When we think of supply chain "risk management" the first question that comes to mind is so obvious that most people don't even voice it: whose risk? Does the risk belong to the supply chain or brand owner? Component suppliers? Fabrication plants? In practice, it can be one, several, or all supply chain community participants.
If a company's supplier carries excess inventory cost that financial hit will inevitably make its way back to the brand owner as higher prices or more restrictive service, or if value isn't there, it just might drop the brand owner as a customer. Worse yet, if the brand owner constitutes a significant portion of the supplier's business, the brand owner's mistake could actually create such a financial burden as to put the supplier out of business.
And flip that: if a brand owner loses a customer because of poor quality or a labor practice scandal (even if it's not the brand owner's fault), then that loss of business and tarnished brand image will cast a pall through the whole community in the form of lower demand for products.
With the new community model, we've seen a power shift around who owns risk. In the past, a single leader-the supply chain gorilla-was responsible for risk. Today, risk lurks within every supply chain participant. If risk is mismanaged, the repercussions will flood the entire community and possibly sink it. But, if handled well-remember how Tylenol market share actually increased because J&J managed the tampering so adroitly?-the rewards will benefit all.
Increased Complexity of Community Risk
In the past, traditional in-house manufacturers used the supply chain primarily to secure raw materials or components for production, but today, more and more companies outsource the manufacturing function to contract manufacturers (CMs.) While reducing costs, this also puts more critical "brand values" (e.g. quality, compliance, time to delivery) at arm's length, requiring new processes and complementary risk management practices to ensure the same quality, reliability and responsiveness as if the brand company itself handled the manufacturing.
This greater complexity coupled with diminished control means that today's supply chain community leaders must create the optimal balance for the brand owning company, all supplier partners and customers, and consider three interdependent types of risk: supplier, financial, and customer service risk.
In the traditional in-house manufacturing model, risk was managed by walking down the hall or calling the responsible department and directly forcing reporting parties to take action.
Today's supply chain reality of increased reliance on outsourced manufacturing and inherent indirect relationships requires a different approach to management, management by influence, to mitigate supplier risk. To ensure high product quality, ethical labor practices and market regulatory compliance within a globally dispersed, dynamic supply base, brand owners need to manage partners indirectly through contractual obligations, but even more importantly, through cultivating relationships that build trust and commitment. A system of shared risk/reward helps unify players to achieve these.
In this time of global crisis, financial risk tops the list of risks, as brand owners feel more pressure to cut costs and squeeze CM budgets. Longer, global supply chains and demanding customers are forcing brand owners to tie up more working capital in inventory at various stages along the supply chain to meet service levels. This inventory is more likely to be in finished (rather than semi-finished) goods and of higher value, and is therefore less flexible as a candidate for a postponement strategy. Being "only as strong as the weakest link" is a suitable adage for today's community supply chain, where a single decision can cause a bullwhip effect that negatively impacts everyone's financial success. If a large retail customer files for bankruptcy (e.g. Circuit City or Mervyn's), does the brand owner make the drastic move to cancel all orders with the supply partners or can he rebalance the load to benefit the entire network? On the opposite side, what happens if a key supplier goes out of business? Did you know that 100,000 Chinese manufacturing companies went belly up in 2008 alone? Talk about risk!
Responsiveness, often the Achilles' heel of brand owners in an outsourced environment, is at the heart of customer service risk, which suffers when promises aren't kept. To ensure high availability of products, brand owners must balance inventory carrying costs and risk of obsolescence with the cost of responsiveness. This may mean enjoying the benefits of outsourced manufacturing with near-shore and domestic outsourced production, instead of doing it 8,000 miles away.
In this new community-centric supply chain world, where product quality is defined and managed by the brand owner but executed by the supplier, the balance of power, and subsequent balance of risk can disrupt business continuity if not managed effectively.
Balancing Risk to Generate Shared Reward
In order to secure the future of the entire community, today's supply chain leaders must create and maintain a new class of efficient and collaborative relationships that recognize, manage and reduce risk across multiple organizations. The following guidelines will help ensure the success and sustainability of the entire supply chain community.
1. Set Community Goals-rather than focusing simply on key performance indicators (KPIs) for individual participants, the supply chain team must also agree on KPIs relevant to the entire community. This may include on-time delivery to reduce customer service risk, product quality to manage supplier risk, or less traditional KPIs that can be written into a contract, such as labor, which can help avert a public or regulatory crisis. Consistent metrics create the foundation of community goals and rewards, creating trust and loyalty that drive sustainability of the supply chain team.
2. Sense and Respond-optimize community-rather than individual-assets and establish real-time, cross-community visibility into your supply chain status and options. By creating a proactive sense-and-respond environment to change, built on top of a collaborative community platform, you can effectively manage dynamic shifts in the supply chain to lower risk and increase financial gain. You'll need to work quickly and confidently with your community partners to do this, so shared visibility and collaborative tools must be in place to keep you ahead of the fire.
3. Use Supply/Demand Shifts to Your Advantage-inevitable supply and demand shifts are, for the most part, out of your control. What is under your control is the ability to aggregate, deconstruct, and re-aggregate forecasts, as well as to see real-time demand to leverage the best resources of the community and thrive on the natural fluidity of the market. If a partner cannot meet obligations, mitigate that risk by being flexible, shifting timing and quantity of supply, or shifting responsibility for fulfillment of that demand to an alternate supplier. Take supplier capacity, for example, which in an outsourced manufacturing environment is often controlled by more powerful competition. Establish yourself as an influential supply chain owner, relying on supplier relationships to get incremental capacity in the case of a spike in demand, or to respond to a supply disruption, even if competitors' strength or future contracts would seemingly beat you out.
4. Make Information Meaningful-is your data up to the minute? Consolidated? Reliable? Accessible to decision makers? Old, inconsistent data hidden in spreadsheets won't help an individual, let alone an entire community of partners. Consider the age-old problem of inventory: understanding demand and having the flexibility to move product faster than you can produce and ship products from the CM becomes more complex when you try to establish cross-community inventory visibility. At the root of this customer service risk is the strength of your data. Establish clear lines of real-time visibility and the integrated capability to take action so that you can move inventory where you need it most, with an eye on fresh inbound supply to avoid shortsightedly piling more inventory in the wrong places. While this may seem obvious, few have the information or wherewithal to execute on this.
5. Align the Community with User-Friendly Technology-new technology investments are useless if not embraced by the entire community. When choosing community supply chain management (C-SCM) software, select a common information system, built on a web-native, global platform. Software as a Service (SaaS) technology greatly facilitates this, integrating easily with partners' existing systems to promote easy adoption and continued use. If a truck or container doesn't make a transport ship, or if there's a strike in Asia, you cannot afford to be surprised. Community risk management requires that you be proactive, enabling the entire network of business partners to share, collaborate and act on transparent data.
All community partners share similar risks of poor manufacturing and supply practice... and similar rewards from effective cross-community visibility and collaboration. Recognizing this and operating as one entity with multiple parts will result in better business for everyone.
Amar Singh is CEO of Amitive (www.Amitive.com), a provider of on-demand supply chain management solutions for brand owners who outsource manufacturing.
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