Supply Chain Planning Blog

Supply Chain Risk and How to Mitigate

Posted by Cyrus Hadavi on Tue, Aug 15, 2017

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Planning is all about risk mitigation. Risks come in many forms: too much inventory, too little inventory, not enough to meet the demand, delivery interruptions because of weather, supplier issues, Acts of God, sanctions, labor disputes and so on. We also plan because we cannot react fast enough when the need arises. The more reactive we are the less planning is needed. How far in advance we plan has to do with how fast we can get what we want. Not every little detail needs to be planned. For example, when you plan for a road trip there is no need to plan for all the bumps on the road. The shock absorbers take care of that. Because they can react a lot faster and therefore remove the need for that level of planning. Furthermore, there is very little “cost” associated with running into small bumps on the road. However, if there is a potential snow storm on the day of travel then the cost might be a lot higher and re-planning needs to be done unless you have already accounted for this risk!

How can we do that? When the original plan was made, because of the season there was a chance of winter storm on that day of travel. We should have sufficient data (in our head for this situation) that indicates snow could be an issue during the winter season in certain parts of the country. Therefore, a risk factor needed to be attached to the plan for that reason. If the risk factor is high enough then a plan B is devised.  The latter could be acquiring snow tires or taking the train amongst others. A summer travel would not have that risk factor but it might have other potential risks. Thus, plans and risks go hand in hand. With every plan, the associated risk needs to be taken into account to ensure that when and if the plan cannot be executed what the potential cost would be. Is there an alternative plan? Is it more expensive? And is the cost high enough to pay the premium to avoid the potential cost?

In supply chains, we are constantly facing these situations. However, we are not necessarily aware of all the underlying trends and moving parts that change the risk factors.  For example, if the product mix changes, then our reliance on some suppliers become more than before. And if these suppliers are single-sourced and/or in earthquake zones then we could be facing a much higher risk than before the product mix was changed. If a new product is introduced and demand is much higher than expected, then do we have the additional capacity needed by the subcontractors to meet the surge in demand?

This is where planning systems become extremely valuable. A planning system has to be able to perform two tasks: Look for underlying changes in risk factors as plans are made for the future and identify the areas of brittleness. Secondly, when and if the risks are too high and the cost is justified, recommend alternative plans as to what can be done when and if the inevitable but unexpected occurs!

Performing such tasks is beyond the capability of human mind especially when it is done in an almost real-time manner. A note of caution, what we are describing here is not just a “what-if” analysis. This is having a system that is intelligent enough to evaluate the future risks and make changes to the plan and/or recommendation as to what needs to be done, based on the severity of the risks.

The interested reader is referred to Self-Improving Supply Chain Systems  and Risk Resiliency for related topics.

Topics: Supply Chain, Risk Management, Enterprise Risk Management, Risk Planning

Supply Chain Risk Resiliency

Posted by Cyrus Hadavi on Tue, Oct 04, 2016

risk-dice.pngThere is risk in almost everything we do. It is unavoidable. Supply chains are no exception facing all kinds of unexpected but inevitable surprises. Some can be very costly to the company. It is imperative that the management are prepared to deal with unfavorable issues when they occur without building too much redundancy increasing the cost of operations. In a typical supply chain, having thousands of SKU’s and suppliers as well as other factors such as geopolitical issues, labor related issues and demand volatility, makes the supply chain operation very complex and in the absence of appropriate tools almost impossible to manage in an efficient manner. The key is to identify the potential risks before they happen so that adequate measures can be put in place.

There are many ways to assess risk vs cost and reward. As an example, one can use Multi Echelon Inventory Optimization (MEIO) to assess risk of on-time delivery vs cost. This can be done by SKU and customer. For certain customers, the desired delivery performance must remain at 98% or higher. Obviously this can be accomplished at a higher cost of inventory at different stages of the supply chains. On the other hand, for many other customers, a delivery performance of 90% might be acceptable at much lower cost of operations. As the demand patterns change, MEIO behaves as an almost perfect postponement strategy, to show where and when inventory is needed for a desired delivery performance and cost by customer and SKU. This algorithmic approach, based on probability distribution and queuing theory, is by far superior to the traditional methods of historical data such as moving averages and/or min-max types of approach.

Having visibility into meeting the financial goals of the company is critical. Any risks associated with that must be detected as early as possible and addressed. Likewise, meeting delivery performance for certain key customers, making sure that the right mix of inventory is available to keep the production running, knowing what options are available in case of capacity shortage, or material running out (or not delivered in time) are all factors that may increase delivery risks, increase cost and even cause loss of market share. Optimization models of systems designed to assess the impact of risks can act as a crystal ball to provide visibility to the end users and furthermore provide guidelines and advise end users as to what the best course of action would be. It is a proactive way of responding to potential risks than reactive.

One other critical use of systems is to perform what-if stress tests on the entire supply chain. By either overloading the supply chain model or trying to break certain links in the chain, one can observe the consequences of such events and what can go wrong, what the financial impact would be and what can be done from the convenience of your desk, before it happens! Preventing such potential disasters are how modern heroes are made of in the world of leading companies!  Learn more about Supply Chain Risk Resiliency by clicking this link.

Topics: Supply Chain, Risk Management, MEIO, Enterprise Risk Management, Risk Planning

Reducing Supply Chain Risk With Better Inventory Planning

Posted by kameron hadavi on Tue, May 10, 2011

Supply Chain Riak ManagementIn 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.   

Inventory Planning Issues

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 planning & 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: Inventroy Planning Defined As Part Of S&OP

 

Kameron HadaviAbout the Author:  Kameron Hadavi is the Vice President of Marketing & Alliances at Adexa, for more information about him please click here.

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

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