SUPPLY CHAIN DESIGN
The design of your supply chain has a key strategic influence on the competitiveness of your organisation. What is your customer response time? What should it be? What is your product or service cumulative lead time? Are you a build-to-stock, build-to-order or configure-to-order supplier? How strong are your relationships in the supply chain? How much consignment inventory do your suppliers hold? Are pull systems implemented such that your response times beat the competitors, hands down? Can you charge a premium price for faster delivery, at no extra cost to your company?
All the above questions are key to determining your company competitiveness in the marketplace. All too commonly however, we work with an inherited supply chain model, and are unaware that alternative models exist that would serve the company better. Development of a lean supply chain for your organisation is a vital step in improving product and service delivery to customers. It will strengthen your supply chain and improve competitiveness, and enable your company to reduce exposure and grow margin.
Bernie Rushe of Lean Ireland is a former Dell employee with a first class honours master’s degree in lean supply chain management. She is also a former lecturer on the APICS training programmes, is CPIM certified, and is a former lecturer on the undergraduate and post graduate programmes in Supply Chain Management at the University of Limerick.
Lean ireland will help you to identify the advantages and disadvantages of your existing model, and improve your supply chain robustness. Please see below for guidelines on Supply Chain Risk Management, and details of our Seven Step to Supply Chain Success training programme.
SUPPLY CHAIN RISK MANAGEMENT
At regular intervals, a local crisis occurs in some country around the world, and the ramifications on global trade are felt for months afterwards. We can all probably name political coups, ash clouds, earthquakes, and tsunamis that have had a devastating effect on many sectors for months after their occurrence.
Benjamin Franklin famously said “Fail to prepare, prepare to fail”. This phrase couldn’t be more apt when it comes to dealing with anticipated and unanticipated risks in the supply chain. Supply chain risk can be defined as the probability of an event occurring that will influence (usually negatively) the ability of a business to serve its customers. Effective identification and management of risk will enable an organisation to guarantee continuous cash flow and profitability. In this blog I will concentrate on identifying and mitigating risk in the supply base.
There are all types of operational risks which need to be considered, ranging from suppliers who create goods and services used in a company’s own operations, to third party providers who distribute the company’s products or services to the customers. By using the following 5 techniques when planning and agreeing to third-party involvement in your business, you will reduce the risk of damaging situations and implement an effective risk management policy. The key factor is to do your research on the suppliers and carefully plan and prepare for all possible supply interruption situations.
1. Map the high-level Supply Stream
For each key product and service, identify and map nodes (the inventory holding points) and activities (the inventory movement between nodes). This visual map on paper is typically completed by the procurement/purchasing teams.
2. Perform a high level risk listing on the supply stream STREAM
Brainstorm along the stream, all the worst-case scenarios from global issues, plant shutdown, loss of goods, restricted transport links, strikes, to internal breaches. Typical high-level categories are
- Quality risk (the primary concern of most organisations)
- Political (including government stability, legal and regulatory requirements, tariffs etc.);
- Socio-Economic (including religious observance, holiday periods, counterfeiting, bribery);
- Supplier organisation stability (ownership, management ethos, financial standing, safety & quality record, insurance)
- Geographic (including distance, transportation mode, number of ports of call, time)
- Climatic (including heat, cold, climatic turbulence, earthquakes);
- Monopoly/supplier dominance (single source supplier, unique technology, patent restrictions, supplier very large by comparison with organisation), and
- Pricing and future currency fluctuation (commodity price increase/decrease).
This step is similar to the first step in a traditional failure modes and effects analysis (FMEA) exercise.
3. Cross reference the suppliers to the risk listing
Using your vendor database, identify all approved and non-approved suppliers. Create a matrix that identifies which risks apply to which suppliers. Prioritise the list in the areas of greatest risk.
The above sample table uses a scale of 1 to 3, where 3 is the highest-level risk. The results of this exercise, typically performed by the procurement/purchasing team, are used to devise a proposed risk mitigation strategy for each supplier. For each of the risks identified, the mitigation plan must include a cost of implementation and quantification of the reduction in the risk. Aim for a 50% reduction, or greater in the risk. The proposals are then presented to the management team for amendment and approval.
4. Implement the mitigation plan
In order to flesh out the mitigation plans, owners need to be found who will be responsible for taking action. This typically involves several months’ worth of work that needs to be planned, resourced and tracked through to completion. Here is where most risk mitigation plans fall down. Often senior management is prepared to live with the risk (‘It won’t happen to us!’) than invest in a mitigation plan.
Some useful risk mitigation strategies include:
a. Vendor-owned consignment hubs close to your organisation (infinitely preferable to organisation-owned safety stock).
b. Safety stock
c. Second and third sourced vendors
d. Alternative transport (e.g. air freight vs. sea freight)
e. Alternative routes
f. Late delivery penalties
g. Contract cancellation option
h. Sue the supplier for breach of contract.
The above options range from the collaborative (most desirable) to the punitive (least desirable)
5. Standard the procurement approach
The process of sourcing new suppliers involves asking where in the world should your organisation purchase raw materials, components, services? Once the supplier is identified, due diligence on intellectual property, capability, quality, pricing, flexibility and confidentiality etc. are all part of a standard contract negotiation process. Your organisation now has a template and guidelines to incorporate risk analysis and fail safes into future procurement processes e.g.
a. Pre-plan the supplier identification and negotiation process, using the risk analysis template developed in 2 and 3 above.
b. Standardise and simplify the contract template.
c. Address the limitation of liability, indemnification, and supplier insurance that covers the potential risks identified. Ensure your organisation is covered in the event of being sued by the supplier or any 3rd party in the event of failure to supply products or services. Incorporate the requirement to keep certificates of insurance up to date.
d. Include opt-out terms in the event on non-fulfilment of terms.
e. Use credit rating agencies to assess the financial stability of the company. Regarding an Irish business, you can obtain financial reports from www.solocheck.ie.
Points c and d above are a different way of looking at the traditional catch-all force majeure contract clause. It can be a fine line. You don’t want to be overly-restrictive in the procurement of third-parties which ultimately leads to reducing your options of encouraging new suppliers and innovators to step-forward or tender. There will always be risks, but it’s about a willingness to take intelligent risks in order to generate profits for the bottom line.
In summary every organisation should strive to establish a collaborative relationship that will benefit both your organisation and the supplier. There is no zero-sum game (I win, you lose) in successful supplier-customer relationships. That being said, disasters can and will happen, out of the blue. I hope the above 5 step approach will help you to prevent or avoid them, or at the very least to significantly reduce their effects on your ability to supply your customers.
So, as you ponder what intelligent steps you need to take to mitigate risk, remember one more quote from Mr. Franklin “Never leave that till tomorrow which you can do today.”
SUPPLY CHAIN TRAINING WORKSHOPS – THE SEVEN KEYS TO SUPPLY CHAIN SUCCESS
Our “7 Keys to Supply Chain Success” interactive workshop series is designed to strengthen your supply chain effectiveness, and can be facilitated on a modular basis, to allow for change implementation and evaluation between modules.
The programme is aimed at assisting senior and middle managers to understand the fundamentals of best practice in supply chain management.
The workshops enable participants to make decisions which lead to shorter customer service cycle times, improved supplier performance, reduction in inventory write off, reduction in inventory levels and of course marked improvement in customer satisfaction.
The workshops also enable candidates to work effectively in cross functional supply chain improvement teams.
Supply chain training modules
1. Scan the environment
Topics include: changing consumer and customer preferences, trade surveys, organisation strategic review, competitor activity, labour issues, technology updates.
2. Partner with the customer
Topics include: Customer needs identification, process mapping the customer’s use of product, freight terms, inventory hubs and consignment inventory, communication, systems integration, paperwork, labeling, troubleshooting, responsiveness, pricing.
3. Partner with the supplier
Topics include: Supplier selection, validation, contract negotiation, freight terms, inventory hubs and consignment inventory, communication, systems integration, paperwork, labeling, troubleshooting, responsiveness, pricing.
4. Reduce lead times by implementing pull systems
Topics include: Value stream mapping – current state, goal setting, creating flow, identifying projects, error proofing, value stream mapping – future state, key metric identification and measurement, service, quality and margin improvement.
5. Educate and train the workforce
Topics include: Developing the management team, spreading understanding throughout the workforce, identifying future improvement opportunities, planning customer & supplier visits.
6. Use IT as an enabler
Topics include: System integration, online sales, customer and supplier portals, order tracking.
7. Outsource non-core activities
Topics include: Make/buy decisions, bill of material configuration, developing sub-contractor relationships, contract negotiation.