If you’re focusing your supply chain risk management strategy solely on unplanned events such as a natural disaster or fire, you’re missing the “meat” of risk management: keeping your supply chain strategy in line with continuously-changing market conditions and corporate objectives.
When you hear the term Risk Management, what comes to mind? Likely the first images are of a natural disaster, labour strikes or political unrest. Certainly these unplanned events and “acts of God” have the potential to create significant disturbances in your supply chain and should factor into your overall risk management strategy. But if unplanned events such as these are the sole focus of your Risk Management plan, the most critical risks to the competitiveness of your business are being overlooked.
What Is Risk, Really?
Think about it this way: what constitutes risk to one business may not be for another, and what may be a significant risk for one product line may not be for another, even within the same business. For example, in order to remain competitive, a consumer electronics company may need to perform better on cost for commodity items but perform better on service and availability for new-to-market devices that sell at higher margins. And the strategy for both of these products could reverse if macro-economic conditions change, removing disposable consumer income.
There are inherent risks with every decision a business makes. The biggest risk to nearly every company is not an unplanned supply chain disruption such as a flood or fire; it’s the risk of not being competitive on a daily basis versus the other companies in the market. Are the other companies:
· Providing better service or more consistent on-time delivery of goods?
· Operating with lower end-to-end supply chain costs?
· Segmenting their customers and products to achieve maximum margins?
· Identifying sensitivity to key market variables with contingency plans?
What makes this challenging is that “superior performance versus competitors” may take on different characteristics depending on market conditions, product types, geographies, or economic circumstances. How can your business adopt the agility and insight to stay competitive and rapidly respond to unforeseen disruptions?
Utilising Living Supply Chain Models.
The companies best prepared to rapidly and effectively react to changing market conditions utilise modelling technology to create living models of their end-to-end supply chains, with the ability to redesign and re-optimise when forecasted changes or unplanned events occur.
Companies that maintain these living digital models of their end-to-end supply chain have the ability to redesign and re-optimise the supply chain under changing market conditions, and can test the sensitivity of their key assumptions. These companies are able to mitigate business risk through the engineering of their supply chain operations, therefore enabling significant and sustained advantage over competitors.
Your supply chain risk analytics platform should consist of a range of modelling techniques, including network optimisation, inventory optimisation, flow-path optimisation, simulation, route optimisation, and others, and must be supplemented with benchmark data on alternative supply chain options and risk metrics that is not present within the corporate ERP environment.
In order to effectively plan for future operations, a company must be able to fully visualise and understand their current operation. Continuous redesign of the supply chain, considering alternative models for the scenarios that present the most risk to the business, is the best form of risk mitigation.
Three Elements of a Truly Effective Supply Chain Risk Management Strategy
Risk planning cycles used to occur only every two to three years - if at all - but now the business environment can change almost overnight and businesses no longer have the luxury of extended planning and reaction periods. If a business can’t properly balance cost, service, complexity and risk, it won’t be competitive and therefore won’t be in business long.
1. Visibility: What is the current structure and flow of goods through my supply chain?
Visibility into what you’re doing today is the essential first level of supply chain risk management. This activity answers the question, “What is the current structure and flow of goods through my supply chain?”
Supply chain modelling technology, utilising your own data pulled from multiple sources, enables you to create baseline models of your existing network. Once you have a living model, you can visualise it in different ways by including maps or charts and graphs. You can create interactive dashboards to help answer specific questions or isolate problems or outliers in the model.
2. Scenario analysis: What if we try this? How would my costs or service be affected by this?
Once you have digital models of your supply chain as it operates today, you can optimise for different scenarios, depending on which scenario you decide presents the biggest risks to your business at any given time. This scenario analysis is the key element of your risk management strategy.
When you are planning your strategy, you are making assumptions about factors such as demand, costs, lead times and availability. It’s easy, using modelling technology, to determine the cost-optimal supply chain network design, based on these assumptions. But what if any of those assumptions change? Will the cost-optimal design still be the right answer? When you have digital models of your supply chain, you can test the sensitivity of all of these assumptions, based on factors that present the most potential risk to your business. For example, you can test whether your current supply chain design is still the optimal design if your demand assumption is off by five or 10 or 15 percent.
You can create sensitivity around scenarios by adjusting variables up and down and testing the effects. You will find not only the cost optimal situation, but under what conditions that situation will no longer be cost optimal. See in advance what will happen under any circumstance and plan the best reaction in order to minimise risk. Sensitivity analysis enables you to make decisions in a digital environment in advance, instead of testing your theories in the real world when the event actually happens.
3. Rapid response: How should I react to an unplanned event?
Now that you have optimised for different scenarios, depending on which scenario you decide presents the biggest risks to your business at any given time, you are ready for an unforeseen event or the next attack from Mother Nature. When unplanned events occur, you can simply add them to the scenario and react rapidly and intelligently.
You can utilise simulation to test different courses of action to mitigate each unplanned event:
· Use the supply chain models to evaluate contingency plans
· Balance production and sourcing against changes in demand
· Prioritise demand during supply short-falls
· Restructure when cost assumptions fail
Conclusion
Utilising modelling technology empowers businesses to build end-to-end living models to visualise the current supply chain and test scenarios based on what constitutes the most risk to the business. Then it will be able to quickly react to unplanned events. Supply chain design, when done right, provides the basis for a truly effective risk management strategy, enabling sustainable competitive advantage no matter what market conditions (or Mother Nature) may bring.
Contributed by: Rod Stout, Director, Business Modelling Associates
