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Incorporating Risk Management Into S&OP

A conversation with Gregory L. Schlegel, adjunct professor of supply-chain risk management at Lehigh University.

If importance can be measured by the frequency that a topic comes up in conversation, then the two most vital issues facing supply-chain managers today have to be risk management and sales and operations planning (S&OP). The first is undeniable - over the last several years, one couldn't have followed the news for five minutes without encountering a story about a natural disaster or human-caused disruption affecting global supply chains. At the same time, S&OP has emerged as the hottest application of information technology in business organizations today. It's becoming a vital means of unifying disparate functions, while linking companies with upstream suppliers and downstream customers. In this interview, recorded at the annual conference of the Institute of Business Forecasting & Planning in San Francisco, Gregory L. Schlegel, adjunct professor of supply-chain risk management at Lehigh University, talks about how risk management and S&OP can go hand-in-hand, as techniques for achieving excellence in global operations.

Q: What's your definition of "supply-chain risk management" today?

A: Schlegel: It's a very new and novel approach. You could think of it as an effective way to identify, assess and manage strategic risks that will impact an enterprise.

Q: Why now?

A: Schlegel: That's a good question. For the last couple of years, all of us have seen the news. We actually call the globalization of all supply chains "the new normal." [It's manifested] in terms of uncertainty, complexity and risk. The reason why we say it's the right time for supply-chain risk management is [the impact of] globalization - call it 2.0 or 3.0. When more and more nodes are injected into someone's supply chain, uncertainty, complexity and risk all increase.

Think of it this way. When you grow your supply chain, lead times and the number of nodes tend to increase. That increases the risk. There's a quote from a survey by AMR Research [now part of Gartner]. It said that the average one-billion-dollar company manages 15 internal manufacturing sites and 38 contract-manufacturing sites across five supply chains, in at least two continents. And that [quote] is at least four years old. Complexity, uncertainty and risk have increased as more and more organizations tend to grow elsewhere across the globe. That's why we think it's very, very timely.

Q: OK, but don't organizations, supply chains and S&OP professionals already exercise good supply-chain risk management?

A: Schlegel: Yes and no. I've been an S&OP owner for a couple of Fortune 100s. All folks in S&OP do that implicitly in every meeting. They are supply-chain professionals. They're can-do people, very hands-on, and they are trained to solve problems. The issue with globalization, as supply chains increase in complexity around the globe, is that the reactive approach of "can-do" is not really playing out well. There has to be more of an explicit approach - with things like framework, process, tools, techniques and so forth - in terms of talking about risks to the organization.

Q: Could you go into more detail about what "proactive" risk management constitutes?

A: Schlegel: There are two schools of thought in the supply-chain risk-management arena right now: should I spend my time on being prepared, or should I spend my time, resources and funding on responsiveness? We at Lehigh feel you need to do both.

One of the things we are advocating to folks around the globe in public workshops is getting into supply-chain scenario and risk-response planning. One technique that's embedded in S&OP methodology is scenario planning, using what we call probabilistic methods. That's something brand new; we don't normally talk about probabilistic tools in supply-chain terminology. It involves running scenarios in your S&OP arena, getting probabilities of occurrence for each scenario, placing risks associated with that scenario, then building a risk-response plan. It's something that the oil and gas industry has been doing for 50 years. Not many other industries take it to that level of sophistication, doing an outside-in scenario. For example, what if my demand increases by 30 percent when I grow [in one area]? Do I have the capacity, the inventory, the infrastructure and the supply partners? Not many folks do it that robustly, in terms of scenario planning and stress-testing their supply chains. Think of the banks doing stress-testing because of the recent financial crisis. You test your supply-chain infrastructure in terms of "if this happens, then this will happen," and determine what is the probability of occurrence. That is preparedness.

On the responsiveness side, once you run through these scenarios, you get outcomes with probabilities of occurrence, and the risks associated with that occurrence, based on assessing the company's supply chain. Then you turn those scenario plans into risk-response plans. Many folks do it down in the Gulf of Mexico for the hurricanes. Who's going to do what? What are you going to do? Who's responsible? And how do you measure success? It's all part of an attempt to be prepared, and be able to respond.

Q: Doesn't it seem, though, that it's the least probable occurrence that always happens?

A: Schlegel: We've seen that. We will get certain scenarios that have a very low probability of occurrence statistically. It's a very interesting sell, because you might get a 5-percent probability, but the risk could be almost catastrophic. It may never happen, but if it does, you may not be able to get through it. Most scenarios are driven by tactical and operational issues. For a high probability of occurrence, you develop some mitigation strategies. But there are a few where it's a tough discussion with a client.

Q: And the severity of that potential occurrence makes you want to prepare for it to a greater degree than the probability would indicate makes sense.

A: Schlegel: Correct. It's a dilemma. It's one of those cases where a board or executive team has to make that tradeoff. Most folks don't just dismiss it; they will develop some response plans to mitigate the risk and try to minimize the issue. They might set up some partnerships with other companies that could help them. They might take out supply-chain insurance, which is brand new. Most people don't understand that you can buy it from folks like Munich Re and Zurich Re. There are a lot of elements merging in this new concept called supply-chain risk management.

Q: Who owns it within an organization?

A: Schlegel: That's a tough one. It reminds me of the birth of S&OP. We still argue after 35 years about who should own the S&OP process. There seems to be emerging a [belief] that you're going to have to give it to one person. When everyone's responsible, no one's accountable. So what we see is a new position - a CRO, chief risk officer. They'll be in charge of identifying, assessing and managing risks to mitigate the strategic impacts to the organization. It includes a lot of other tools like a war room, dashboards and scenario planning. There's a host of new threads emerging.

Q: So, a new person in the C-suite?

A: Schlegel: Pretty much. It's going to take a while to grow. There are many folks out there now - small boutique operations - that are codifying, classifying and reporting on supply-chain disruptions. On average for public corporations, there are 1,500 supply-chain disruptions every six months. They're starting to put financial-impact numbers on these disruptions. If you're a publicly held company, it can impact your shareholder value by 10 percent or more.

To see the video of this interview, click here.

Resource Link:
Lehigh University

Keywords: Supply Chain Security & Risk Mgmt, Global Supply Chain Management, Supply Chain Analysis & Consulting, Business Strategy Alignment, Business Intelligence & Analytics, Business Process Management, Collaboration & Integration, Customer Relationship Mgmt., Event Management, Forecasting & Demand Planning, Network Design, Sales & Operations Planning, Supplier Relationship Management, SC Finance & Revenue Mgmt., SC Planning & Optimization, Supply Chain Visibility, Sales & Operations Planning, Supply Chain Risk Management, Globalization, Supply Chain Disruptions, Natural Disasters, Chief Risk Officer, Lehigh University

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