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It's tempting to say that in the webbed world, there is no risk that an enterprise can't avoid or mitigate if it's armed with the right information. And that seems to be the consensus of most supply chain professionals. Nevertheless, they hedge that statement with a number of qualifiers.
Obviously, they say, information has to be accurate to be of value, whether you are concerned with risk avoidance or business continuity. Information also must be complete and germane to a specific risk-a problem in sourcing, production, inventory, transportation or somewhere else. And, of course, timely. Companies depend on rapid-fire, neural-network data transfer today, and it does little good if information is long in coming to the rescue.
With costs continually rising and supply chains ever stretching, manufacturers, retailers and others say they are managing more risk than ever before. It's as if a deal killer lurks in every link. Advanced supply chain modeling, transportation management systems, multiple sourcing and inventory optimization are among the strategies that some companies are implementing to help control risk. Of course, information has to be reliable for any one of these strategies to be successful.
"One of the big challenges in supply chain is getting information, the right information, complete and in time," acknowledges Greg Johnsen, executive vice president of sales and marketing for GT Nexus of Oakland, Calif. "Whether the risk we're talking about is missing a ship window or not getting the right combination of products to a customer sales point and missing out on a very expensive promotion, what you're doing is missing out on revenue." Johnsen acknowledges that you could draw up a laundry list of risks-"How about the risk of getting inferior product or incomplete product to market on time?"-and not include everything. The point, he says, is that any risk, no matter its type or origin, poses an economic threat to a company's health.
That's especially true if one's brand is put at risk. Product recalls, for instance, can be very costly and embarrassing, but it's potentially far more damaging to a company if the equity in its brand is eroded because of some event that was neither planned for nor handled efficiently and quickly as it unfolded.
"The benefits are in seeing, managing and controlling all aspects of your supply chain in ways that, for example, avert delays and allow you to ensure your on-time deliveries to customers are made," Johnsen says. "These can really save you. Information is the key thing."
While it's very difficult for importers to know everything at all times about products, parts or materials that come from afar, a company's duty is clear once a problem is known. They must not only pull faulty products off the market but identify any others in the supply chain that might endanger consumers.
"Information systems can help companies identify and monitor in real time the exact location and whereabouts of every single item moving in their supply chain, and then make moves to divert or remove items," Johnsen says.
Of course, recalls could be sidestepped and companies could avoid going into frantic, crisis mode if they were receive early indicators that something is amiss in the supply chain. Those companies that collect detailed performance data on their suppliers and logistics providers are well positioned to see such warning signs. "If a supplier is chronically missing ship windows or if one has repeatedly shown an inability to build complete shipments and report satisfactorily, this is a supplier that's risky to you," Johnsen says. "You can begin to take proactive actions to remove them altogether or to at least reduce the amount of business they do for you."
That kind of visibility is neither traditional nor widespread today. If anything, the technology that most companies have used for the last 25 years or so was intended to give them views into processes only inside their four walls, Johnsen says. What is needed is a visibility that extends well up and down the supply chain. "To enable that, you have to rely on a different kind of technology platform, one that's grounded or based on the internet, which has become the ubiquitous B2B communication backbone."
Platforms like that of GT Nexus are designed to automate processes among companies and act as data hubs. With such systems, any party to a given transaction, from suppliers to forwarders, brokers and consolidators, and from carriers to retailers, can make updates. "This electronic filing system in the sky is a different kind of technology that allows everyone along the supply chain to see a common system about product flow, orders and inventory."
It's also a system of record, which can help in avoiding risk. Users can mine the system for performance. "Where are those suppliers missing ship windows?" Johnsen asks. "Where are the ones with quality problems? Are they based in certain regions of the world? Do I need to pay attention to their size?
"You can see these patterns right way," he says. "That historical perspective gives you the information to make risk management decisions at a global level."
"It's all about information and money, right, and most companies in the global supply chain arena survive and get by with a fraction of the information that they could be getting, making suboptimal decisions about the physical and financial supply chain all the time."
Clearly, the longer the supply chain, the greater the number of potential risks. And some companies that looked to the far to the East failed to adequately insulate themselves from harm when they only considered the availability of low-cost of labor. "It's one of the biggest mistakes that they made," says David Johnston, senior vice president for manufacturing and wholesale distribution at JDA Software of Scottsdale, Ariz. "They didn't look at the cost of additional inventories to cover longer cycle and lead times, and they didn't prepare for increased logistics costs. They're now suffering because they didn't do any modeling or consider the additional risk mitigation costs required."
To offset some of the expenses they are now saddled with, Johnston notes, many companies today are either moving back to the U.S., at least for some functions such as packaging, or they are relocating nearshore. Some have rediscovered Mexico.
Of course, there are myriad other strategies for cutting cost and, not incidentally, reducing risk. Some companies are looking to lower network inventory by stocking facilities closer to ports of entry. Others have increased the proportion of product they move by rail; even with longer lead times, they save money.
Any number of cost-saving strategies are on the table these days, Johnston says, but the primary ones involve adopting planning systems and taking what he calls a more holistic approach to inventory network optimization in a multi-echelon environment.
"Companies are investing not just in technology but in the organization so that there is a full-time focus on strategic optimization around modeling of the network, contingency planning, and multiple and alternate sourcing strategies," he says. "Also, they are modeling the right modes of transportation. Customers who are successful are the ones who have the technology and have a process in place that's focused on strategy, not just operational efficiencies."
Johnston says he realizes there's nothing new in diversifying one's pool of contract manufacturers or having a secondary supply of materials in place in case of a disruption. But there is a renewed focus on them, and that's because there's really no other choice, he says. "Companies know it's an additional cost to maintain those [secondary] relationships, but it's a requirement to mitigate the risk. Before, it was all about fewer suppliers, but it's just too risky to do that in today's flat world."
Enlarging the supplier base is not enough without increased levels of collaboration and visibility, however. Tight communication ensures better projections of material requirements and inventory data, and provides for the early warnings about supply so companies can adjust production and protect customer service levels.
The communication Johnston speaks of is vital inside and outside any company. "You have to break down the silos across the supply chain, and that's not easy. Customer service, demand management, distribution planning and production planning-all need to be connected tighter, so the production plan is driven by prioritized customer demand, etc. It's not an easy task, and it requires technology to make those connections."
It also demands that executive management bring the metrics used in those different disciplines into better alignment as well.
Interestingly, most companies have the information they need to optimize any number of processes and mitigate risk, Johnston says. But they have to identify where the data is, determine its accuracy and "assemble" it so holistic decisions can be made.
While you can't plan for every conceivable risk, a serious audit by a supply chain network design company can protect you from a reasonable number of them, says Jeff Karrenbauer, president of Insight Inc. of Manassas, Va.
Such a question-and-answer session can spotlight just how high the stakes are for companies. Take a manufacturer's sourcing policy, for example. "I would ask you to rank/order all of your raw materials in terms of finished product volume and finished product profitability," Karrenbauer says. "I want to know the most critical raw materials in terms of the endgame. Then I want to know how many suppliers you have for each one of those.
"Oh, you have one supplier in a Third World country with an unstable government.
"That's called stupidity," he says. "It's certainly called unnecessary risk."
Karrenbauer is highly critical of most supply chain practitioners when it comes to risk preparation. He quotes an Aberdeen study that found that only 11 percent or so of the companies studied had any kind of risk management program in place. "The other 90 percent are placing the biggest bet in the history of Las Vegas-and the bet is, nothing's gonna happen."
But stuff does happen, and supply chain network design can help ward off some of those problems, says Karrenbauer. But beginning and ending a risk audit with analysis of suppliers is not enough, in his view. The tools that were used to design the supply chain in the first place should continue to be utilized for contingency planning. "You ask, for example, what happens if I lose this or that facility? Do I have enough capacity to replace it, and if so, where?"
The need for a business continuity plan is critical, he says. "You need to be able to say, 'If this plant goes down for a fire or strike or hurricane or terrorist attack or whatever, I know what I'm doing next.' And you know that because you hammered that all out when things were calm.
"And you must do that for every important-and you get to define 'important'-supplier, manufacturing location, DC, port, all the critical nodes in the network, and all the critical transportation links in the network."
Planning does not take care of itself, Karrenbauer says. "As long as contingency planning is left unstructured, it gets driven out because the phone's ringing, you've got meetings all day, etc. There's never time to do the planning that's necessary. But what does it cost you to take care of the customers keeping you in business? That's what you have to keep in mind."
Karrenbauer decries the mentality that demands prudent management of an investment yet is hesitant to invest in managing risk. "Wall Street doesn't get it," he says. "It can't even spell 'supply chain'."
He says that same type of thinking is what drives so many companies to Asia where the cost of labor is admittedly a much better bargain than that in the U.S. But the narrow focus on labor causes companies to minimize a long line of potential problems. Karrenbauer recalled a client whose relocation team advised against moving sourcing operations to Asia two years ago. "When the client looked at everything, not just the buck-an-hour labor, but the cost of raw materials acquisition, the technology transfer, the 12,000-mile supply chain (remember, this is way before the oil price run-up), duties and taxes, inventory for 8 to 12 weeks-you add all that up, and the sum of all those costs overwhelmed the labor cost savings. And we haven't even talked about intellectual property theft or quality problems.
"They told their boss not to do it. They should not be doing Pacific Basin outsourcing. This is not a buy-America polemic, by the way. It's just looking at the numbers. Now, with the oil price run-up and the attendant examination of risk, sourcing there has become less and less desirable."
Like Johnston, Karrenbauer sees some operations moving back home or at least a bit closer. But he feels the same accent on cheap labor will eventually focus on Africa.
While the distances would not be as great, operations in Africa would pose many of the same risks. "But we don't seem to learn from history very well."
While information is the basis of risk avoidance or mitigation, it has to be realized that future information is inherently unreliable, says Sujit Singh, chief operations officer for Supply Chain Consultants.
He maintains that that uncertainty is accounted for in the solutions that the Wilmington, Del.-based developer markets. With the what-if planning that he describes, the planner tries to mitigate risk by basing decisions not on an exact data point but around ranges of data points. To illustrate, he says, "We may anticipate our demand to be 3,000 tons of something, plus or minus a certain percentage because we're dealing with uncertain future data. The what-if scenario could be, hey, what if it were 50 percent more? What we're trying to do by asking that question is to see the robustness of our current plan within an acceptable range of variation in the information that might come in the future."
By definition, plans entail some risk, Singh says, so you operate within certain parameters. "As long as we stay within such-and-such range, for example, we will be OK. You meed to be able to say, however, if we go out of this range, the variation will be so much that it will require a new plan."
The example of one of SCC's clients illustrates the value in carefully modeling variation. The company, a beef processor, was tempted to flood the market when a Canadian rival was hit by the mad-cow disease scare some years ago. There was great fluctuation not only in supply but in pricing as well. "Through a what-if capability, our client figured a better position was to carefully control this high-price situation rather than flood the market and depress prices."
Today's rather difficult economy has given the chemical industry, a major vertical for Supply Chain Consultants, a rough ride. There's no doubt that there has been a high demand for various chemical products in the last few years. At the same time, raw material prices for the chemical companies are tagged to the petroleum industry. Sourcing, production, inventory and transportation have all been impacted by the economy and rising fuel costs, and each requires careful modeling and planning.
In the last 20 years or so, says Singh, a major challenge has originated internally in most companies, from management. "They are saying, 'You've got to do all this, and be best in class, and meet my customer demand, and have 100-percent service levels and, oh, by the way, don't keep any inventory.'"
Singh says, "You have multiple forces pulling you in different directions and yet you must optimize everything and get this mix that management demands. That's the central problem."
Supply Chain Consultants recommends assessment of five functions that if done properly should help manage risk: demand data, collaborative demand planning, inventory planning, supply/demand balancing and sales and operations.
Using just one, inventory planning, as an example, Singh says there is a renewed focus to look at the inventory picture in totality. "We call it inventory structural analysis, which is a term borrowed from civil engineering, and we're saying if the inventory structure supports the different fluctuations in your business, you need to evaluate the structural capability of that inventory, where is it strong, where is it weak, what are the areas where you can make improvements. This is as opposed to just coming in, and saying from the top down that we will run at this or that level.
"Using this analysis, we're trying to manage risk by figuring out a targeted plan."
Clearly, the future is filled with variables, many of which pose great risk to the enterprise. The right information, timely, accurate and specific, may just help you target an intelligent plan.
GT Nexus, www.gtnexus.com
JDA Software, www.jda.com
Insight Inc., www.insight-mss.com
Supply Chain Consultants, www.supplychain.com
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