Supply Chain Risk Management Tools

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This presentation was given at TKW\'s annual Manufacturing Conference in Portland, OR on September 25, 2012

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Supply Chain Risk Management Tools

  1. 1. Shifting Sands in Supply Chain Risk Three major advancements/shifts over the past decade have significantly increased Supply Chain Risk:1. The Good - Innovation2. The Bad - Commodity Cost Increases Volatility 303. The Ugly - Volatility of Input Costs 20 Price 10 0 1 3 5 7 9 Period Copyright 2005
  2. 2. Innovation – The Good?1. Adoption of Lean tools, Six Sigma, 5S, new materials, etc2. A disproportionate share of these improvements have been created by improving labor efficiencies…3. …Labor costs shrinks as a % of total costs or…4. …Other costs grow as a % of total costs Copyright 2005
  3. 3. Copyright 2005
  4. 4. Advances Even Greater in OregonAnnual Labor Productivity improvements since1995 have averaged 3.3% in Oregon• a 69% increase• Key Inputs – Raw Materials, Energy andTransportation content have been relatively flatKey Inputs as a % of finished goods arerising rapidly while the labor % declines Copyright 2005
  5. 5. Key Input Costs Increasing – The Bad CPI and PPI - Commodities index 2002-2012 160 PPI 4.6% annual average Index 2002 = 100 150 CPI 2.2% annual average 20% Cost Disadvantage 140 24% 130 margin erosion 120 110 100 0 2 03 04 05 0 6 07 08 09 10 11 12 20 20 20 20 20 20 20 20 20 20 20 CPI PPI " Input Costs are up 55% since 2002Selling Prices are up only 25% over the past 10 years Copyright 2005
  6. 6. Volatility of Input Costs – The Ugly Annual % change in CPI and PPI - Com m odities Index 1983-2012 12.5% Annual % Change CPI: max 5.4% 1990 min .4% 2009 7.5% 2.5% -2.5% 48 87 90 93 96 99 02 05 08 11 19 19 19 19 19 19 20 20 20 20 -7.5% PPI: max 9.8% 2008 min -9.1% 2009 -12.5% CPI PPI The risk of incurring financial losses from Key Input price changes isdramatically higher than it has been in the past Copyright 2005
  7. 7. Example of the Impact 2002 $/unit % 2012 $/unit %Sales 100 Sales 100Labor 30 30% Labor 15 15%Key Inputs 30 30% Key Inputs 50 50%Gross Margin 40 40% Gross Margin 35 35%Key Input Price 10% Key Input Price 30%Volatility VolatilityVolatility Effect +3 to - 3 Volatility Effect +15 to -15GM Margin $43 to $37 15% GM Margin $50 to $20 85% Earnings Volatility can sink the ship Copyright 2005
  8. 8. How to Battle these ForcesThree basic areas to focus on:1. Risk Management Plan2. Hedging Options and Execution3. Margin Management Strategy Copyright 2005
  9. 9. Risk ManagementHistorically Risk Management has been managedthrough insurance brokers and bankersChanges in Key Inputs:• A bigger % of your cost structure• Higher relative to your product price• And pricing much more volatile than in the pastDemands more attention be given to the resources, systems and processesdedicated to managing your key inputs Copyright 2005
  10. 10. Risk Management1. Risk Charter or Risk Policy Risk r r te Cha • Includes price risk2. Risk Committee • Include supply chain3. Risk Management Tools • Internal • External Copyright 2005
  11. 11. HedgingA thoughtful action that reduces thefinancial impact from a change in prices.Speculation, increased risk taking oractions that don’t reduce risk Copyright 2005
  12. 12. Example: Hedging a PositionTo keep the doors open a facility uses 2000therms of natural gas per dayRunning at full capacity another 8000 therms isused per dayThe facility is booked at 80% capacity for thecoming year and 50% the following year. Copyright 2005
  13. 13. Hedging Mechanics1 Position Reporting2 Price Exposure3 Hedging Tools Copyright 2005
  14. 14. Examples of HedgesMost effective Least Effective Copyright 2005
  15. 15. Margin Management System System that links inputs to outputs Price and Quantity of Outputs $ XXX Less: Price and Quantity of Inputs $ YYY Margin $ ZZZMargin Management Systems link the Sales and Procurement Function Copyright 2005
  16. 16. Margin Management Systems• Builds on Risk Management and Hedging •Risk Charter/Policy •Position Reports •Clear Understanding of Hedging Tools• Margin Standards/Parameters• Quotes• Forecasts• Excellent Costing Systems/Reporting Copyright 2005
  17. 17. Red Flags• Your organization spends more time managing costs than margins•Your organization does not have a method to measure raw materialand energy price risk• Sales decisions are made independent of buying decisions and viceversa• “Higher raw material and energy costs” frequently explain awayearnings shortfalls•Your organization has a separate department called procurement orpurchasing•“Risk Management” mainly refers to the relationship you have withyour insurance broker• “Hedging” conjures up the image of expensive, complex transactionsthat are to be avoided Copyright 2005
  18. 18. Contact Points KRM BUSINESS SOLUTIONS Steve Rosvold 360.695.8605 Office 360.606.7592 CellSteve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com www.linkedin.com/in/steverosvold Copyright 2005

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