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Creating Value Through Supply-Chain Risk Management

Blake Johnson, consulting professor with Stanford University, details the value that companies can derive from supply-chain risk and flexibility management, and how sales and operations planning can help.

Much of the talk of supply-chain risk and flexibility management has centered around extraordinary disruptions such as natural disasters. Johnson's focus is on "garden-variety business uncertainty." He looks at anything that can affect a product's lifecycle or alter customer demand. In the last two to four years, he says, that area has attracted increased interest.

When it comes to a discussion of risk, business executives argue about what's more important: agility or prevention. Johnson believes that the real opportunity for reducing risk lies in the planning realm. Being flexible has its virtues, he says, but it also comes with a cost. "Supply-chain plans are not going to be perfect. It's abut how you build that uncertainty into planning decisions."

Planners need to assess how much uncertainty exists on the demand side for a particular product and industry. "The bigger the range," says Johnson, "the more reason there is to do this." At the same time, they need to be looking closely at the supply side, assessing whether they have a large dollar investment, long lead times and capacity constraints that make the supply line inflexible.

Businesses have been slow to realize the significance of the connection between supply-chain risk management and the sales and operations planning (S&OP) function, Johnson says. The optimal tradeoff between performance and cost can't be determined by supply-chain professionals alone. Their expertise needs to be supplemented by the customer-facing side of the organization. "You need clear buy-in and guidance from the rest of the company," he says.

Conducting a pilot is one way to begin implementing a collaborative risk-management strategy. Individuals from multiple disciplines need to assess the looming uncertainties and the choices involved. By testing the concept in a smaller environment, they can begin to get a handle on the complexities involved in proper planning, he says.

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Keywords: supply chain, supply chain management, inventory management, global logistics, supply chain planning, supply chain risk management

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