In our last blog article, we talked about how today’s advanced planning technology can help with managing risk in a supply chain (read: Use Advanced Planning To Manage Supply Chain Risk). More importantly, we talked about how uncertainty (i.e. risk) in the supply chain, most often, leads to imbalances in the inventory levels. The following table was used to show how common supply chain issues lead to either too much, or too little, inventory at different points in the supply chain.
The good news is that many of the most frequent risks, and their impact on the inventory levels, are quantifiable. For example, most companies have a good idea as how reliable major suppliers are, how often certain machines breakdown, or how accurate are their demand forecasts. Furthermore, the negative effects that indirectly propagate to other parts of the supply chain can also be considered. For example in Japan, many of the suppliers who were not directly damaged by the recent earthquake, still felt the ripple effects of difficulties in procurement of raw material, shipping Finished Goods, and other logistical problems. These too, can all be calculated with a proper supply chain inventory model.
Let’s talk about how supply chain planning technology can help. Since risk and its effects on inventories can be measured then wouldn’t it be logical to manage supply chain risk from within your Inventory Planning system? In fact, today’s advanced Multi-Echelon Inventory Optimization (MEIO) systems are intelligent enough to be used for supply chain risk management. Forecast streams, incremental costs, revenue factors, service impact, etc. can all be dynamically modeled in a MEIO system. Supply chain risk scenarios can be simulated and their effects on inventory levels, profit margins, and customers can be closely examined. Such a technology can make it a lot easier to decide whether it would be worth to operate at a higher cost structure (for example, by introducing alternate suppliers, or increasing buffer inventories), or consider other options to mitigate risk. In some cases, you may even realize that it would be too expensive to greatly reduce certain risk factors. That is your choice, but as long as you can fully and systematically assess the consequences.
An MEIO system with supply chain risk management capabilities would be most useful in assessing the more frequent risks, causing the infamous inventory seesaw effects, rather than risks that may occur twice per century—such as Japan’s recent earthquake. Take Apple for example, which was in middle of iPad2’s launch, as the disaster occurred. According to CNBC, some of the components of this device are built only in more advanced manufacturing countries, such as its unusually thin battery. Chances are that Apple will not dramatically change this supply strategy due to a similar risk in the near future—even as it delayed iPad2’s launch date in Japan by two months, and the wait time for all online orders increased to 4-5weeks. However, you can be sure that Apple has assessed many alternate supply strategies based on risks of much higher probability.
Risk assessment can never be too accurate. A Multi-Echelon Inventory Optimization system can be your best tool in simulating, assessing, and mitigating risk factors, and their full impact on your supply chain. Feel free to use the comments section to tell us what tools you are currently using to manage risk in your supply chain.
For more information about MEIO, use the following links:
Download this ePaper: Demystifying Multi-Echelon Inventory Optimization
Youtube video: http://www.youtube.com/watch?v=K0kpf2Qi_aE
About the Author: Kameron Hadavi is the Vice President of Marketing & Alliances at Adexa, for more information about him please click here.
The biggest risk in any supply chain is having either too much inventory, or too little, at different points in your supply network. Too much of it leads to additional cost, as well as waste of capacity and space for products that are not selling. On the other hand, not enough inventories would obviously lead to less revenue, and in many instances loss of valuable market share. After 3 years, GM is most likely to reclaim the title of the world’s largest automaker from Toyota, the father of best supply chain practices in the industry--due to the Japan’s earthquake’s devastating effect on its production and inventory levels. Could it happen to you? You bet!
Some may argue that there are many more risks other than the two specified above. Our experience shows that all the other factors lead either to availability of inventory, or lack of it. Consider the following scenarios:
As you can see, every one of the above issues can create a risk that would ultimately lead to either too much, or too little, inventories at different points of the supply chain. So, you should consider adjusting inventories based on what risk level is best for you. Conversely, each potential risk would have an impact on availability of inventory. The amount of impact can be estimated by its relative importance. For example, a delay from a key supplier of Boeing, for a critical part, can cause months of delay in delivery of the Dreamliner—this is a much bigger risk factor than bad weather forecasts in some parts of Asia, during the monsoon season.
For each one of the potential issues listed above there is empirical data as to how often it happens. Most companies keep track of their supplier performance and supply chain issues with respect to delivery and quality. Based on this data, you can determine what the financial consequences of such events would be using advanced planning technologies that are now available to you. The use of this technology allows a more holistic approach, taking into account the entire supply chain’s risk rather than pockets of exposure, such as the supply process, design issues, forecasting errors, or manufacturing glitches.
An unfortunate disaster, such as the recent earthquake in Japan, can cause many supply chain problems for a myriad of companies. By simulating an event such as this in a supply chain risk management system, you can estimate the potential loss as well as what it would have taken to avoid such a loss. If the cost of avoiding such a loss, which happens, say, once every 50 years does not justify it, then a number of steps can be taken to mitigate risk rather than building just-in-case inventories. For example, many automotive companies could have a standby supplier at a slightly higher cost, which can step in and mitigate the risk of supply disruption. Thus, the higher cost structure would be justified by removing the risk of halting the entire supply chain, when frequent risk factors materialize into supply problems.
In general, risk and cost have an inverse relationship; the higher the cost, the lower the risk, and vice versa. The idea is to know where the trade off is and at what cost the enterprise is willing to mitigate certain risk potentials. Of course, this does not mean that every time you increase the cost, you are necessarily lowering risk.
In summary, use advanced supply chain planning technology for a speedy answer on when to take a risk, and when not to, based on objective financial consequences. All it takes is a holistic process to risk assessment, and the right planning system. The technology is ready. Are you?
Dr. K. Cyrus Hadavi is the president and CEO of Adexa, for more information about the author please click here.