Supply Chain Planning Blog

Use Advanced Planning To Manage Supply Chain Risk

Posted by Cyrus Hadavi on Thu, May 05, 2011

Supply Chain Risk ManagementThe 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:

Inventory Planning Issues

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?


Cyrus HadaviDr. K. Cyrus Hadavi is the president and CEO of Adexa, for more information about the author please click here.

Topics: Multi Echelon Inventory Optimization, Supply Chain Planning, Inventory Planning, Enterprise Risk Management, Risk Planning