 0 0 7 . F u t u r e sp r i c e s of c r u d e oil, g o l d , s i l v e r , l e a d , u r a n i u m ,c a t t l e , c o c o a a n d c o r n a r e a ll ato r n e a r r e c o r d s .

C l o s e f o l l o w e r s in t h e r a n l d n g s w e r e s u p p l i e rf a i l u r e r i s k , l o g i s t i c s s e r v i c e s c o s t s a n d s h o r t a g e s ,a n d e n v i ro n m e n t a l r i s k s . A ll i n d i c a t e t h a t c o m -p a n i e s f i n d t h e m s e l v e s f a c i n g s i g n i f i c a n t r i s k sa c r o s s t h e i r e n t i r e s u p p l y c h a i n s . Fora g l o b a lc o m p a n y m a n a g i n g an e x t e n d e d s u p p l y c h a i n ,r i sks in s u p p l y , d e m a n d , c o m p l i a n c e a n d l o g i s t i c sa r e a l w a y s l u r k i n g , n e c e s s i t a t i n g a n e w w a y oft h i n k i n g t h a t b a l a n c e s t r a d i t i o n a l c o s t e f f i c i e n c yf o c u s w i t h t h e n e w g o a l of r i s k m i t i g a t i o n .S o m e c o m p a n i e s a r e t h i n k i n g b e y o n d r i s k m i t i -g a t i o n , a n d a r e e m b r a c i n g s u p p l y c h a i n r i s k s as ap o t e n t i a l f o r a g a m e - c h a n g i n g c o m p e t i ti ve a d v a n -t a g e . F o r e x a m p l e , H P h a s e m b ra c e d e n v i r o n m e n -t a l r i s k a n d p o s i t i o n e d i t s e f f o r t s tobui ld a g r e e ns u p p l y c h a i n a s a n o p p o r tu n i ty t o g ro w i ts l e a d andi t s m a r k e t s h a r e in a lo w c a r bo n e c o n o m y

U s e r c o m p a n i e s s e e k i n g to b u i l d r i s k - f o c u s e do r g a n i za t io n s t h a t c o n t in u a l l y m a k e e d u c a t e d h e t sb a l a n c i n g r i s k s w i t h [ l o t e n t i a l r e w a r d s a r e i n v e s t i -g a t i n g S C M t e c h n o l o g i e s t o a s s e s s t h e i r a b i l i t y tos u p p o r t t h i s n e w b u s i n e s s m o d e l . T h e i r f in d i n g s ?

T r a d i t i o n a l SCM t e c h n o l o g i e s w i t h a pr imaryf o c u s o n c o s t r e d u c t i o n a n d e f f i c i e n c y a r e n o t a d e -q u a t e i n s u p p o r ti n g g l o ba l c o m p a n i e s i n m a n a g i n ga n d c a p i t a l iz in g o n s u p p l y c h a i n r is k s .Accounting for Risk and ProfitabilityIf y o u a s k e d o p e r a t i o n a l m a n a g e r s teny e a r s a g ot o li st th e r e a s o n s w h y th e y h a v e i n v e s te d i n S C Mt e c h n o l o g i e s , c o s t e f f i c i e n c i e s a n d i m p r o v e d c u s -t o m e r s e r v i c e u n d o u b t e d l y w o u l d h a v e b e e n thet o p t w o r e a s o n s . N a t u r a l l y , r i s k m a n a g e m e n t hasa l wa y s b e e n a d ri ve r i n S C M t e c h n o l o g y s e l e c t i o n .S C M t o o l s h a v e i n d i r e c t l y h e l p e d m i n i m i z e r i s k s ;be itthe risk of o b s o l e s c e n t i n v e n t o r y , c u s t o m e rser \ ' i ce fa i l ure , or n o n - \ a l u e - a d d t r a n s p o r t a t i o nc o s t s . B u t ra re l y d i d tr a d i ti o n a l S C M t e c h n o l o g i e sv i e w s u p p l y c h a i n r i s k a s ane x p l i c i t v a r i a b l e t h a tc a n b e a c c o u n t e d l or, q u a n t i f ie d , a n d o p t im i z e d .

F o r i n s t a n c e , t h e p r i ma r y g o a l o f a t o o ! li k e f a c -to ry p l a n n i n g i s t o o p t i m i z e t h e o p e r a t i o n s o f m a n u -f a c t u r i n g p l a n t s t h r u t i g h b e l t e r r e s o u r c e a l l o c a t i o na n d p r o d u c t io n s c h e d u l i n g . A p o s i ti ve b y p r o d u c t offactor].' p l a n n i n g i s t h e r e d u c t i o n of the r i sk of fail-ure to fulfill a c u s t o m e r s o r d e r o r t h e r i s k o f a p l a n tu n d e r u t i l i / a t i o n or s h u t d o w n . S i m i l a r l y , s o l u t i o n sl i k e d e m a n d f o r e c a s t i n g and t r a n s p o r t a t i o n m a n -a g e m e n t t h a t f o c u s on s u p p l y c h a i n c o s t e f f i c i e n -c i e s d o m i ti g a t e s u p p l y c h a i n r is k s , a l be i t i n d i r e c tl y .

C o m p a n i e s h a v e l o n g s t r i \ c d tom i t i g a t e s u p -p l\ c h . i i ii ri s k s l ik e s u p p l i e r fa i l u r e o r c o m m o d i t yp r i c e f l u c t u a t i o n s by a v o i d in g t h e m a l to g e t h e r.D u e toi n c r e a s i n g p r e s s u r e s on g l o b a l s u p p l yc h a i n s s u c h as low c o s t c o u n t r y s o i i r c i n g ands h o r t e r p r o d u c t l i f e c y c l e s . s u p p l y c h a i n r i s k hasi n c r e a s i n g l y d o m i n a t e d e x e c u t i v e s " m i n d s h a r e .

8/3/2019 HW08-Can Technology Handle Supply Chain Risk

2/3

TEChNQLOGY cnnlinued.lU'L-cntiy, leaders like Samsung have viewed risk, as anopportunity that ciin he leveraged to improve profit andmarket sliare. Companies iire he ginning to realize that theymust take a new approaeli to managing their supply chains:explicitly accounting for risk and making decisions basedon the poten tial eosts and value that each risk introduces.

A great example of embracing supply chain risk for g rowthand profitability comes from Panasonic. In 2004, Panasonicwas selling $S,000 plasma TV's ant! in troducing new modelsevery year. Migh levels of inventory of the older models werechipping away at its pro fit margins from new models, Demandfor plasma TVs was \'olatile, and there was little collaborationwith channel partners toshare accurate demand signals. Allthese factors resulted in the dangerous com bination of Inven-i()r\ channel stuffing and out-of-stocks.

In this situation, Panasonic was faced with a myTiad ofsupply chain risks: volatile demand, frequent newmodel intro duction, excess inventory, and lost sales.But these risks also offered apotential upside;improvement in margins, growth in market shareand better relations with its top customers like BestBuy Panasonic realized that many risks can be miti-gated with closer collaboration w ith its channel part-ners, so the company worked with them to de\elopannual budget plans and demand shaping events based onseasonality and promotion analysis, and together analyzedPOS data to better position their products. Panasonic hasreaped stellar be nefits, includ ing double-digit improvementsin forecast error and in-stock rates combined with a signifi-cant reduction in required on-hand inventory.How SCM Technologies Can HelpAs risk permeates every supply chain function, risk man-agement logic must permeate every supply chain manage-ment solution. This means that every SCM technologymust be retooled toexplicitly manage the opportunity andthreat that asupply chain risk presents. To do that, tradi-tional SCM tools must change their focus:

De terministic m odeling to stochastic modeling; Goneare the days when deterministic modeling was acceptableto solve supply chain problems. Using a demand forecast-ing tool togenerate a one number forecast and planningyour supply chain accordingly istoo simplistic tobe cred-ible. To account for risks associated w ith the range of sup-ply and demand uncertainties, SCM technologies mustrely on stochastic modeling. With stochastic modeling,a tool like inventory optimization weighs the threats andopportunities associated with each risk in demand fore-casting and supplier lead times to generate the most p rofit-able in\'entory recommendation.

Localized standalone solutions to end-to-end pro-cess solutions. S olving a jiroblem like sourcing in isolation

will likely generate additional risks inother areas, such aslogistics or demand fulfillment. To manage risk, solutionsneed toquantifv' the total risk associated with an end-to-end process like procure-to-pay or order-to-cash. Findingthe "optima l" routing plan for a distribution network mightfail to see theupside in accepting the risk of idle trans-portation resources, as acalculated het to meet potentialdemand from a key client.

Direct costs to expected value and opportunity costs.To simplify supply chains, many technologies focus ondirect costs: minimizing working capital orminimizingsourcing spend. With a risk focus, the technologies takeinto account the expected financial impact and the oppor-tunity costs associated witb each decision. For instance,while minimizing inventor}', the company must contrast thecost savings wit h the expected red tiction inability to meet

As risk permeates every supplychain function, risk managementlogic must permeate every supplychain management solution.

the key customer's fluctuating demand. Making the inven-tory decision has tobe based on a risk/reward analysis ofthe risk in carrying excess inventory and obsolescence w iththe potential of market share growth.Without organizational alignment, education and pro-cess redefinition, technology cannot drive the fundamentalmin d shift that companies must embrace to manage supplychain risk. Whenand only whena company bas estab-lish theorganizational and process foundation, it shouldassess if its current SCM tools have the right approach tomanaging risk, even if they are not deployed in that capac-ity. For example, can the simulation functionality in theimplem ented network design tool be used to quantify' risk?For more traditional SCM tools, companies should workv\ith their SCM vendors to find out their plans for re\ amp-ing their solutions to explicitly manage risk.Which brings us to tbevendor side. For all vendors,"risk m anagement" shou ld not be a mere m arketing mes-sage. Determine if this isa pain point you'd like to solve.For those \'endors who helieve that they can immediatelyhelp companies manage their supply chain risks, clearlyexplain how your solutions have been deployed in thatcapacity and present users with actual success stories. Forvendors who believe that their tools bave tbe potential tomanage supply chain risk, allocate development dollarsto achieve the necessary functional enhancements. AllSCM vendors must realize that risk will coiUiiuK' In takecenter stage.

8/3/2019 HW08-Can Technology Handle Supply Chain Risk

3/3