(11/26/2014) eSourcing Wiki-Wednesday: Modern Strategies for Supply Risk Management
This week's eSourcing Wiki-Wednesday topic is Modern Strategies for Supply Risk Management. An excerpt of the article is below, but you can also read the full article on the eSourcing Wiki. Have something to add? The eSourcing Wiki is an open content community and you are invited to register and contribute to this resource, which benefits our whole professional community.
If you are interested in more, read today's post on 'The Point': More Strategies for Supply Chain Resilience.
Modern Strategies for Resilience
The good news is that it is possible to design supply chains that are robust enough to profitably continue operations in the face of expected deviations and unexpected disruptions and quickly recover from disasters. The foundation is a strong, stable supply network forged from good supply base management, strong supplier links, and continuous improvement and a corporate culture that embraces change and flexibility.
In fact, the factor that has been found to most clearly distinguish companies that bounce back quickly from a disruption from those that do not is a corporate culture geared towards flexibility. A flexible culture is one where communication is pervasive and continuous. Low-level employees have the power to make decisions and the end goal is continuous improvement.
True resilience comes from attacking supply chain risk from all the angles and having operational, tactical, and strategic plans to deal with it. Operationally, companies need to be able to quickly fill in gaps that result from disruption and reschedule activities so that business processes remain synchronized and deliveries are made within customer delivery windows. Tactically, plans need to have redundancies in terms of human resources, machine resources, logistics and supply organizations to allow for this flexibility. Strategically, companies need reliable partners with intrinsic capabilities in deviation and disruption handling, and the skills and ability to adapt to changing market conditions.
Five common strategies for building resilience into the supply chain and mitigating risks are production versatility, concurrent processes, decision postponement, risk-mitigating sourcing strategies aligned with organizational supply base management strategies, and business process management. These are sometimes complemented by cycle time reduction, market intelligence, price hedging, contracts, collaboration, training, and incentives.
Production versatility is the ability to move production between plants, use interchangeable and generic parts (Build to Order), and apply employees to different tasks. The ability to move production between plants minimizes risk of complete supply disruption with respect to a part or product, the use of a small number of commodity parts simplifies operations and concentrates procurement outlays and creates the flexibility to move the business among suppliers, and flexible cross-trained employees will be able to step in and get the business back on track when something goes wrong.
Concurrent processes with respect to product development, ramp-up, and production/distribution allow an organization to reduce time to market, decrease the time required to recover from supply disruptions, and improve overall operating efficiency.
Designing products and processes for maximum postponement of as many operations and decisions as possible in the supply chain, thereby enabling build to order operations, allows for the diversion of parts and semi-finished material from surplus areas and products to satisfy shortages.
Risk-mitigating sourcing strategies aligned with supply base management initiatives minimize the possibilities of preventable disruption, maximize response time, and allow for the definition of contingency plans for immediate execution upon a supply chain disruption. There should be a contingency plan for each priority disruption that includes both a detailed description of the procedure to follow and a definition of roles and responsibilities in the event of the disruption.
Business Process Management
With regards to supply risk management, especially with regards to suppliers, it is important to establish clear expectations, provide timely feedback when performance falls short, and manage consequences. Reward suppliers that succeed and penalize suppliers that fail. Undertake joint efforts with strategic suppliers to optimize cost, inventory, processes, and flexibility. Manage key categories with a sound understanding of the commodity markets and devise substitution options when an impending shortage might be on the horizon.
Cycle Time Reduction
One of the best general ways to mitigate risks is to minimize the cycle times it takes to complete each stage of the product lifecycle. If the time for inception, design, prototype, sourcing, manufacture, distribution, and shipping is reduced, it will not ony minimize the chances of something going wrong within the cycle, but minimize the time it takes to correct a disruption, especially if the organization has already optimized not only its corresponding continuity plans but also its continuity planning process. Having the ability to react and execute quickly is always key in not only preventing, but recovering from, a disruption.
Another great way to mitigate risks is to understand what the various risks are that are relevant to the organization are and how likely they are to occur. Hurricanes just aren’t very common in the middle of large landmasses, earthquakes tend to happen along fault lines, and tornados and tsunamis also only happen in locations where the right weather conditions could form. Civil war is not likely to break out in areas where there is no civil or political unrest, exchange rate fluctuations are usually predicted by changing economic indicators, and prices don’t generally rise for raw materials where demand is falling. Knowing what the risks are, where they are likely to occur, and what their probabilities are lets the organization focus on creating contingency plans for the right risks.
It’s a lot easier to recover from a disruption with help than it is to recover from a disruption without help, and collaborating with suppliers and partners up front on the creation of contingency plans greatly increases the probability that the plans will be able to be executed without unexpected surprises or the introduction of further disruption.
“Incentivize for success” has the same relevance in risk management as it does in other areas of sourcing and procurement. Provide incentives for supply chain partners and suppliers to go above and beyond the call should a disruption occur, and it is much more likely that they will.
If market intelligence indicates that the price of a commodity is likely to fluctuate wildly during the term for which the organization desires to establish a contract, consider using price hedging to provide it both with stable supply and cost. The organization might pay a little more up-front, but it might ultimately save a lot of cost and, more importantly, grief to lock in desperately needed supply up front.
This strategy can be used to augment each of the other strategies by making sure that personnel are not only well trained on how to do proper risk assessments and continuity planning, but on how to execute those plans and perform other functions as back-ups in case the organization happens to lose key personnel either due to strikes, natural disasters, or forced relocation from its primary facilities.
If one were to ask the legal term, they’ll probably tell hear the best way to mitigate risks is to insure they are someone else’s responsibility and put contracts in place to that effect. They’re at least partially right. Although it should be a company’s responsibility to insure continuity of the supply it needs to keep operating, it should not be a company’s responsibility to also be responsible for it’s suppliers continuity of supply. A good contract can help the organization to combat authority limit risks, regulatory non-compliance risks, security risks, terms and conditions risk, environment, health, and safety risks, and reputation risks, just to name a few.
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