Aberdeen Supply Chain Risk Research Brief


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Aberdeen Supply Chain Risk Research Brief

  1. 1. July, 2009 Supply Chain Risks in the Uncertain Economy: Grappling with Changes Whether in good economic times or bad, volatility is the main factor Research Brief increasing the extent of supply chain risks. Building on Aberdeen's research Aberdeen’s Research Briefs in supply chain risk management over the past two years, this Research provide a detailed exploration Brief analyzes the changing landscape of supply chain risks, corporate of a key finding from a primary strategies to combat them, and highlights several third-party services and research study, including key solutions that aim to solve these challenges. performance indicators, Best- in-Class insight, and vendor insight. The Changing Nature of Supply Chain Risks In a study conducted in July 2008 for the Supply Chain Risk Management: Building a Resilient Global Supply Chain report, companies identified the events shown in Figure 1 as the top disruptions to their supply chains over the preceding 12 months. Figure 1: Supply Chain Disruption Events Occurring over the Past 12 Months - Mid 2008 75% % of All Respondents 56% 49% 50% 45% 39% 35% 25% 0% Supplier capacity Raw materials Unexpected Shipment delayed Fuel price did not meet our price increase/ changes in / damaged / mis- increase/ demand shortage customer demand directed shortage Source: Aberdeen Group, July 2008 Just a year later - but after the economy had plunged into a worldwide recession - the landscape of supply chain risks has changed dramatically. Aberdeen's recent survey of 209 companies for the Supply Chain Executive's Agenda 2009 study, showed that demand-side challenges were now ranked at the top. Supplier-related risks have shifted from suppliers not being able to cope with their clients' excessive demand, to suppliers going out of business because of the deteriorating financial and economic conditions or because of their clients not maintaining the minimum level of orders. Figure 2 shows the changes. © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
  2. 2. Supply Chain Risks in the Uncertain Economy: Grappling with Changes Page 2 Figure 2: Supply Chain Disruption Events Occurring over the Past 12 Months - Mid 2009 75% 62% 50% 42% 41% 34% 24% 23% 25% 20% 0% Reduction in Raw materials Fuel price Commodities Unfavorable Key suppliers' Supplier customer price volatility volatility price volatility change in financial capacity did demand currency standing not meet our exchange rate deteriorated demand Source: Aberdeen Group, June 2009 With one in five companies reporting that the deterioration of their suppliers' financial position had disrupted their supply chain, it has become critical for companies to have the ability to effectively monitor and manage emerging supplier-related risks. To combat the challenges of today's volatile economy, most companies have begun more intensely focusing on the supply chain. Echoing the pains from the disruptions outlined above, the top reported pressure driving companies to improve SCM in 2009 is economic and financial volatility (40% of survey respondents). In addition to this and other top pressures, one-fifth of companies indicated that increasing risks were the reason for improving SCM strategies this year. Considering these trends, it is not surprising that formalized supply chain risk management has become one of the differentiators among the top-performers. In the Supply Chain Executive's Agenda 2009 study Best-in-Class companies are more than twice as likely as Laggards to have a formalized process for managing supply chain risks (56% vs. 25%, respectively). Supply chain risk management has gained significant attention in the recent years, after numerous quality, compliance, and security-related disruptions had shaken even the major companies. Aberdeen's July 2008 study for the Supply Chain Risk Management: Building a Resilient Global Supply Chain report showed that most companies were still lacking the adequate processes and capabilities to accurately assess and manage both supply and demand network risks. In fact, less than one-third of companies in the 2008 study reported actively managing each individual risk, including risks related to trade compliance, raw materials, demand fluctuations, product quality, financial instability, risk profile of suppliers and customers, currency volatility, catastrophic events, logistics capacity and congestion, supply chain security, and environmental disasters. There was also an evident disconnect between the Enterprise Risk Management (ERM) function and supply chain risk managers, where the ERM department often did not fully understand the potential impact that supply chain disruptions could have on the business as a whole. © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
  3. 3. Supply Chain Risks in the Uncertain Economy: Grappling with Changes Page 3 In these circumstances, formalized supply chain risk management has repeatedly shown to be a Best-in-Class approach. This includes regular risk assessments and the identification of clear operational response procedures in case of disruptions. Companies need to evaluate their network-wide vulnerabilities and put preparedness plans in place; they should also ask all of their supply chain partners about their own risk preparedness plans. Industrial Products Manufacturer Increases Focus on Supplier Rationalization and Risk Management to Ensure Business Continuity The Director of Procurement at a large global manufacturer of industrial and high technology products describes his company’s recent supply chain transformation journey; “The company has acquired many firms over the years, leading to increased supply chain complexity and redundant processes. The ensuing global recession led to some reduction in customer demand for the company’s products and a higher awareness of the importance of monitoring the financial condition of its suppliers. Under these circumstances, inefficiencies within the global supply chain network became more evident. In order to improve supply chain performance, executive management set new goals for the supply chain and procurement organizations to optimize the end-to-end processes and reduce costs.” The solution the large global manufacturer put in place addressed the following problems: • Business objectives were deployed across the organization to drive supply chain rationalization and process optimization. Due to many acquisitions, the company has a wide base of smaller suppliers that are difficult to manage, so it set out to drive a 50% reduction in the supply base. This initiative is still under way as it has proved more difficult to achieve the target reduction level without a larger-scale supply chain optimization program that addresses manufacturing strategy and new product development activities. • To avoid the potentially disastrous effects of critical component suppliers going out of business, the company has enhanced its supplier risk and performance management processes. It has also begun to work on creating back-up plans for alternative supply in case any of its critical suppliers were to interrupt deliveries. “Improving supplier risk management has not been easy,” explains the Director of Procurement. “Many times suppliers are privately owned and it is difficult to access their financial information; it is also difficult to find enough staff to perform the checks on such a large number of suppliers. Nevertheless, we now have a mandate to review the higher-risk custom parts suppliers at least quarterly and all others at least semi-annually. We are also currently evaluating available tools for supplier risk assessment.” © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
  4. 4. Supply Chain Risks in the Uncertain Economy: Grappling with Changes Page 4 Solution Snapshot To address the growing challenges in supply chain risk management, many third-party solution and services providers have begun introducing enhanced monitoring and information services to help their clients improve their supplier risk assessment and management capabilities. These services are offered by different types of solution providers: • Consulting services providers. Management consultants have recognized that supply chain risk management is a highly under- implemented area at companies that presents a fertile ground for consultative engagements. For example, IBM Global Business Services (GBS) offers a comprehensive set of services to help clients assess their risks in various areas, as well as estimate the overall vulnerability of their supply chains. IBM GBS offers supply chain risk modeling using mathematical approaches to analyzing risks and the services of its consultants with expertise in specific industries and supply chain areas. A recommended solution for risk mitigation may include additional supply chain monitoring and control capabilities, supply chain redesign, and new approaches to supplier information management. IBM GBS also offers software solutions for supply chain visibility and optimization if the need for them is identified during the supply chain risk assessment. Other consultancies focused on supply chain risk management include PwC, Marsh, Deloitte, among others. • Specialized supply chain risk management solution providers. There are some specialized risk management solution providers in the market, which focus on supply chain risk management. For example, Protiviti - a specialized risk and audit business consulting services provider - offers a set of services targeted at uncovering and managing supply chain risks. Protiviti's experts in supply chain risk management help companies identify the sources of risk, define optimal risk response strategies, and build long-term strategies for proactive risk monitoring and assessment, including organizational, process and technology strategies. The company is currently seeing the most demand from the market for its supplier-focused risk solutions, although its capabilities encompass both supply and demand network issues. Other specialized providers in the supply chain risk management space include New Momentum, among others. • Best-of-breed software providers. These are existing supply chain and procurement software solution providers that are adding risk management capabilities to their solutions. For example, Ariba - a provider of on-demand spend management software solutions - has recently unveiled its new Supply Risk Assessment Services - an information service that leverages Ariba's © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
  5. 5. Supply Chain Risks in the Uncertain Economy: Grappling with Changes Page 5 extensive supplier information databases covering registered suppliers using its procurement and spend management solutions. This new service can be used both by the existing customers of the Ariba platform and as a stand-alone service for companies that are not yet using Ariba's software. The Supply Risk Assessment service comes as a natural extension of Ariba's Supplier Information Management and Supplier Performance Management solutions, which offer broader supplier-related information and performance management services. The Supply Risk Assessment covers global spend category risks, supplier's financial health analysis using detailed financial information and third-party developed risk profiles, as well as relevant industry and market analysis to identify the impact on supply continuity. Other software providers that have recently introduced risk management services include Aravo Solutions, CVM Solutions, among others. Generally, by improving overall supply chain management practices, companies can create a less risk-prone environment leading to more resilient supply chains. There are multiple consulting services and software solutions available to resolve various supply chain issues: from functionally focused (sales and operation planning, network design, global trade management, transportation management, etc.) to "horizontal" solutions for supply chain visibility, event and disruption management, supply chain intelligence, etc. The solutions and services mentioned in this section describe the additional capabilities and offerings beyond core SCM solutions. To read more about supply chain best practices and solution in general, visit our SCM page at http://www.aberdeen.com/channel/scml.asp. Recommendations Companies should re-visit their supply chain risk management strategy and identify key supply chain risks and critical vulnerabilities: • On the supply chain planning side, the processes that need to include risk considerations include supply chain network design efforts, sales and operations planning, and inventory planning. • On the supply chain execution side, companies need to improve their logistics and transportation management capabilities, secure alternative third-party supply chain partners if needed, and ensure pro-active alerting process and response management for disruptions. • Increased attention should be paid in the short-term to assessing and managing supplier risks, especially during today's period of increased economic volatility. • In the long run, companies should adopt a holistic approach to managing supply chain risks, weighing the risks, costs and returns of various supply chain business models and strategies. All factors © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
  6. 6. Supply Chain Risks in the Uncertain Economy: Grappling with Changes Page 6 should be taken into account, including supply network, demand network, financial considerations and other factors impacting the business overall. All these factors jointly should help companies pick the right supply chain strategies and solutions. • In addition, the Enterprise Risk Management group (if it exists) needs to be fully aware of the potential impact of supply chain disruptions on corporate business performance, and incorporate supply chain risks into the corporate-wide risk management efforts. For more information on this or other research topics, please visit www.aberdeen.com. Related Research Supply Chain Risk Management: The Supply Chain Executive's Agenda Building a Resilient Global Supply 2009: Weathering the Recession; July Chain; July 2008 2009 Author: Viktoriya Sadlovska, Research Analyst, Global Supply Chain Management (viktoriya.sadlovska@aberdeen.com) Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte- Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. 010109a © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897