risk management in supply chain

OperationsPlanning.net

Risk-based inventory classification

OperationsPlanning.netAlex Rivlin


Agenda

Agenda

Goals of risk management Process of risk management Inventory risk management


Goals of risk management

Levels of risk management

Types of risks

Maturity of risk management

Goals of risk management

Reduce loss of sales Reduce expenses

Business Continuity

Crisis Management

Product Resiliency

Supply Chain Resiliency

Raw Material Supplier

Supplier YOU Customer End customer

Missed ScheduleOut of StockAbility to grow

E & OExpedite chargeManagement $$

Drop in demandExpedite chargeManagement $$

Acknowledge (search)

Monitor (and document)

Proactively look for

solutions

Implement solutions

Define & Achieve

acceptable risk tolerance


Agenda

ouch

packing

Supply late

Quality

Reporting

Wrong part

Column1

I MAN-AGE

No problems


Accepted Reallocation Established daily monitoringEscalated to VP of operations

Continued to wait Re-design to accept alternative chipsent RFP to two alternate suppliersacquired alternate capacity

Escalated the situation to executivesPressed situation at CEO meetingsReallocated production to Philips plant in Shanghai and Eindhoven

Division 1.6B annual lossLoss of market shareSale to Sony

Emerged as a market leader

Philips realized that extent of the damage is higher than expected

Supply Chain Risk Management – history and backgroundPhilips fire

• Philips FAB in New Mexico manufactured RF chips for cell phones. • Ericsson and Nokia accounted for 40% of production.

March 17

2000

•Fire hit facilities

March 20 •3 days

passed

March 31

•14 days passed

April 7•21

days passed

Outcome


Supply Chain Risk Management – history and backgroundCisco example

Goal

•Apply where it matters•To

support key SKU and key customers

Scope

•Identify areas to be monitored•Partner

financial strength•Contentio

n points in supply chain•Know

the supplier’s supply chain•Include

geography and distribution

Process

•Mitigation framework• Second

source• IT support

and analytics to measure impact• Cross

Training, support from Engineering, Marketing, Supply Chain• Inventory

buffers

Results

• Team of 8 people was able to achieve acceptable risk tolerance for 45% of Cisco sales and sustain multiple bankruptcies in the supply chain.

Gartner, “Case Study: Cisco Addresses Supply Chain Risk Management”, 2010


Supply Chain Risk Management – takeaway

Culture

• Does your company has risk management program in place?

Identificati

on• Are

abnormal events identified?• When?

Resolution

•Is escalation path available?•Is analytics

and support available to estimate the impact?•Is

framework in place for escalation, resolution, closure?•Are cross

training and second sourcing being proactively implemented?•Are all

areas in the company available to support event resolution?

Or you invent all of the above after the fact?.....


Agenda

Agenda

Goals of risk management Process of risk management Inventory risk management


Price Operation1 Operation2 Operation3 Sales10 PP -1 Item 1-1-1 150

Item 1-1 Item 1-1-2 10

500 RM -1 Item 1 Item 1-2 Item 1-2-1 10

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10

Inventory related risks: Sample supply chain

NOTES: Raw materials RM-1 and RM-2 are converted to Item 1 via operation S1. Item1 is combined with subassembly PP-1 or PP-2 to produce Item1-1, Item1-2, Item1-3 via operation S2 The above items are converted to final items Item1-1-1 … Item1-3-4

Sample supply chain

Inventory related risks: controls and prevention Lets consider simple supply chain and identify controls that are required to monitor and minimize inventory related risks

Spend



Item 1-1 Item 1-1-2 10

500 RM -1 Item 1 Item 1-2 Item 1-2-1 10

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10

LegendA-item B-item C-item

Supplier side risk: sample supply chain

Sample supply chain

On sales side ABC is assigned by sales volume, on supplier side – by spent

Inventory related risks: controls and prevention Lets consider simple supply chain and identify controls that are required to monitor and minimize inventory related risks

Spend



Item 1-1 Item 1-1-2 10

500 RM -1 Item 1 Item 1-2 Item 1-2-1 10

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10


Supplier side risk : sample supply chain

Sample supply chain

Supplier side risk – PP-3 affects 95% of sales. If supplier delays/cancells/defaults on their commitment...Ensure healthy pipeline; establish second source.

Closer look

Affects 95%Of sales

Spend



Item 1-1 Item 1-1-2 10

500 RM -1 Item 1 Item 1-2 Item 1-2-1 10

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10


Supplier side risk: sample supply chain

Sample supply chain

.

Zoom in

Affects 95%Of sales

We get healthy and reliableProfit. Supplier gets 0.1And has to invest 1.9

PP-2 costs $2. Supplier's fee is $0.01, and parts they need to buy are $1.99... Supplier may not carry enough Inventory to support volume, which affects $20 revenue for the company.

Monitor supplier's inventory and ensure supplier has enough cash to deliver the goods.


Supplier side risk categorization

Goals

•Ensure optimal cost is contracted, executed, and monitored for opportunities•Minimi

ze/prevent supplier's risk – leverage multiple sources•Conso

lidate to increase volume and further improve prices

Identificati

on

•Effect of delay of materials on company's revenue and risk of loss of business

•Know limited use/C category items that feed in A-items

•Review supplier's ability to fund their purchases and support volume (Expense/Revenue)

Prevent

•Build redundancy; monitor supplier’s risk exposure

•Define escalation path with supplier

•Qualify multiple sources

Source: “Cisco addresses supply chain management”http://www.cisco.com/web/strategy/docs/manufacturing/Cisco_Case_Study_AMR_10-0917.pdf

http://www.cisco.com/web/strategy/docs/manufacturing/Cisco_Case_Study_AMR_10-0917.pdf



Item 1-1 Item 1-1-2 10500 RM -1 Item 1

Item 1-2 Item 1-2-1 10Item 1x

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10


Customer side risk : sample supply chain

Sample supply chain

.

Zoom in

Used by one customer

Our highest runner is usedBy ONE customer and for

ONE design only

Item 1-1-1 : If anything happens with customer's design, our entire WIP can become obsolete.Item 1-3-3 : If anything happens with [our relationships with ] the customer – back end wip will be obsolete

Spend


Customer side risk categorization

Goal•Protect

from E&O due to drop in demand

Identificati

on

•Items sold to a single customer•And

used in single design

Preventio

n

•Establishing NRE and robust liability monitoring•Establish contractual liabilities•Review frequently

•Monitor amount of material in distribution channels and at contract manufacturers.


Summary

Established practice Supported by reliable process Dedicated to direct attention to right risk areas Includes teams from supplier, company, and customers

Well communicated and transparent Has access to senior and executive level management

Summary : Successful risk management is:

risk management in supply chain

Business

simple supply chain

risk management process

supplier side risk

identify controls

supplier

item1

controls

customer