Can You Afford The Risk?

Apr 16 2014, 1:55pm CDT | by

Can You Afford The Risk?
Photo Credit: Forbes Business

In 2013, 80% of supply chain leaders had a material supply chain disruption. It was not just one. The average company had  three. Yet, in a study that I just completed at Supply Chain Insights, when asked about business pain, supply chain risk rates low. How come?

It is new.  It lacks a consistent definition and set of practices. Companies reward the urgent. Risk management requires a focus on the important. It requires leadership and orchestration.

Today, teams don’t know what to do. The companies that are the most mature learned the hard way. They had a disruption.

Defining the Topic

Let’s start with a definition. For the purposes of the study that we just completed, we defined supply chain risk management as the proactive identification and resolution of potential risks to the supply chain. The key word in this sentence is proactive. Unfortunately, too many supply chains are reactive. The systems respond, but they do not sense. Performance is measured by indicators, not by performance predictors.

New Insights

Supply Chain leaders answers are hard-wired for supply. Many companies will wax eloquently about the work that they are doing on “control tower” or “supply chain visibility.” It is not sufficient. We find that we are only dipping our toes into turbulent waters.

I have been working as an analyst in supply chain management for the last decade. In this role, I have done a study on risk management about every five years. I seldom get surprised on study results; but, the answer to the question on risk drivers in this survey surprised me.  As you can see in Figure 1, today it is less about supply and more about demand. Demand is the highest risk factor today; but in the future, the largest gap in risk management will be the management of global operations. The total risk profile is shown in the figure. For me, these two trends are significant:

Demand Variability. The biggest surprise for me in the research is the role of demand uncertainty on risk. Demand is more volatile and unpredictable. With the elongation of product platforms, demand latency has increased. (Demand latency is the time that it takes to translate customer purchases into an order for replenishment.) The building of demand sensing capabilities automates of market sensing and the use of channel data and can improve the time to sense market changes by 10-40X. It is much different than forecasting. Unfortunately, too few companies understand the concepts of demand latency and the importance of the use of these new forms of analytics.

When it comes to the implementation of demand sensing technologies, the implementation is easier than the organizational change management issues. However, it is difficult for the supply chain organization to accomplish this by themselves. Why?  The term “supply chain” is politically charged. It has become a function, not an end-to-end process.  Marketing and sales are also functions. The functional approach does not allow us to build demand processes. By and large, marketing and sales are not good at forecasting demand. They introduce bias. To combat this issue, and drive success in demand sensing, many companies have to rename the work stream so that it can truly be an end-to-end focus. For sales-driven and marketing-driven companies, this is a major change management issue. Simply put, to reduce risk, redefine demand processes.

Increasing Complexity of Operations. With a decade of building global supply chains behind us, companies are feeling the impact. Local regulations, fair labor, variability in shipping lanes, new materials, outsourced manufacturing and faster product development cycles are all contributing to the pain. The financial stability of contract manufacturers and third-party logistics firms is a growing risk. It is not just one factor. We are better at managing regional supply chains than tangled/knotty global ones. The organizational dynamics and politics make regional/global governance difficult. The availability of talent in Brazil, China and Africa is a also a risk.

Figure 1: Supply Chain Risk Management Issues

What are your thoughts? I would love to hear from you.

 
 

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