Supply Chain Risk Management corrected - Whitepaper


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This paper introduces the concept of Supply Chain Risk
Management. It identifies various risks and explains the process of managing these risks. With technology in place, automation of some of the processes brings down the risks involved. Sadly, many companies are not adequately automated to address these issues. The paper also highlights how information technology can be adopted in certain areas in supply chain to ensure visibility and reduce risk occurrence.

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Supply Chain Risk Management corrected - Whitepaper

  1. 1. Supply Chain Risk Management Vinod Pisharoti NIIT Technologies White Paper
  2. 2. CONTENTS 1 Abstract 3 2 Introduction/Background 3 3 Supply Chain Disruptions 4 3.1 Types of Risks 4 3.2 Risk Management Framework 4 Visibility – Uncertainty Exposed 5 4.1 Demand Visibility 5 4.2 Supply Visibility 5 4.2.1 Electronic notification of Shipments 5 4.2.2 End-to-end Visibility on the Supplier Side 6 4.3 6 Inventory Visibility 4.3.1 Tracking in Warehouse 6 4.4 6 Logistics Visibility 4.4.1 Alerts 7 4.4.2 Electronic Tagging 7 4.5 7 Where Technology can help? 4.5.1 Web Services 7 4.5.2 EDI 7 5 Conclusion 8
  3. 3. 1. Abstract Businesses, today, are restructuring themselves to operate globally. The ever increasing pressure to improve efficiency of supply chains, demanding customers, competitive pressure and ability to move material faster at lower cost have given rise to a some of the processes brings down the risks involved. Sadly, many companies are not adequately automated to address these issues. The paper also highlights how information technology can be adopted in certain areas in supply chain to ensure visibility and reduce risk occurrence. stream of new methods and initiatives. Modern supply-chains have now become superior, with goods and information flow happening in parallel, to ensure that the products are cost effectively delivered in right quantities, to the right place, at the right time. With pressure to deliver value every time, organizations constantly face uncertainties and risks. Uncertainties occur due to outsourcing, procurement from multiple suppliers, lack of 2 . Introduction/Background Supply-chains, today, are becoming highly sophisticated and vital for the existence of a company. The drive to make supply chain more efficient has resulted in it becoming vulnerable and exposed to a range of uncertainties and risks. Risks originate from various sources including Supply, Demand, Disasters, IT and Logistics [Figure 1]. integration with suppliers, globalization, demands from customers, dependency on Information Technology, laws and regulations, and Supply security. Planning, measuring, controlling and managing this within the supply-chain network is critical to remain competitive, reduce the margin of error and maintain the brand image of the company. Logistics Demand Sources of Risks Supply chains are vulnerable to various types of risks that mainly originate from five different sources: Supply, Demand, Disasters, Disasters IT Information Technology and Logistics. Unstable supply chain increases the need to control, monitor and evaluate risks to Figure 1: Source of Risks maintain continuity, remain cost effective and maximize profitability. Supply Chain Risk Management is an answer to minimize the impact on profitability. According to an Aberdeen best practice Supply chain is at risk when there is a threat of interruption to the physical or information flow due to unwanted events. If companies have to track these risks and address them appropriately then it is research report conducted in 2005, supply chain visibility is one of imperative to have visibility on the exceptions or unwanted the most critical areas where companies are investing. Stan Smith, happenings during Risk assessment consultant from Q+E defines Supply Chain Risk multi-faceted nature of risks and piece meal solutions the first step Management as a “Systematic process of managing unwanted is to have a proper supply chain risk management strategy and events or unwanted change in the Supply chain”. apply technology wherever possible to mitigate the risks. This paper introduces the concept of Supply Chain Risk Most companies lack automation and visibility which has resulted Management. It identifies various risks and explains the process of in longer lead times, more than required inventory buffers, supply managing these risks. With technology in place, automation of the supply chain process. With the imbalance and cost implications to name a few. 3
  4. 4. The Aberdeen Global Supply Chain Bench Mark report states that 3.1 Types of Risks 79% of the large companies lack supply chain process visibility Avoiding and reducing risks is a big challenge for all the which has now become a top concern, and 90% of all enterprises enterprises. The risks to supply chains are numerous and report that their supply chain technology is inadequate. constantly evolving, and emanate from different sources. 3. Supply Chain Disruptions Enterprises have identified and documented different types of risks in the Supply chain. Let us take a look at some of the supply chain disruptions that Types of Risks took place in the past. Disruption Scenario/Impact Supply Related A European consumer durable manufacturer that out-sourced production of a component part to China discovered that the first shipment of parts was defective. By the time the further shipments could be stopped, a six-month supply was already on its way. The company had no option but to install them and absorb the expense of warranty repairs.[Global Supply Chain Risk Management, John T. Mentzer] Information Technology Inaccurate forecasts, Distorted information, Data protection. IT Infrastructure breakdown, Failure of integration systems, Failure of IT applications Demand Related Disaster Related IT Related Logistics Related Cisco in 2001 had to announce an inventory write-off of US$2 billion due to decline in orders for their network infrastructure products. All levels of supply network had been heavily buffered because the demand of these products was rising and supply of components was getting affected. [Risk in Supply Chain, Dr Shoumen Datta] A fire in a factory that produced semi-conductors for mobile phones in March 2000 had a major effect on the supply of their parts. Nokia and Ericsson owned 40% of the market share between them at that time. Both companies were highly exposed to potential shortages of critical components for their products. Nokia responded quickly with alternate actions. Ericsson did not respond until early April, by which time supplies were not available. As a result, Ericsson lost sales of approximately $400m. [Risk in Supply Chain, Dr Shoumen Datta] Supply • • • • • • • • • • • Material non-availability Supplier bankruptcy Failure/miscommunication Partnership breach Lack of response to change Poor Quality of materials Late arrival of materials Exchange rate fluctuations Dependency on a single source Price Increase by supplier Shortage on arrival Demand Logistics • Storing obsolete goods • Excess Inventory • Holding high value/short life stocks • Stock pilling • Underutilized capacity • Carrier unavailability • Not meeting delivery schedule • Delay due to accident • Dispatch to wrong destination • Pilferage • Short shipments • Damage to goods in transit • • • • • Lack of demand Volatile demand Fraudulent Customers Changes in requirement Failure/miscommunication Disasters Natural Disasters, Diseases, Political unrest, Political unrest, Terrorism, Currency fluctuations, Goverment regulations. IT breakdown, Labour strikes Figure 2: Types of Risks Reports suggest that most companies are aware of the possible risks in the supply chain and the impact they have. However, companies wait for them to happen before acting on them. Companies should look for a holistic approach to manage the risks involved, and achieve greater flexibility and control. They should In 1998-99, Hershey Foods spent more than $100 million on a new order management, supply chain planning, and CRM system to transform the company’s IT infrastructure and supply chain. System had critical glitches and was not ready to go live on time. As a result Hershey’s lost revenue due to missed orders. [SCDigest] build a risk management plan to quickly adjust and recover from The on-line division of a leading toy retailer, Toys R Us advertised and promised delivery by Christmas on any orders placed before 10th Dec. The inventory was in place; however, the company could not pick, pack and ship the bulk orders immediately. Eventually the shipping of the orders was outsourced to another company; leading to huge losses. [SCDigest] and analytical framework for the management of risks in supply the anticipated and unanticipated risks. Technical Aspects 3.2 Risk Management Framework Roshan Gaonkar and N Viswanadham in their paper ‘A conceptual chain’ mention two approaches (preventive and interceptive) to build resilient supply chains. The preventive approach reduces the probability of risk occurrence in the supply chain. The interceptive approach takes immediate The above examples highlight that if these problems were identified action after the occurrence of an event to minimize the impact. on time and managed properly, disasters could have been averted. 4
  5. 5. Providing visibility in a supply chain is one way of reducing the 4.1 Demand Visibility probability of risk occurrence and therefore becomes a part of the “Forecasting has never been cent percent correct and probably will preventive approach. Supply chain consultants in various forums never be”. There is no way one can know well in advance what and papers have mentioned the standard processes that need to and how much the customer wants unless he/she shares it. be followed in order to proactively manage risks in a supply chain. They are; Years back, supply chain was not complex and technology was • Identify unexpected events virtually non-existent. At that time, vendors used to forecast based on • Conduct root cause analysis “intuition”. Vendors also started forecasting demand based on sales • Assess and quantify impact of each risk made in the past; which brought figures closer to actual needs but • Assign probability of risk occurrence were still not precise. This technique is used even today by most • Build risk mitigation plan vendors. Today, supply chain management has become a • Assign owners and implement actions sophisticated discipline and technology is available for forecasting. Using proper data collection and forecasting techniques, vendors can 4. Visibility – Uncertainty Exposed reduce the gap between the forecasted data and the actual data. Risks can be transferred to a supply chain partner or can be To get an insight on demand, an ideal demand visibility solution should minimized but cannot be avoided. One way of minimizing the risk capture demand history, customer orders, point-of-sale data, historical is by having good visibility and control over the Supply chain. sales data, market forecasts, any recorded seasonal variations, information on weather conditions, promotions etc. Combined with Companies should focus on the following to go a long way in technology, different techniques can be applied to create demand reducing the risks in the supply chain patterns, forecasts and plans for an effective inventory management • How well connected are you with the Suppliers and other and cost-effective customer service. trading partners? • What is the current status of the order? • Do you have specific details (dimensions, weight, type etc) of the item? • Where exactly is the item at any given time? 4.2 Supply Visibility According to an AMR Research, supplier failure is one of the top supply chain risk factor. It is important to extract information about the state of the concerned product and supplier to mitigate the • Where is the item getting stored? risk. Electronic Data Interchange (EDI) is one solution but Web • How much of the item is available? Services is preferred as a viable solution. • Is the item being stored in the right environment? • When is the item going to arrive? Implementing Web services enable organizations to integrate with suppliers and easily share or access information stored in disparate • Are the goods received in full (or is there any shortage)? systems operating on different platforms. Visibility to supplier • Are the items in the condition it is supposed to be (damaged, information reduces most of the supply related risks. fake etc)? 4.2.1 Electronic notification of Shipments Right information available at the right time ensures greater Information on shipments or orders obtained through emails, fax or visibility. End-to-end visibility allows companies to respond quickly telephone is entered manually into the system. The process of to issues that directly and indirectly impact the flow of goods from entering information is laborious, costly, and error-prone. Suppliers source to the consumer. with EDI capabilities push the information electronically but it does not necessarily reach on or before time. There are several visibility solutions and technologies that can be used in a supply chain scenario. Some of them that directly contribute to operations are: 5
  6. 6. An alternate solution is to pull the information directly from the RFID tag is attached to every item in the warehouse. Once the tag supplier (on mutual agreement) at regular time intervals irrespective is associated, all warehouse movements are tracked by readers. of the format it has been stored. The information is then translated Information about items movement can be immediately transmitted to the required format (e.g. XML) before being used. It removes to the driver. If the driver delivers the item to the wrong storage bay dependency on the supplier. or shipping dock, he immediately gets an alert. A real-time locating 28.8 14.4 12 system can also track truck’s movement and position. 4.2.2 End-to-end Visibility on the Supplier Side Improved visibility is at the top of the supply chain strategy list. To 4.4 Logistics Visibility achieve end-to-end visibility, it is important to leverage the Supplier An order needs to be tracked from the time an order is shipped portals that provide some level of visibility, and generates Advance from the source (warehouse from a supplier or warehouse to a Shipment Notifications and bar code label printing capabilities. customer) to the consumer. Building interfaces to access critical information and integrating it to the end-to-end workflow of the supplier brings down a lot of supply related risks. 4.3 Inventory Visibility Some of the basic questions are; • Have all the items and quantities been shipped as per the order? • When will the shipment arrive? In a supply chain, it is important to control inventory for countering • Has the order been delivered to the customer? risks. Companies in order to ensure availability of the product • Has the order reached in-time at the destination in perfect condition? without maintaining excessive inventory need an accurate picture of the stock across distribution centers or warehouses. Customer As long as there is visibility, an ideal logistics visibility solution commitments can be met only if a company has real-time visibility should cater to them. A logistics visibility solution should cover the of the stock placed as an order, in a store/warehouse or in-transit. following; • Consolidate all shipment relevant information from internal A perfect solution that provides inventory visibility should cover the systems, suppliers, carriers, agents, customs authorities and following; other trading partners. • Ability to provide real-time alerts on operations including short receipts, no-shows or out of stock etc., inside the warehouse/DC so that decisions can be made • Ability to capture accurate data of items and stock • Ability to extract information from within the premises by consolidating data or integrating it with other systems • Display relevant information through web portal so that stake holders can access information and take decisions accordingly. 4.3.1 Tracking in Warehouse • Provide milestone based shipment status i.e. each time the shipment changes hands, relevant information - time of arrival, departure and position - is captured. • Keep track of the shipment quantity to ensure it matches the expected order. • Raise alerts each time there is an exception • Provide inventory visibility • Capture details of goods shipped for tracking purposes. Radio Frequency Identification (RFID) can be used for real-time • Provide electronic verification and confirmation of delivery location tracking. It pinpoints items to their location. • Capture supplier and carrier service level details for performance improvement. RFID is emerging as a key technology in applications as varied as asset tracking, logistics and transportation, surveillance and Information in the form of actionable data is extremely important security. It reduces warehousing and inventory management costs if one has to quickly react to the supply chain demands. through effective asset and pallet tracking, and theft alerts. RFID Visibility solutions display data that needs attention through does not require a line-of-sight between the transponder and the alerts, dashboards, reports, handheld devices, and emails. The reader. It therefore works effectively in dirty environments and solution presents data to the right people at the right time and eliminates the need to manually scan each case or pallet's in the right method. magnetic cards and bar codes. 6
  7. 7. 4.4.1 Alerts collection of operations accessed over the network through Considering the global route that goods travel in the supply chain, standardized XML messaging. A group of Web services interacting logistics disruptions are bound to take place. Late arrival, shortage, together defines a Web service application in a Service-Oriented damage, dispatch to incorrect destinations, pilferage, loss in transit and Architecture (SOA). untraceable goods in the warehouse happen in a day-to-day supply chain scenario. This has led to unhappy customers and loss of eBusiness Solutions from NIIT Technologies credibility. Situations may go out of control not because the companies NIIT Technologies service offerings help organizations keep pace do not react, but due to unavailability of information at the right time. with the rapidly changing dynamics of eBusiness. It provides Supply chain event management can solve this problem. end-to-end eBusiness solutions and services that include: • Web Services solution and SOA consulting services These are systems that discover “Exceptions” in the supply chain when goods change hands. In other words, it keeps track of the actual activity deviated from the planned activity. If there is any deviation, alerts are sent to executives on personal computers, mobile phones, pagers etc. The alert will trigger managerial action to mitigate the impact of the disruption as quickly as possible. For example, if a shipment is carried by an airline to a destination in a different country and for some reason • Formulating eBusiness strategy, architecture, and process automation • Developing new Web-based applications and Web front-ends integrated to legacy applications • Integrating the enterprise value chain through Web • Developing enterprise information portals the airline does not depart at the scheduled time, an alert is sent to the • Providing verification and validation services concerned executive on mobile phone or desktop so that appropriate • Maintaining Web applications. action can be taken. In this manner, exceptions to the arrival and departure of goods can be tracked. 4.4.2 Electronic Tagging RFID technology can be used to tag a container consisting of cartons or pallets. This technology helps in tracking assets as they move through a supply chain. It minimizes the number of containers lost. Similarly, if a pallet or a consignment was shipped to the wrong location, alerts are sent to the transport management system, and if necessary the pallet are re-routed. 4.5.2 EDI Electronic Data Interchange (EDI) is a set of standards for structuring and electronically exchanging information between and within businesses, organizations, government entities and other groups. EDI can be formally defined as 'The transfer of structured data, by agreed message standards, from one computer system to another without human intervention'. Enterprise Integration from NIIT Technologies NIIT Technologies Enterprise Integration services include integrating 4.5 Where NIIT can Help? legacy and ERP applications using leading integration platforms 4.5.1 Web Services such as MQ-Series, TIBCO, BEA WebLogic, and webMethods. In IBM explains Web service as a technology that allows applications addition, NIIT Technologies can also build custom-solutions based to communicate with each other in a platform independent of the on different standards. programming language. It is a software interface that describes a 7
  8. 8. 5. Conclusion 3. Supply Chain Digest, “11 Greatest Supply Chain Disasters” Considering the global nature of trading, competitive market, 4. Aberdeen Group, “Global Supply Chain Bench Mark volatile customer demands, multiple constraints and uncertainties that come along with it, it is important to have an agile and efficient supply chain management system. The paper described the various risks associated with the supply chain and recommended a solution to minimize the occurrence. Information technology has helped reduce these risks. Visibility through information technology can be used to minimize risk in a supply chain. A reduced risk and improved visibility provides; • Reasonable reduction in inventory • Lower material handling costs • Reduced transportation costs • Improvement in Order cycle time • Increased fulfillment rates • Reduced stock outs • Provides better customer service Report”, June 2006 28.8 14.4 5. InfinityQS International, “Mitigating Supply Chain 12 Risk using Collaborative Technology, May 2007 6. John T. Mentzer, “Global Supply Chain Risk Management”, Sep 2004 7. Martin Christopher and Hau L. Lee, “Supply Chain Confidence”, Nov 2001 8. Prof Alan Harrison and Dr Andrew White, “Intelligent Distribution and Logistics” 9. Supply Chain Europe, “Risk Management”, Nov 2007 10. Rob Handfield, “Reducing the impact of disruptions to the supply chain” 11. Roshan Gaonkar and N Viswanadham, “A Conceptual and Analytical Framework for the Management of Risks in Supply Chains”, 12. AMR Research, “How Best To Measure Your Supply References & Readings Chain Today” by John Hagerty, Lora Cecere, and Joe 1. Cap Gemini, Ernst & Young, “The Transition from Tactical Souza to Adaptive Supply Chains, 2003” 2. Emily (Rong) Liu and Akhil Kumar, “Leveraging Information Sharing To Increase Supply Chain 13. Dr Shoumen Palit Austin Datta, “Risk in Global Supply Chain” 14. Stan Smith – Risk Management Consultant, “Applying Configurability”, 2003 — Twenty-Fourth International Risk Management to Supply Chain, LA Convention center Conference on Information Systems lecture, 2005 8
  9. 9. About the Author Vinod Pisharoti heads the Logistics practice in NIIT Technologies. He has over 26 years of experience in the Information Technology industry providing solutions in the area of Supply Chain Management. About NIIT Technologies NIIT Technologies is a leading IT solutions organization, servicing customers in North America, Europe, Asia and Australia. It offers services in Application Development and Maintenance, Enterprise Solutions including Managed Services and Business Process Outsourcing to organizations in the Financial Services, Travel & Transportation, Manufacturing/Distribution, and Government sectors. With employees over 8,000 professionals, NIIT Technologies follows global standards of software development processes. Over the years the Company has forged extremely rewarding relationships with global majors, a testimony to mutual commitment and its ability to retain marquee clients, drawing repeat business from them. NIIT Technologies has been able to scale its interactions with marquee clients in the BFSI sector, the Travel Transport & Logistics and Manufacturing & Distribution, into extremely meaningful, multi-year "collaborations. India NIIT Technologies Ltd. Corporate Heights (Tapasya) Plot No. 5, EFGH, Sector 126 Noida-Greater Noida Expressway Noida – 201301, U.P., India Ph: + 91 120 7119100 Fax: + 91 120 7119150 NIIT Technologies follows global standards of development, which include ISO 9001:2000 Certification, assessment at Level 5 for SEI-CMMi version 1.2 and ISO 27001 information security management certification. Its data center operations are assessed at the international ISO 20000 IT management standards. Americas NIIT Technologies Inc., 1050 Crown Pointe Parkway 5th Floor, Atlanta, GA 30338, USA Ph: +1 770 551 9494 Toll Free: +1 888 454 NIIT Fax: +1 770 551 9229 Europe NIIT Technologies Limited 2nd Floor, 47 Mark Lane London - EC3R 7QQ, U.K. Ph: +44 20 70020700 Fax: +44 20 70020701 Singapore NIIT Technologies Pte. Limited 31 Kaki Bukit Road 3 #05-13 Techlink Singapore 417818 Ph: +65 68488300 Fax: +65 68488322 Write to us at D_49_131213 A leading IT solutions organization | 21 locations and 16 countries | 8000 professionals | Level 5 of SEI-CMMi, ver1.2 ISO 27001 certified | Level 5 of People CMM Framework