As low-cost country sourcing and lean inventories increase supply-chain risk, companies are employing the latest technology to manage and mitigate that risk. Mark Hillman, a senior analyst at AMR Research, said supply-chain risk falls into two categories: external risks such as natural disasters or geopolitical events, and internal risks such as product, procurement and sourcing failures.
In an April survey of more than 100 logistics executives, AMR found that the top supply-chain risk concern was supplier failure, followed by strategic and business risks, natural disasters, logistics failures, and government trade and regulatory risk.
According to the survey, companies are using or plan to use risk-management tools that include inventory optimization, performance management, event management, sourcing, contract management, network design and data warehousing. About 30 percent of companies said they were using some type of risk-management technology. About half said they plan to evaluate or implement risk-management technology within the next 12 to 24 months. "It is clear that awareness of risk management as an issue that demands resources is high," Hillman said.
The software that companies employ for a variety of functions
- optimization, inventory management, network design and supplier relationship management - has ancillary benefits in managing specific supply-chain risks, Hillman said. Technology designed to increase supply-chain visibility often lends itself to risk management.
Vendors, sometimes led by executives with risk-management backgrounds, are rolling out risk-management and advanced analytic technologies that can be incorporated into supply-chain management modules.
Companies need increasingly sophisticated analytical services to manage the data their IT systems provide, said Tim Fairchild, business development manager for SAS Sourcing Intelligence, a Cary, N.C.-based provider of business intelligence and software services. "The amount of available data can enable you to go beyond the old risk categories to measure trade, political and competitive risk," he said.
A number of factors are driving the growing interest in supply-chain risk management. Major retailers and manufacturers are demanding that key suppliers have extensive contingency plans in place in the event of disruption. Sourcing from low-cost countries has added risk and complexity to global supply chains, and regulators are demanding preparedness and compliance in the wake of the Sarbanes-Oxley Act and other events. Insurers are starting to take supply-chain factors into account when issuing business-continuity policies (in the event of a disaster) and other types of coverage.
Strategic design and network optimization software enable "what-if" analyses based on disruptive events of various frequency and impact. It allows shippers to compare the risks and benefits of a range of network-design scenarios and enables flexible processes for responding to disruptive events. It can provide data analysis that supports decisions on freight routing and pricing strategies, and visibility into supply and demand to mitigate the costs associated with excess inventory, including obsolescence.
While supply-chain risk has become an executive-level concern, most companies don't have the technology or processes to manage it, said Beth Enslow, senior vice president of enterprise research at Aberdeen Group. An ongoing Aberdeen supply-chain survey shows that most companies are identifying major risk factors such as pandemics and port strikes, but only 4 percent have active risk-management processes in place.
"Traditional tools are being enhanced to incorporate more risk-management planning," Enslow said. "The addition of inventory planning and optimization tools into strategic risk management is a new phenomenon."
A growing number of shippers are thinking of risk management as advanced inventory optimization, said Rajib Roy, vice president of marketing and product development for Optiant, a Burlington, Mass.-based developer of supply-chain optimization software. Now that the cost-savings have been wrung out of low-cost-country sourcing, companies are realizing that to maintain consistent customer service levels in a more complex, risky environment requires proactive risk management.
"A good number of industries are waking up to it in varying degrees," Roy said. "Post-Katrina, companies realize they have to do something."
New technologies introduced within the past five years have greatly improved analytical capabilities. So-called non-linear program models have evolved to address variable risk scenarios.
An example would be trying to predict the next San Francisco earthquake, Roy said. A linear model would focus on the time it would occur, which is impossible. The non-linear model provides estimates for the likelihood of it occurring at various intervals over number of years.
Advanced inventory optimization technology enables a "sense-and-respond" model that allows companies to process huge amounts of scenarios in minutes. That's where the industry is headed, said A.J. Brohinsky, senior vice president of Pittsburgh-based SmartOps, a provider of enterprise-class inventory optimization technology. The system takes vast amounts of data provided by enterprise-resource-planning systems, including historical supplier data and forward-looking data from point-of-sale sources, to sense changes in demand and identify supply problems.
The non-linear analytical capabilities that underpin the company's Multistage Inventory Planning and Optimization (MIPO) service can assess the impact of small changes in one variable on other variables. For example, improving on-time fulfillment rates from 95 percent to 98 percent can cut costs by more than 3 percent.
Companies with seasonal products can use the technology to mitigate the severe inventory risks associated with over-demand or under-demand.
Moline, Ill.-based John Deere & Co. is a case in point; 65 percent of retail sales for a majority of products in the company's Commercial and Consumer Equipment division occur between March and June. In 2001, an order-fulfillment group at the division began to phase in the MIPO system, which can calculate 52 million variables and 26 million constraints within four hours. On-time shipment has improved by 29 percent, and by the end of 2004, Deere had saved close to $1 billion in inventory reduction or avoidance.
The inventory risks of obsolescence and excessive capitalization can damage companies, Brohinsky said. An example is the April 2001 announcement by Cisco Systems that it was writing off more than $2.2 billion in inventory, which sent company shares plummeting.
The technology also can be applied to model supply-chain risks such as strikes and hurricanes, Brohinsky said.
Before implementing a risk program, companies must have a good understanding of their supply base, but that kind of knowledge is rare. "A lot of companies have to do a lot of blocking and tackling before they get there," Fairchild said.
Kenneth Travers, senior vice president of ABS Corporate Solutions, a consulting and technology-based risk management firm, said that in the era after Sept. 11 and Hurricane Katrina, supply-chain risk management has evolved from an operational activity concerned with high-frequency, low-impact events to one focused on catastrophic events.
Through its Eqecat Inc. subsidiary, ABS provides hazard models and simulation software to quantify the impact of risks such as fires, explosions, floods, hurricanes and earthquakes.
New York-based consulting firm Risk Solutions International works with global companies to provide emergency and crisis management, and to maintain supply-chain resiliency by managing operational risks.
Scott Corzine, RSI's senior vice president, said the company has developed a Web-based platform called the Vendor Continuity Assessment Program that allows companies to gauge the impact of disruption on critical supply partners and assess the risks of single sourcing. "One of the largest enterprise supply-chain risks is supplier failure, and it's the one that companies have the least control over," Corzine said.
Business Objects, a global business intelligence software company based in San Jose, Calif., and Paris, provides analytics for planning, sourcing, manufacturing, logistics and returns, the five operations processes as defined by the Supply Chain Council. The analyses of key operations enable companies to reduce the risk of stock-outs, and reduce business risk by improving customer service and supplier and inventory management.
Business intelligence provides the basis for informed decisions about supplier selection, consolidation, vendor satisfaction and contract compliance, said Steve Wooledge, Business Objects' director of performance management. The company's Supply Chain Intelligence application provides common benchmarks for evaluating supplier performance, which enable companies to evaluate how well vendors will perform in the event of disruptions or in response to increased demand.
A lot of the tools are already in place to manage supply-chain risk and don't have to be rebuilt, said Markus Rosemann, manager of Application Solution Management, SCM, at SAP AG, the world's largest business software company. Interest in supply-chain risk management is growing rapidly as companies realize the financial impact of supply risk on operations and finance.
Risk management is not a single tool; event management, analytics and optimization modules all play a role in risk management, although as companies become more aware of the enterprisewide nature of supply-chain risk, the field will likely evolve into an integration of strategic and operational approaches.
Rosemann sees risk-management services not as operational tools but as decision support tools that enable management to develop strategies and take appropriate measures when risk events occur.