October 2015 | Commentary | Risks and Rewards

Three Steps to Mitigate Supply Chain Risk…Now

Tags: Risk Management, Logistics, Supply Chain

Dr. Jeff Karrenbauer is President and Co-Founder, INSIGHT, Inc., 703-366-3061

A supply chain vulnerability and risk assessment should be an integral part of any overall supply chain strategy analysis. Unfortunately, this is rarely the case.

Many businesses don't address supply chain vulnerability and aren't prepared for potential supply chain disruptions due to either random acts of nature or deliberate actions. The recent West Coast port strike is an excellent example of where advanced planning could have made a significant difference. Once containers are already in the port, or on a ship in the queue outside the harbor, it's already too late.

So, how can you go about assessing supply chain risk? A proper vulnerability analysis is a three-step holistic process that encompasses the entire supply chain, starting with a company's customers and the products they purchase, then working back to the upper-most tier of raw material suppliers.

  1. Preliminary discussion. This phase focuses on education, informal company assessment of risk, supply chain description, and fundamental strategic drivers. A rigorous study involves formal supply chain mapping to include commodities, facilities, inventory, transportation, customer locations, and information flow details.
  2. Audit. Typically the most time-consuming phase, the audit consists of detailed information gathering. For example, prepare databases for raw materials, work-in-process products, and finished products that contain annual volume in units, sales and profits, number of sources, and location and contribution of each source. For raw materials and intermediate product items, annual sales and profits are the corresponding values summed across all the finished products for which they are part of the bill of materials.

    To evaluate the viability of vendors, gather a variety of financial, performance, and business environment data. You can then apply various predictive analytics and statistical methods to develop models of vendor success or failure.

    This step requires time, patience, persistence, expertise, and management commitment to an ongoing program of vendor evaluations. A supply chain map should include:

    • Descriptive data.
    • Commodities (raw material, intermediate product, finished product).
    • Locations (supplier, manufacturing, port, distribution center, crossdock, pool point, customer).
    • Major channels (especially critical in omni-channel environments).
    • Customer demand data (preferably at a line-item level of transaction detail).
    • Facility costs and capacities (procurement, manufacturing, distribution center, port handling, inventory).
    • Transportation costs and historical utilization (preferably by lane/mode/shipment size).
    • Duties and taxes, if applicable.
    • Detailed historical flows by link, location, and commodity.
  3. Create a model using advanced network analytics. Use this opportunity to redesign the supply chain and ask questions about location, capacities, customer service, and sustainability goals. Here are four examples of possible analyses for a vulnerability assessment:
    • Eliminating facility locations one at a time, two at a time, and so on.
    • Forcing service to critical customers from secondary locations.
    • Forcing allocation of a portion of procurement and manufacturing activity to secondary locations to diversify risk.
    • Following the prescriptive optimization-based analysis with a detailed, day-by-day descriptive simulation of a proposed network.

      Waiting to address your company's supply chain vulnerability is a serious mistake, with potentially catastrophic consequences. It is well beyond time to dedicate resources to careful planning and formal risk mitigation.






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