Supply chains are becoming far more extended, complex and under increasing risk from disruption. Ulrike Rowbottom, Clyde Buntrock and Haukur Hannesson set out three steps to building the resilient supply chain.
Recent tragic events in Japan graphically illustrate the vulnerability of modern supply chains. The disruption in the supply of automotive components has been felt worldwide, halting assembly lines continents apart. The electronics sector has been equally hit with the closure of numerous sites around Tokyo, pushing up the price of components and chips as manufacturers seek new sources of supply. These problems are not uncommon, only last year air traffic was severely disrupted by volcanic ash over Europe and unusually large heavy snowfalls hampered transport in late autumn.
These may be regarded as 'Blue Moon' events, but as supply chains have extended to distant locations in search of lower manufacturing costs, the risk of supply disruption has grown significantly - exacerbated by techniques such as just-in-time inventory management, outsourcing, and lean supply chain philosophies. Understanding supply chain risk is now critical to the success of every enterprise operating in a global market.
However, risks come in many varied forms and the more complex the supply chain the greater the risks. So, risk assessment and mitigation must be planned with a high degree of skill. The consequences of a lack of adequate planning can extend well beyond the cost of remedial action and include loss of sales, negative publicity, devalued brand image, loss of market share and eroded shareholder value.
In this White Paper we look at three key steps to mitigating risk and ensuring supply to the customer. They are:
1. Mitigating supplier risk
2. Managing global flows
3. Demand forecasting to avoid stock-outs
Step 1 - Mitigating supplier risk
All too often, a disruption in supply may be the result of a failure in a supplier's supply chain, beyond a buyer's sphere of control. The situation is frequently exacerbated by a lack of visibility.
New supply chain strategies, such as horizontal collaboration - which is attracting huge interest from manufacturers and suppliers alike - is further increasing reliance on partner organisations and their supply chains. Although these collaborative initiatives may deliver benefits in terms of increased profitability, reduced carbon footprint and improved customer service, it may also add greater complexity with less direct control. Therefore, it is essential to recognise the risk of disruption to the business from any potential supply chain glitches occurring at first, second and even third tier supplier level.
At a macro level, it is very likely that at least one core supplier will have off-shore dependencies with ensuing socio-political and economic constraints - and environmental scanning is no longer a nicety, but rather a must.
In October last year, a survey of resilience professionals conducted by The Business Continuity Institute found that almost three quarters of supply chains had experienced significant disruption in the 12 months prior to the study. With 28 per cent of those occurrences attributed to supplier insolvency and 20 per cent due to failure of outsource service provision, almost half of these supply chain disruptions were down to supplier or service provider failure - in other words, circumstances outside one's own immediate control.
This raises some key questions: How secure is your supplier's supply chain? What visibility do you have of their risk management and continuity policy, if indeed, they even exist? What processes and audits are in place and who is responsible for what at any given juncture?
Systematic risk assessment evaluation and modelling will not only highlight your own company's inherent weaknesses and ensuing break points, but will also throw light on those of your suppliers. In so doing, one often identifies processes that can be fixed almost immediately, making your supply chain more secure. For more complex processes, a rigorous risk management programme using risk minimisation tools, techniques and applications should be employed.
One example of 'best practice' business continuity management is the coupling of demand forecasts with an intelligent supplier management function, enabling automated visibility, monitoring and control of a supplier's quality and delivery promise.
This process can also serve as a catalyst for changing suppliers through adopting a set of rigorous supplier selection criteria which rewards those who collaborate in mitigating risk, whilst moving away from those that under perform and therefore constitute a higher risk.
In summation, an organisation's dependency on its suppliers' supply chains should not be underestimated - the risk of doing so can result in a substantial adverse impact to the bottom line. Any supplier collaboration initiatives should encompass a formalised and structured risk resilience programme that not only identifies risk, but also pro-actively strives to minimise and eliminate risk factors wherever possible.
Step 2 - Managing global flows
In addition to managing suppliers, supply chain resilience requires the close management of operations and global flows. This must involve the logistics service providers who need to, firstly, link their incentives and objectives to those of the ultimate consumer - so that they understand when change is required quickly in response to the unforeseen - and, secondly, have the agility to action a contingency plan to maintain product and cash-flows.
With complex flows and a network of trade lanes, international service providers often see expediting shipments as simply moving a box. However, it is imperative that it is seen as an operation built around a consumer in a store who wants product on a shelf at a certain date, and at a particular level of quality and price. The provider needs a workforce that is attuned to the needs of the end customer.
Resilience also comes from prescience of potential disruption to global flows. Short-to- medium term horizon scanning will, by sifting through the calendar for potential disruptions across the globe, allow time to mitigate risk by establishing how forthcoming events will affect the supply chain, plan for it, and even identify any opportunities to be gained.
Joint activity planning allows the service provider and the customer to create a shared calendar around the company's key pinch points. A collaborative approach will provide both parties with a common view of where overlaps and pinch points occur, and is an important element in a service provider's ability to align its operation to the objectives of the customer.
This should be backed up by technology - for example, a global visibility system showing the stock keeping units (SKUs) and purchase orders (POs) which must be shipped and when, in order to meet customer demand. So, when an order is raised on a supplier in a location such as Chongqing, 1000 miles up the Yangtze in China, the service provider's local office will get an alert. The alert will show the order and the fact that it needs to be shipped in two weeks time or it will miss its required-by date in the UK.
Systemisation and a degree of automation is critical for developing scale and requires managing the process by exception. When placing thousands of orders a year across a shifting supply base in multiple locations, it becomes impossible to micro-manage the process. A system is required that highlights only where problems are occurring, issuing alerts for failures and missed targets, and so enabling preventative action to be taken.
A system offering visibility of the key milestones can manage the entire process against those milestones - raising an order, order confirmation, acceptance, quality control checks, dispatch, shipping and receipt of goods. This will ensure the order is on-track and, if it goes off-track, such a system can identify where and why, and then deal with it at source.
Slack in the critical path can be removed by performing total lead time compression. This will often find that time is wasted upstream within the supply chain, which then puts a huge amount of pressure on the physical transport of the goods. Too often the focus is placed on the 'seen' lead time such as physical movement, rather than the 'unseen' lead time, which is most often the 'enabling process'. A system can then be deployed to manage the process in the compressed environment.
Having gained this agility a company can find the optimum way of moving product to match the nature of the demand and deal with a product that is running late. It is a thermostat for the supply chain that can be turned up or down based on the required demand. This allows an organisation to make savings on freight by, for example, putting an order on a ship sailing out of China to Korea and then air-freighting it to Europe at a 30 per cent cost saving over direct air freight from China. Product may move in 7-10 days rather than 3-4 days, but direct airfreight incurs a price premium but may also cause a problem by arriving too early.
By utilising a system that is capable of delivering full visibility across a supply chain, a network can become pro-active, identifying errors early on and consequently, being able to take immediate action to resolve the situation.
Step 3 - Demand Forecasting to prevent stock-outs
Managing flows and suppliers in a way outlined in the first two steps will help create supply chain agility, but the third important step to building supply chain resilience is achieved through improving demand forecasting - optimum inventory investment whilst ensuring product availability to the customer.
Exception management systems play an important role in demand forecasting. Often they work on the Pareto principle and focus mainly, or in some cases only, on 'A' items identified in an ABC analysis, which account for 80 per cent of the turnover or units sold. Some companies will list, for example, 50 of the most vital products on which they will be alerted immediately if a problem occurs. Perhaps, a further 2000 items will be rated as 'important' and an alert will be generated on a daily basis in the event of a problem.
However, it is important to review the exception rules. It may be that, having divided stock into A, B & C categories, in practice a number of 'A' items might behave like 'C' items or vice versa. For example, an automated ABC analysis carried out by a carpet manufacturer might classify a carpet glue as a 'C' item because the low-cost product is given away free, so it may not seem important. However, because a carpet cannot be despatched without the glue, a stock-out of glue will prevent sales of an 'A' item.
A two-dimensional ABC analysis will classify items simultaneously based on turnover value and sold units giving, for example, AA, AC, BA items and enabling companies to prioritise their efforts in terms of the importance of each product.
The key to having a good forecast is to have the right data, the ability to cleanse the data and a set of automated rules that take into account issues, such as dealing with peaks. A simulator module can be used to answer various 'what if' questions to evaluate the impact of change. Finally, having some estimate of how accurate a forecast is can be even more important than the actual forecast.
In conclusion, accurate real-time information on all aspects of purchasing, inventory and sales will give greater visibility into the supply chain and will have a positive impact on decision making, responsiveness and efficiency. These process improvements will help deliver more accurate forecasting decisions that can, in turn, reduce inventory, whilst meeting high customer service requirements. Together, these are the steps that will build supply chain resilience.
1. 'Supply Chain Resilience 2010',The Business Continuity Institute (BCI) 2nd annual survey of resilience professionals, published October 2010