BUSINESS

Managing Risk in Your Supply Chain

September 2007

In the interest of cost and competitive pressures, companies now depend on lean and highly outsourced supply chains to feed their operations. But have efficiency gains also brought higher risks? Many experts think so.

Internal and external risks

Organizations are still vulnerable to events or disruptions that impact their supply chains – everything from cross-border issues and labor unrest to natural disasters and fires, even bankruptcy. For those that depend on a single supplier, one disaster can bring business to a halt.

A Case Study in Risk Management

In March 2000, a fire at a Philips semiconductor plant damaged some of the components used to make chips for mobile phones. Two of the company's biggest customers – Nokia and Ericsson – responded in different ways.

Nokia's supply-chain managers quickly realized the issue when their computer systems indicated that shipments were being held up. The company began to monitor the situation and built contingency plans. Ericsson decided to let the delay take its course.

On further investigation, Philips discovered that smoke and soot damage had contaminated a wider area of the plant. This would disrupt production for months, rather than a few days.

By that time, Nokia had already lined up alternative sources for the chips. Ericsson, on the other hand, faced a severe parts shortage since Philips was its only supplier. As a result, the company was constrained in launching its next generation of handsets and the company suffered huge losses in its mobile phone division.

Source: "When the Chain Breaks,"
The Economist, June 15, 2006.

"In many cases shippers have gone too far in implementing the lean supply chain and have found themselves virtually out of business because of a catastrophic event," says logistics consultant Ted Scherck.¹

But having too many suppliers doesn't guarantee immunity, either. In this case "the overall number grows exponentially the further you go down the chain, where problems can be harder to spot," says The Economist.² "In fact, some firms do not know who is supplying their suppliers – or even where some of their lower-tier suppliers are based."³

Markets, too, punish companies that are hit by supply chain disruptions (see sidebar). In the short term, share prices can drop. And the effects may last longer: "Operating income, return on sales and return on assets are all significantly down in the first and second year after a disruption."⁴

Ways to manage them

There are ways to manage supply chain risks. One of the best strategies is gaining complete visibility across the chain – so you know where and when problems occur and can take informed action.

Transaction systems can help companies achieve this kind of visibility. But the trick here is integrating all the data sources up and down the line – from internal applications to data systems operated by each supplier, often dispersed across the globe.

As The McKinsey Quarterly suggests: "To gather vital information, companies must selectively invest in IT connections between their own systems-supply-chain management software and ERP systems-and the systems of their suppliers."⁵

Connect the data

ERP systems can't provide this next level of functionality. But business intelligence can. The scalable software leverages all this data and presents it consistently to highlight key issues, wherever they occur. And it provides answers while there is still time to act on them.

Here are four ways that business intelligence helps to manage supply chain risk:

Dashboards and scorecards: Provide highly visual information for monitoring supply chain operations. If performance falls into the red or exceeds a threshold, managers can access detailed information through supporting reports and analysis.
Business event management: Supply chain managers receive email alerts when a pre-determined disruption or unusual event occurs-such as parts shortages or shipments at risk.
Analysis: Lets managers explore current issues or problems in the supply chain to understand what led to the results. It's the complete information they need to achieve process optimization.
Reporting: Provides up-to-the minute views on key supply chain areas that can be shared across portals and extranets.

What-if planning

Business intelligence gives companies the information to take immediate action when something happens. Enterprise planning also lets organizations look ahead so they can be more proactive.

In this case, it's the value of what-if planning, in which managers and suppliers use a collaborative platform to forecast and model the effects of different business scenarios. They can analyze things like operational trends or supplier performance and project them forward. If a worst-case event happens, people have the flexibility and contingency plans in place to reduce the impact of shortages or stoppages.

Managing logistics: U.S. Coast Guard

The U.S. Coast Guard's Aviation Logistics Management Information System (ALMIS) project is designed to consolidate disparate flight operations data – such as flight itineraries, aircraft status, maintenance, logistics and supplier information – into a single system, which is powered by IBM Cognos BI.

The Coast Guard has been able to improve visibility into its supply chain; enable transparent data access and facilitate report generation for its air station personnel; and significantly reduce the costs of its aircraft parts requisition process. Among other benefits, the organization has seen $2.4 million in annual savings from improved parts forecasting and availability.

"Our success with the ALMIS project is directly attributed to the fact that senior Coast Guard officials are always intimately familiar with what is happening at the core of our operations," says Commander Donna Cottrell, Chief, Information Systems Division of the U.S. Coast Guard's Aircraft Repair and Supply Center.⁶

Summary

When events happen, it pays to be prepared. Performance management software – Business intelligence and enterprise planning – provides a complete view of supply chain indicators across all transaction systems. It helps companies plan and respond effectively to keep the business on track no matter what happens down the line, a critical ability in the high-risk world of supply chain dynamics.