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In the wake of the recent economic collapse, the effects of poor risk management are painfully obvious in businesses around the globe. From mom-and-pop shops to international giants like General Motors, the economic recession has had crippling effects on nearly all business sectors and industries. And while economic instability is difficult to impossible to predict, a sound risk mitigation strategy can make a world of difference when it comes to responding and adapting intelligently to environmental disruptions.
After all, economic crisis is only one of the innumerable risks threatening to compromise profitability in today's global landscape. And while the majority of potential risks occur on a much smaller scale, they can still put a sizeable dent in your bottom line if you are not well prepared. Increasing natural resource constraints, price volatility due to commodity resource constraints, and technology/communication disruptions are just some of these risks-and in today's precarious economy, they threaten not only reduced revenues, but complete business failure.
A Changing Landscape
With the rise of globalization and outsourcing, supply chains today are larger and more complex than ever; and while this has meant lower-priced labor and manufacturing for many companies, it also means more risk and uncertainty. In order to lower product costs, increase flexibility, and speed up time to market, organizations have looked beyond their four walls in search of low-cost labor, manufacturing, and talented designers and engineers. As a result, today's global supply chains are not only more vulnerable to supply chain disruptions and unplanned events, they are also more difficult to manage and control.
The keys to regaining control? First, acknowledging that supply chains have effectively evolved into demand-supply networks that span the globe. Accordingly, it is necessary to take an end-to-end approach towards "risk-resilient execution," instead of continuing to invest in traditional "risk mitigation planning." Risk-resilient execution means having the necessary processes and functionalities in place to quickly identify, assess and respond to supply chain disruptions when and where they occur. Because today's supply chains extend across multiple tiers and geographies, real-time visibility to 100 percent of trading partners and inventories is imperative. Flexibility and collaboration are also critical, ensuring that your supply chain is prepared to adapt quickly in response to sudden disruptions.
Visibility-How Do I Mitigate Risk if I Don't See It Coming?
Enabling supply chain visibility is the first step towards implementing a successful risk management strategy. Clear visibility increases demand predictability and enables your company to plan its capacity and resources based on actual-as opposed to forecasted-demand, resulting in improved utilization of working capital and reduced "just-in-case" inventory. This, in turn, lowers both margin and write-off risk.
With better visibility into actual demand, companies are able to place orders for long lead-time items and manage deliveries for the correct quantities-and only when they are needed. Companies that lack such visibility, however, are forced to place orders for long lead-time components based on unreliable, often overly optimistic customer forecasts, leading to either excesses or shortages. With real-time visibility across multiple tiers of trading partners, companies are finding they are able to reduce their contractual liabilities for unnecessary components, while also reducing the risk of shortages or missed delivery dates. This is because suppliers are able to use their limited capacity to produce components closer to actual market demand, as opposed to blindly following purchase orders driven only by forecasts.
Flexibility-Building a 'Resilient' Demand-Supply Network
Global competition and economic volatility leave little room for error, making supply chain flexibility, or "change agility," a huge competitive differentiator. Unexpected changes in demand-not to mention unexpected environmental or economic disasters-are the norm in today's marketplace, and the inability to respond quickly can mean huge losses in potential sales.
So what does a flexible and adaptive demand-supply network look like? At its best, a flexible network is lean, agile, and most importantly, responsive. It is sensitive to both minor and major disturbances, and also has the capacity to intelligently assess and respond to unexpected events. Additionally, when a demand-supply process is adaptable, it is able to make the appropriate adjustments without further disrupting the overall functioning of the network. That is, it is able to transform potentially disastrous "disruptions" into recoverable supply chain hiccups.
Collaboration-We're All in This Together
Shorter product life cycles, coupled with growing product proliferation, require better coordination and collaboration with customers and suppliers to achieve perfect execution. Without open collaboration, risks of revenue loss from stockouts or write offs from excess inventory remain high. After all, a supply chain with no multi-enterprise collaboration is effectively a conglomerate of suppliers, manufacturers, logistics providers and retailers working in isolation at various stages of a common product life cycle-with no clear view of how well the network is performing.
For the average supply chain, a sudden increase in demand at a particular retailer translates to stockouts and lost sales-not because there isn't enough time to direct additional inventories to the location, but because the relevant manufacturers and logistics providers aren't alerted to the changes in consumer behavior in time to do something about it. Waiting for demand signals to travel all the way through the supply chain before reacting is simply becoming an obsolete business practice. In order to prevent stockouts and lost sales, retailers must be able to communicate back through the supply chain in real time.
Additionally, a poorly integrated demand-supply network makes it difficult to incentivize trading partners to work toward common goals, such as mitigating risk in order to maintain profitability. A successfully integrated, collaborative network functions like a single "virtual enterprise," as opposed to a geographically-dispersed group of trading partners. Members of this virtual enterprise are able to support one another in managing supply chain risk because they understand that both the rewards and risks of doing business are inextricably connected.
Leveraging the Right Technologies
For today's global businesses, investing in the right technologies is a huge part of effective risk mitigation. Technologies specifically designed to share, process, and synchronize information across multiple enterprises are available, and offer real-time visibility across 100 percent of trading partners, regardless of integration requirements or technical sophistication.
While traditional ERP systems are designed to manage business processes within the four walls of an organization, they cannot extend to the bulk of the supply chain, which may include hundreds to thousands of trading partners across the globe. What are needed are technologies capable of providing visibility, collaboration, and business process enablement across multiple tiers of the supply chain. After all, the bulk of supply chain risk occurs outside a company's four walls.
Risk is an inherent aspect of any company's supply chain, but the ability to prepare for, and respond to, risk intelligently can prove a huge competitive differentiator. Investing in technologies that support a broad range of inter-enterprise supply chain, procurement, logistics, and quality processes is a good first step. Taking a true collaborative approach-to both risk management and business more generally-is equally crucial. Perhaps most important of all, though, is thinking about risk management as a fundamentally end-to-end challenge that requires a true end-to-end solution. The times are a-changin', and we had better keep pace.
Becks is vice president of strategic demand-supply solutions at E2open.
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