Maximizing supply chain performance at the lowest operating costs and the lowest inventory levels means eliminating duplication of facilities and redundancy of vehicles and routes. It means reducing safety stock and work-in-process inventory at facilities.
But elimination of duplicate facilities and redundancy of routes and reducing on-hand inventory often means an increase in risk. The very elimination of duplication and redundancy needed to create cost efficient supply chains also tends to increase the numbers and effects of supply chain risk points. This is because the lack of redundancy limits options for responding to unexpected supply chain disruptions.
In your supply chain model, efficiency needs to be carefully balanced with responsiveness in order to properly manage risk in the environments where your supply chain operates. And the balance between the two is always evolving as that environment changes.
EFFICIENCY versus RESPONSIVENESS
Supply chain cannot maximize both efficiency and responsiveness at the same time. Instead, supply chains must find a blend of efficiency and responsiveness that is best for the customers they serve and the environments they operate in. Supply chains must continually assess and adjust their blend of efficiency and responsiveness as their environments change. The more stable and predictable an environment is, the more a supply chain can focus on EFFICIENCY and low cost. However, the more volatile and uncertain an environment becomes, the more a supply chain needs to focus on RESPONSIVENESS and risk reduction.
Supply chains need to monitor and respond to factors such as: product demand; product prices; production rates; and delivery frequencies. What are the present and forecasted numbers for demand and prices? Can production rates be quickly increased or decreased to meet demand? How reliable are product delivery schedules? How reliable are the forecast numbers?
Many supply chains now operate in volatile, uncertain, complex and ambiguous (VUCA) environments. In such environments forecasts are less reliable because changes can occur suddenly and unexpectedly. So risk assessment and creation of appropriate supply chain contingency plans is an on-going process in VUCA environments, not just a one-time or annual event. This risk assessment and planning process is illustrated in the four steps shown below.
The best risk assessment and planning comes from cross-functional teams who can look at supply chains from different perspectives such as operations, finance, procurement and technology. SCM Globe provides a common platform for many different people to participate in the creation and review of supply chain contingency plans. See the case study titled “Java Furniture Company – Indonesia” for an example of how this online collaboration process can work.
Cross-functional risk management teams can model company supply chains and run simulations to identify likely points of failure and risk. They then create contingency plans and new supply chain models to be used in the event of those supply chain disruptions.
Managing supply chain risk and resiliency to support business continuity is further explored in a case study called “Fantastic Corporation – Unexpected Disruptions“. The case is based on events in 2011 when a tsunami hit the coast of Japan, causing the meltdown of a nuclear power plant which necessitated evacuation of all people from the region surrounding the Fukushima Daiichi power plant (shown in screenshot below, click for larger image). This caused factories in the region to close which resulted in critical shortages of certain computer chips and electrical component parts used by manufacturers of electronic devices from video cameras to flat-screen TVs. Suddenly there was a scramble to find alternate sources for these critical parts; nobody was prepared for this and supply chains everywhere were affected.
Supply chain models and simulations such as those produced while working with the cases above or while modeling real supply chains can clearly illustrate a team’s risk assessments and recommendations. These models and simulations are easily shared with and reviewed by a wider audience of people who can examine proposed supply chain models and see for themselves what happens in the simulations. And they can also experiment with their own ideas and share them in this review process.
In this way, supply chain models are continuously evolving as supply chain risks evolve. And contingency plans benefit from the input of a wide group of people with relevant and valuable experience.
SUPPLY CHAIN MODELING AND RISK ASSESSMENT SERVICES
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